The primary duty of a board of directors is to monitor the management of a company on behalf of its shareowners. But a CEO who also serves as chair can exert a dominant influence on the board and its agenda, weakening the board’s oversight of management. Also, a CEO-chair is a chief executive who effectively evaluates his or her own performance.
Separating the chair and CEO positions avoids that fundamental conflict of interest. An independent board chair provides a better balance of power between the CEO and the board and supports strong, independent board leadership and functioning.
That is why the Council has long advocated that boards should be chaired by an independent director. Only in very limited circumstances should the CEO and chair roles be combined. In such cases, the Council believes, the board should provide a written statement in the proxy materials that discusses why a CEO-chair is in the best interests of shareowners and it should name a lead independent director with approval over the flow of information to the board, meeting agendas and meeting schedules.
Non-executive chairs are common in many countries outside the United States. Some 79 percent of companies in the United Kingdom’s FTSE 350 index report that they have independent chairs, according to “Chairing the Board,” a March 2009 report published by the Millstein Center for Corporate Governance and Performance at the Yale School of Management. That report, which backs separate chairs and CEOs, says that splitting the two roles is the norm also in Australia, Belgium, Brazil, Canada, Germany, the Netherlands, Singapore and South Africa.
The United States presents a sharp contrast. In 2008, 49 percent of companies in the S&P 1500 index had separate chairs, up from 41 percent in 2006, according to a study by RiskMetrics Group (separate does not necessarily mean independent; some chairs were former top executives of their companies). U.S. critics of the split model assert that it can create tension and even a power struggle between the chair and CEO. It can also sow confusion among employees, customers and clients about whether the CEO has the full backing of the board and suspicion that he or she is a figurehead, some maintain.
Shareowners are stepping up the pressure for independence. Proxy proposals seeking independent board chairs garnered strong votes in 2009. Such proposals averaged 36.9 percent support at 34 companies, up from 24.8 percent in 2007, according to Riskmetrics. The financial crisis has been an important catalyst. The investor backlash over losses at many big U.S. banks, where CEO-chairs have been the norm, has fueled vigorous support for independent chair proposals and other measures that seek to strengthen the accountability of the board.
Four shareowner proxy resolutions advocating independent chairs won majority support. The most notable was at Bank of America, where on April 29, 2009, 50.34 percent of shareowners voted to split the chair and CEO positions. Following the vote, then- CEO Kenneth Lewis stepped down as chair. The vote marked the first time that shareowners had forced a company in Standard & Poor's 500-stock index to strip a CEO of chair duties, according to RiskMetrics. On Dec. 24, 2009, John Mackey, co-founder, CEO and chair of Whole Foods Market Inc., voluntarily relinquished his chairmanship, following years of pressure from shareowner group CtW Investment Group.
March 2009 Chairing the Board, a report of the Millstein Center for Corporate Governance and Performance