A Friday Editorial: Board Independence and the Separation of Chairman and CEO

We couldn't help but read with great interest the editorial in the Journal written by Gary Wilson called "How to Reign in the Imperial CEO."  He should know about the subject.  He was one of the directors on the Disney board  found to be "independent" by the Delaware court in the 1990s (the same board labeled by Business Week as the "worst" two years in a row, with the article noting that it was packed with "Eisner chums.").   

Wilson sits on the board of Yahoo and is a candidate for the board of CSX.  His editorial is not subtle.  The first two sentences say this:  

• America's most serious corporate governance problem is the Imperial CEO – a leader who is both chairman of the company's board of directors as well as its chief executive officer. Such a CEO can dominate his board and is accountable to no one.

What are the consequences of the imperial CEO?

• The result of this conflict of interest is excessive CEO compensation and undeserved job security. Entrenched management leads to empire-building, continued adherence to flawed business strategies, resistance to change, the stifling of healthy debate in the boardroom, and destruction of shareholder value. All too often, we also find an imperial air force of large private jets reserved for the CEO's trips to the Masters, the Super Bowl or that Paris "business" trip.

These are topics we have constantly discussed.  Excessive salaries, personal use of the aircraft, golden coffins (making a CEO sometimes worth more dead than alive, a curious type of incentive), they are all there.  They reflect boards that do not act independently.  Why?  Many have a comfortable sinecure (Goldman directors were paid last year around $700,000 for ten meetings) and don't want to rock the board.  In other words, they are not independent.  The CEO sits on the board and, while not on the compensation committee, has considerable ability to influence the process.  Compensation decisions are often justified by consultants who have every incentive to be an advocate for the CEO rather than provide neutral advise.  In other words, the Delaware courts impose procedural requirements for compensation (independence director approval and a requirement to be informed) but do not enforce either.  

What Wilson suggests is to separate the position of chairman and CEO.  For those who wonder about the power of the CEO, they need only realize that most CEOs of Fortune 500 companies insist on having it.  As he further notes, this is the norm here but not overseas.  Capitalism manages to function adequately in places like the UK despite a separation of chairman and CEO.  Indeed, the need for this can be seen by the growth in the use of a lead independent director.  In other words, some degree of independent director leadership is widely recognized but only in an emasculated fashion that does not, typically, come with the authority of the chairman such as the ability to call special meetings of the board. 

Sooner or later an imperial CEO will make an imperial mistake.  Countrywide?  Disney?  A board with an independent chairman provides a mild check on the CEO.  If the CEO wants to take a step that he or she cannot justify to an independent Chairman, perhaps the step ought not to be taken. 

The battle over access, the battle over a bylaw that would require companies to pay proxy contest expenses, the battle over separating these two positions, is a battle over an outdated model of governance, one that increasingly has the appearance of a dinosaur to the international community.  Most importantly it is a model that in long-term will harm business development in the US.  Or, as Gary Wilson puts it:

• The simple change I suggest to effect the separation of chairman and CEO – requiring that an independent director become chairman when a new CEO is named – would increase the rightful influence of ownership in the governance of American corporations, and lead to extinction of the Imperial CEO. This, in turn, would improve corporate performance and decrease the need for new, expensive and intrusive government regulations to control management excesses.