But more than 20% of the companies in the S&P 500 index now split the CEO and chairman's role. And the trend appears to be growing.
Power sharing has long been common in non-US corporations. The role of government ownership stakes, differing rights and laws, as well as more accomodating attitudes about the trade-offs between private and state interactions have made the strong executive chairman a relatively non-controversial feature of corporate governance.
In the US, however, where an ethos declaring 'the buck stops here,' and 'my way or the highway,' has concentrated authority in the hands of a combined CEO and chairman. The pressure to change, however, comes not as much from outside investors as from board recognition that these jobs, in an increasingly complex and demanding global economy, may require more than one person to be optimally performed.
In addition, as risk management protocols have expanded their scope, it has become apparent that financial and reputation risk can be mitigated by appointing an independent chair who can both deflect some of the criticism routinely hurled at the contemporary business as well as serve as a buffer when scandal strikes. The proliferation of online commentary regarding corporate affairs virtually guarantees that problems which would once have been handled quietly inside the organization are now aired publicly with immediate and widespread fanfare. The recent spate of CEO resignations due to personal pecadilloes may have less to due with changing mores than with increased reporting.
The shared governance role once considered a sign of weakness may now convey a sense of confidence. At the very least, it suggests that in the post-imperial-CEO era, rational solutions to vexing problems are welcome. JL
Joann Lublin reports in the Wall Street Journal:
CEOs aren't the bosses they used to be.
Under pressure from activist investors, more companies than ever are splitting the roles of chief executive and chairman. More than 20% of the companies in the S&P 500 Index have appointed an independent outsider as their chairman, up from 12% in 2007,
according to executive recruiters Spencer Stuart.
The development is gradually creating a second seat of power at the top of big companies and easing CEOs' grip on the one institution charged with overseeing their performance and decisions.
CEOs who hold chairmanships get to run the board, lead board meetings and heavily influence their agendas. Naming a chairman without ties to their company's management gives board members a better chance of acting as an effective counterweight—a priority for some investors after a decade in which weak board oversight of management has been blamed for contributing to accounting scandals and bank meltdowns.
The latest move toward independent chairmen came April 19, when Moody's Corp. MCO stripped Chief Executive Raymond McDaniel Jr. of his chairman's job a year after shareholders approved a proposal to put an outside director in the post.
Further boardroom power shifts seem likely. In May, investors at Sempra Energy, SRE KeyCorp and Kindred Healthcare Inc. endorsed proposals calling for independent chairmen. All three say their boards are evaluating the results.
Similar resolutions nearly passed this year at several other companies including AT&T Inc., where the proposal won 43.8% of the vote. Many companies have separated the roles on their own, but the investor campaigns have pushed the issue higher on directors' agendas.
"Shareholder resolutions have been critical in opening boards' minds to splitting the chair and CEO," says Stephen Davis, executive director at Yale School of Management's Millstein Center for Corporate Governance and Performance.
Independent chairmen also recruit new directors and handle CEO successions. Investors at tw telecom Inc. vote Thursday on a proposal to install one. It's among the 49 companies with such ballot measures so far this year, the highest figure since at least 2007, according to Institutional Shareholder Services Inc., which advises big investors how to vote in corporate elections.
Four independent chairmen resolutions passed last year, and this year's tally could be higher, said Patrick McGurn, an executive director of ISS. Nine of the 12 companies where shareholders approved independent chairmen resolutions between 2007 and 2011 subsequently appointed independent chairmen.
Moody's new chairman is Henry A. McKinnell, a retired leader of Pfizer Inc. who has served on the board of the big credit-rating firm since 2000. Mr. McDaniel had held both titles for seven years. "Moody's values the views of its shareholders," a spokesman said.
The Laborers' International Union of North America and Hermes Equity Ownership Services, a U.K. investor advisory service, sponsored the proposal for an independent chairman at Moody's amid concerns the company's board hadn't done enough to restrain management ahead of the financial crisis, when some debt given high ratings by Moody's and other firms quickly went sour.
Moody's initially defended its practice of giving both titles to one person. "This structure also enables the chief executive officer to act as a bridge between management and the board," Moody's directors said in a proxy statement urging investors to defeat the proposal when it came up for a vote last year for the third straight year.
The resolution won 56.6% of the vote, but it wasn't binding, and Moody's initially took no action. The sponsors then stepped up the pressure, submitting a binding proposal for the 2012 annual meeting that would have required an independent chairman.
Mr. McDaniel and Mr. McKinnell, then Moody's lead director, met with the proposal's sponsors in mid-February at the credit rating firm's New York headquarters, according to a person familiar with the situation. The pair expressed fears that Wall Street analysts might conclude the CEO "is on the way out" if he lost his chairmanship, the person said.
The Moody's officials finally agreed that splitting the roles would work if the outside chairman didn't try to run the business, another person said. The proponents dropped their binding proposal. After naming Mr. McKinnell to the post, directors gave Mr. McDaniel the added title of president.
It isn't clear how quickly other boards will react to successful recent independent chairman resolutions, which are also nonbinding. Sempra, for instance, didn't agree to put its directors up for election annually until shareholders voted for that switch four times.
The independent chairman measure won 55% of the vote at Sempra. Senior executives are reaching out to big investors, and directors will decide what's in the best interest of the power-and-gas company's shareholders, said Randall Clark, the corporate secretary.
Sempra directors will get a chance to make the change later this year when former CEO Donald E. Felsinger retires from the executive chairman job he has held since Debra L. Reed succeeded him as CEO in June 2011. Mr. Clark declined to speculate about the timing or identity of Mr. Felsinger's successor.