Corporate Governance

The SEC and Corporate Governance: Separating Chairman and CEO

By J. Robert Brown

Chairman Schapiro gave a speech to the Council of Institutional Investors and outlined some of the SEC's corporate governance agenda.  Some are important but relatively uncontroversial.  She mentioned the possibility of stepped up disclosure about director nominees, something long overdue.  More importantly, however, the Chairman noted the possibility that the SEC would begin to delve into the problem of board structure.  As she noted:

• We'll also be considering whether boards should disclose to shareholders their reasons for choosing their particular leadership structure — whether that structure includes an independent chair, a non-independent chair, or a combined CEO/chair.

This Blog listed as an agenda item for the SEC the use of disclosure to try to encourage the separation of chairman of the board and CEO, a separation common overseas but not in the United States.  By combining the two positions, public companies in the United States more or less give to the CEO a monopoly over the information funneled to the board.  This by definition makes it harder for the board to monitor the activities of the CEO, a primary function of the body.  Those serious about corporate governance reform know that these positions need to be separated.

The proposals represent a first, albeit very small, step in that direction.  They entail an attempt by the SEC to influence corporate governance through the only means available:  disclosure.  As discussed at length in Corporate Governance, the Securities and Exchange Commission, and the Limits of Disclosure, the Commission has attempted to use disclosure to affect substantive board behavior in a number of instances, ranging from an effort to improve disclosure of beneficial ownership to exerting downward pressure on executive compensation. In most instances, however, the approach has proved ineffective.

The same will likely be true in this case.  CEOs want to remain chairman because of the control that it provides.  With most large companies having a super-majority of "independent" directors (89 of the 100 largest companies in one survey), these directors have few sources of information about the company except what they get through their position on the board.  As a result, the position of chair, with its control over information and agendas, becomes even more critical.

To the extent that the SEC moves forward with these disclosure provisions, it will force boards to justify why they have in place a system that puts the fox in charge of the hen house.  But they will do it (most likely with boilerplate) rather than actually separate the two positions.  Why?  Because the costs of any bad publicity are outweighed by the desire of the CEO to retain control over the body that can fire him or her.

Full post as published by The Race to the Bottom on April 13, 2009 (boomark / email).