Posted on Conversation Starter: November 9, 2009 8:25 AM
When the U.S. pay czar, Kenneth Feinberg, approved the compensation of the top executives at seven troubled financial institutions, he insisted that they all appoint an independent director as the board chair rather than the CEO. Several major investors—the Government Pension Fund of Norway, which manages $400 billion in assets, among them—believe that this splitting of the roles of Chairman and CEO should become mandatory for all public firms.
The main argument for the split is that a board of directors should in theory be better able to monitor the performance of company executives if it is chaired by someone who is not one of these executives. This argument has become received wisdom in the UK and Canada, where over time most public companies have appointed an independent board chair. American companies, however, haven't yet been convinced. Only 37 percent of U.S. companies have a separate board chair from the CEO, and over half of these chairs are not independent—they are the former CEO of that same company.
So who's right—the British, Canadians, and Kenneth Feinberg, or the overwhelming majority of U.S. firms that still combine the chairman and CEO roles?
Let's look at the data. What it tells us quite clearly is that the appointment of an independent board chair, separate from the CEO, is not associated with any statistically significant improvement in either the company's net income or its stock price. This conclusion has been reached by several empirical studies of UK companies (by Baruch University Professor Jay Dahya) and of Continental European companies (by Basel University Professors Markus Schmid and Heinz Zimmermann).
In light of these empirical studies, I cannot support a general requirement that public companies appoint an independent board chair. That's not to say that it never makes sense. If a new CEO comes from domestic operations in a company with global ambitions, it may make be very helpful for him or her to have an independent board chair with broad global experience. It may also make sense for a financial institution controlled by the government to have an independent chair to concentrate primarily on government relations.
In any event, most U.S. firms already have an independent person performing the key functions that you would want from an independent chair. That person is the lead director, an independent board member who helps set board agendas and conveys the concerns of independent directors to the CEO. The lead director is also needed to preside over periodic executive sessions—attended only by independent directors—which are now mandated by listing standards at U.S. stock exchanges. Choosing a lead director is a less dramatic way of fulfilling this listing standard than appointing an independent board chair.
Finally, the empirical studies suggest that there is only one arrangement with generally negative results for a company: having a former CEO becoming the board chair of the same company. This can undermine the power of the new CEO. Unfortunately, as mentioned above, over 15 percent of U.S. companies have this arrangement. Clearly that practice needs to change.
Do you think Kenneth Feinberg's requirement should be rolled out to every publicly traded firm—or would that be unnecessary?