According to reports, during last year’s proxy season, shareholders of 56 companies (a record high) voted on shareholder proposals requesting the board to separate the role of CEO and chairman. Shareholders of only four of those companies voted in favor of the proposal. This year, shareholders of a range of companies (including JPMorgan Chase, Walt Disney, Boeing and DirecTV) will have similar opportunities. Not unexpectedly, proxy advisory firms recommend that shareholders vote in favor of the proposal to separate the roles.
While nobody claims that changing board governance solves all problems at a company, proponents of separated roles argue that an independent chairman strengthens board oversight of management and that it allows the CEO to focus on strategic planning and effective execution. Even defenders of the combined role, acknowledge that separated roles can work well at companies during transitions in management. Ford Motor, Citigroup, Wal-Mart, Microsoft, Oracle, Tenet Healthcare, The New York Times and Hewlett-Packard all have separated roles.
Commentators on the other side of the spectrum argue that these type of proposals are nothing more than attempts by a few activist shareholders to overhaul corporate governance to suit their personal agenda. These same commentators point out that having separated roles does not mean improved corporate governance or improved financial performance and that many prominent companies (including IBM, P&G, Home Depot, Boeing, Dell, GM, Time Warner and Walt Disney) that have had the separation of roles, have abandoned it. According to a research study on 309 companies that separated roles between 2002 and 2006, the financial performance of high-performing companies was often hurt by the separation, and only 23% of S&P 500 firms have a truly independent director as chairman. These commentators also point out that companies involved in some of the biggest corporate scandals (think Enron, WorldCom, Computer Associates, HealthSouth and Global Crossing) had separated roles in place before they collapsed.
We’ll see what shareholders have to say this proxy season.