Corporate Governance

Corporate Governance Reform and the SEC: Separating the CEO and Chairman of the Board

By J. Robert Brown

We are discussing Exchange Act Release No. 60280 (July 10, 2009), the SEC's recent set of rule proposals designed to improve disclosure in connection with the corporate governance process.

One of the most obvious areas of abuse concerns the resolute insistence by most public companies to have the CEO serve as chairman of the board.  (Some stats are here).  With the board responsible for supervising the CEO, the the combination of the two positions materially weakens the function. Moreover, the chairman has the authority to call meetings and exercise control over the issues placed on the agenda.

Nor is this the norm overseas.  Most other countries, including the United Kingdom, call for a separation.  Pressure is growing for this to occur in the United States.  Shareholders are agitating for a separation; a provision of the Shareholder Bill of Rights would require it for exchange traded companies.  This Blog called on the SEC to address the separation as part of its corporate governance agenda.  The call seems to have been answered.

The SEC's corporate governance proposals call for increased disclosure about a company's "leadership structure" and an explanation as to why "the company believes it is the best structure for it at the time of the filing."  In other words, those companies that combine the two positions will have to explain why this is in the best interests of shareholders.  As the release noted:

• Under the proposed amendments, companies also would be required to disclose whether and why they have chosen to combine or separate the principal executive officer and board chair positions. In some companies, the role of principal executive officer and board chairman are combined, and a lead independent director is designated to chair meetings of the independent directors. Those companies would also be required to disclose whether and why the company has a lead independent director, as well as the specific role the lead independent director plays in the leadership of the company.

The Commission has disavowed any attempt to influence the choice of management structure.  Yet in explaining why the disclosure was necessary, the release could only offer the thin justification that it would "increase the transparency for investors into how boards function."  In fact, for companies that separate the two positions, the disclosure will largely be meaningless.  For those that do not, however, they will find themselves having to justify the explanation, either to institutional investors, the Commission, or, perhaps, to a judge should they be sued for securities fraud under a theory that the justification was misstated.

Whether in fact this will affect practice depends upon the strength of enforcement.  To the extent the disclosure becomes boilerplate, it will end up being a few lines in the proxy statement that investors skip when looking for the CEO's total compensation.  If made meaningful, however, some companies will have a difficult time coming up with a meaningful justification, particularly for CEOs under challenge.  It may simply be easier to separate the two positions.

Full post as published by The Race to the Bottom on July 31, 2009 (boomark / email).