Restoring American Financial Stability Act of 2009: Separating the Chairman and CEO: The Battle Begins

One of the newest fronts in the corporate governance area has been the consistent decision on the part of most public companies to combine the positions of chairman and CEO.   

The approach is facially inconsistent with the role of the board.  To the extent that the board has as a primary obligation the duty to oversee the CEO, it defies logic to set up boards consisting mostly of independent directors, a status that, while not ensuring independence, does generally ensure that they have no independent source of information about the company except what they get in the popular press or from board meetings, but having them be chaired by the person they must oversee.  The chair typically calls special meetings of the board and controls the agenda.  In short, if problems arise with the CEO, it is the chair who presumably alerts the other directors, something that has to diminish inordinately when the chairman is the CEO.

Nor is this conjecture.  In the realm of global corporate governance, the practice of combining the two positions is the exception.  Indeed, some of the pressure for reform is coming from overseas sources.

As with most matters of corporate governance, it is state (read Delaware) law, there are no practical impediments to the practice, despite the clear disadvantages for shareholders (demonstrating the meaningless of the requirement that the board must act “in the best interests of shareholders). 

Given the widespread refusal to separate the two provisions, any effort to make the separation mandatory will likely result in a raft of hostile criticism.  As a result, regulatory efforts have, so far, been tentative.  Thus, in the Act, Section 973 would add Section 14A to the Exchange Act and require companies to explain their practices.  Specifically, the Commission would be required to adopt a rule that requires companies to explain “the reasons why the issuer has chosen” to combine or separate the two positions.  It is something like what we called for this time last year. 

The proposed provision is not likely to have much affect.  The explanation will likely result in boilerplate.  Moreover, even if the positions are separated, there is nothing in the provision that would require the position to go to an “independent” director.  Nonetheless, it is the first set of tepid steps towards an eventual separation of the two positions, something that will likely await the next corporate governance crisis.  Moreover, by using disclosure rather than listing standards, the provision applies to all public companies and will be subject to enforcement under Rule 10b-5 to the extent that the explanation is deemed to be materially misleading. 

In the meantime, the bill and a summary are posted at the DU Corporate Governance web site.

SEC. 973. DISCLOSURES REGARDING CHAIRMAN AND CEO STRUCTURES.

Section 14A of the Securities Exchange Act of 1934, as added by section 971, is amended by adding at the end the following:

(b) DISCLOSURES REGARDING CHAIRMAN AND CEO STRUCTURES.—Not later than 180 days after the date of enactment of this subsection, the Commission shall issue rules that require an issuer to disclose in the annual proxy sent to investors the reasons why the issuer has chosen—

(1) the same person to serve as chairman of the board of directors and chief executive officer (or in equivalent positions); or (2) different individuals to serve as chairman of the board of directors and chief executive officer (or in equivalent positions of the issuer).