One way that the United States is an outlier in the realm of corporate governance is that public companies generally allow the CEO to also hold the position of chairman of the board.  The practice is widespread.  It is also inconsistent with good corporate governance.  Why is the combination of the two positions such a bad example of corporate governance?

First, a primary, if not the most important function of the board is to oversee the activities of executive officers, particularly the CEO.  When the CEO serves as chairman, however, he or she is in a position to control the agenda of the board meeting.  Logic would suggest that a CEO will be less likely to place on the agenda issues about his or her management.

Second, boards of exchange traded companies must contain a majority of "independent" directors.  A majority of the largest companies include a super majority of independent directors.  In a significant number of large companies, the CEO is the only non-independent director on the board (44 out of the top 100 companies in 2008).  All of this means that "independent" directors typically have no significant connection to the company and, therefore, have no independent source of information about the company.  Instead, with the exception of stories in the public domain, they get their information at board meetings.  But it is the chairman who typically sets the agenda and determines what will be presented.  Thus, in most public companies, the CEO controls the information flow to the board.

Third, the chairman typically has the authority to call special meetings of the board.  When quick action and immediate board action is needed, the chairman has the authority to act.  But when the problem arises with the CEO and the CEO is the chairman, the likelihood of a meeting of the board to discuss the matter is reduced. 

Fourth, by acting as chairman, the CEO has enhanced authority on the board.  Yet governance often has as a goal the reduction in CEO influence.  Thus, there is reason to believe that the CEO often has excessive involvement in the determination of his or her compensation.

Add in that the practice internationally is to separate the two positions and that the stock exchanges have developed the complex substitute of "lead director," a clear recognition of the need for independent decision making on the board but a likewise clear refusal to mandate a practice that would be opposed by most large listed companies. 

There have been shareholder proposals that call for the separation of the two positions and some have passed.  The staff has generally indicated that proposals calling for a separation cannot be omitted under Rule 14a-8, at least where phrased in a precatory manner.  See Xcel Energy Inc. (March 12, 2007)(company not allowed to omit proposal:  "That the shareholders of XCEL ENERGY INC. request their Board of Directors to establish a policy of separating the roles of the Chairman of the Board and the Chief Executive Officer (or President) whenever possible, so that an independent director who has not served as an executive officer of the Company serves as the Chairman of the Board of Directors. This proposal shall not apply to the extent that complying would breach any contractual obligation in effect at the time of the 2007 annual meeting.").  On the other hand, the staff does permit the exclusion of proposals that require the Chairman to maintain his/her status as independent without providing the company with an opportunity to cure should the director lose his/her independence. 

The problem is, as with most issues in the governance area, one of state law fiduciary duties.  One would think that boards would have a hard time justifying the combination of CEO and Chairman in the same person as consistent with fiduciary obligations.  Yet there is no chance that the pro-management courts in Delaware would ever impose such a requirement.  In contrast, the North Dakota Publicly Traded Corporations Act calls for the separation of the provision.  Nonetheless, that statute is unlikely to have much impact on the corporate governance debate.

In foreign markets, the reverse is the case.  The offices are separate.  Moreover, in countries such as Great Britain, the chairman has specific responsibilities, including outreach to shareholders.  The practice overseas makes it harder to argue that separating the two positions would somehow damage the economic activity of corporate America.

The SEC lacks the authority to require the separation of the two posts.  It could attempt to jawbone the stock exchanges to impose a bylaw that would accomplish the same thing.  No single exchange would do this; it would have to be done simultaneously at least by Nasdaq and NYSE.  Otherwise, companies would delist from the exchange separating the two positions and move to the other.  Moreover, obtaining agreement of the two exchanges is not likely since it will be resisted by listed companies and potentially interfere with profit making activities.

The SEC, however, does have disclosure authority and can at least shed light on each company's practice and the reasons for the practice.  Item 407 of Regulation S-K could be amended to include a section on companies that combine the positions of chairman and CEO.  For one thing, they should be required to disclose why they combine the positions and how doing so is viewed as consistent with the board's fiduciary duties.  Second, companies that combine the position should be required to disclose the method used to set the board agenda and the method used in determining what information will be provided by the board. 

Third, the same companies should be required to disclose the procedures by which a director can have matters scheduled for board meetings and can request specific information for review or presentation at the board meeting.  Finally, the company should be required to disclose any mechanism, system, or procedures, that require information be disclosed to directors without first having to be approved or reviewed by the chairman.

As the article Essay: Corporate Governance, the Securities and Exchange Commission, and the Limits of Disclosure discusses, the use of disclosure to effect substantive behavior often does not work.  It is, however, the only avenue open to the Commission in the governance area, at least after the Business Roundtable case.  It would at least force public companies to highlight the practice and have to dance around the issue of alternative sources of information to directors.  By limiting the intrusive disclosure to board that combine the two positions, they can avoid the burden by not combining them.