Separation and Oversight: A Matter of Checks and Balances
February 01, 2008
by Stephen T. Giove and Catherine Kemnitz
from Shearman & Sterling LLP
Companies have been focusing on the issue of the separation of the positions of
chairman of the board and chief executive officer for several years. Yet change has been
happening gradually. Shearman & Sterling LLP’s 2007 Survey of Trends in Corporate
Governance of the Largest U.S. Public Companies found that 22 of the top 100
companies had separate individuals serving as chairman and CEO. While this is a
slightly lower proportion than in 2006, it is noticeably greater than in 2003 and 2004
where only 14 and 19 companies, respectively, separated the two functions. The goal
pursued when proceeding with such a separation is the preservation and strengthening
of the oversight role of the board of directors. It is a matter of checks and balances.
The presence of an independent lead or presiding director is often suggested as an
alternative to the requirement that an independent director serve as chairman of the
board. Are companies embracing this other answer to the oversight question? The
number of companies choosing to have a lead or presiding director has decreased
slightly in 2007 after increasing steadily for several years. This decrease is possibly due
to an overall increase in the proportion of companies separating the CEO and chairman
of the board functions. In addition, the answer to the issue of board oversights seems to
vary depending on the size of the company and its industry, with the larger companies
more often opting for a lead or presiding director. Smaller companies are more likely to
separate the functions of CEO and chairman.
Is the real evolution then to be found in the role filled by the lead or presiding director?
The Shearman & Sterling survey reviewed the duties taken on by lead or presiding
directors and found a large increase in the number of top 100 companies giving such
directors responsibilities in addition to setting the agenda for, and presiding over,
executive sessions. These directors often act as a liaison between the non-management
directors and management, review and advise on board meeting schedule, materials or
informational needs, preside at board meetings in absence of the chair and consult with
major shareholders as requested.
How do the independence requirements affect the approach taken by companies?
Whether a company separates the functions of CEO and chair or appoints a lead or
presiding director, the key question of the independence of this person remains. A
separation of functions alone does not necessarily yield the independence which
Excerpted from: www.boardmember.com
companies seek, especially if the chairman or lead director is or was an employee of the
company on whose board he or she serves. It is often unclear how the appointment of a
former CEO as chairman will be perceived by investors. The complexity of the situation
is increased when the former CEO initially appointed many of the board members with
whom the CEO now serves. This may be why investors have not overwhelmingly
embraced the separation of the role of CEO and chairman as a solution to the board
oversight concern, even when presented with shareholder proposals to this effect.
In a diverse and ever changing environment, there is no one solution. Companies should
consider the various options available to them. Whether by creating a lead or presiding
director position or separating the functions of CEO and chairman of the board, they
should consider what will best serve their shareholders’ need for checks and balances
and ensure board oversight of management. This analysis should take into account the
management culture of the company, the preferences of investors and should pay
particular attention to the independence of the person filling the position. After all, should
a problem arise, what answer will the company want to be in a position to give when
asked about the role and autonomy of its board?
Stephen T. Giove is a partner in the Capital Markets – Americas Group at Shearman &
Sterling LLP in NY. He can be reached at [email protected] or 212-848-7325.
Catherine Kemnitz is a Shearman & Sterling associate in New York. She can be reached
at [email protected] or 212-848-8805.
For more information: www.shearman.com
Excerpted from: www.boardmember.com