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12 Nov. 2010 | Comments (0)

While the big takeaway from the inaugural Korn/Ferry Market Cap 100 report on Board Leadership is that few public companies among the large capitalization public companies have non-executive chairs, it doesn’t mean there isn’t a trend towards the European practice. In fact, a recent survey conducted by The Conference Board in collaboration with the Society of Corporate Secretaries and Governance Professionals shows the practice is not so rare among companies with less than $5 billion in revenue. One theory both studies seem to support is that the larger the company, the less likely it is to separate the Chair and CEO positions although those companies tend to have a lead or presiding director. Meanwhile, fewer smaller companies tend to have both a non-executive chair and a lead director. The recently released Korn/Ferry report found that only 9 percent of the Korn Ferry Market Cap 100, which includes such companies as Bank of America, Citigroup, Walt Disney, and McDonald’s, are led by non-executive chairs. That didn’t mean that the other companies were all led by a dual CEO/Chair. The survey showed that 12 percent were led by other insiders, such as the former CEO, a founder or a member of the founding family. The report points out that 19 percent of the S&P 500 have non-executive chairs. However, it did show that 49 percent of those boards have a lead director and another 28 percent have a presiding director. One of the points made in the report is that although a very small percentage of those surveyed has independent chairs, a good portion of the companies are aware of the importance of what Korn/Ferry calls a “non-executive board leader.” Many of those leaders are active or former CEOs, presidents or chairs on other boards, the report states. In its engagements with companies, Korn/Ferry found the following prevailing responsibilities for such leaders:
  • Chairs all executive sessions and, in the absence of the Chair/CEO, board meetings.
  • Consults with the chair and directors on meeting schedule, agenda, and materials.
  • Acts as liaison between chair and board members.
  • Works with the Chair to respond to shareholder inquiries and approves company responses to outside communications.
  • Works with the compensation committee chair on CEO performance evaluation and compensation.
  • Determines who should attend board meetings.
The Conference Board Governance Center 2010 U.S. Directors’ Compensation and Board Practices Report [Download free to members.], which was released last month, found the presence of a separate chair and CEO by company size by revenue ranges from 34.5 percent ($5 billion and over) to 57.9 percent (under $100 million) for the manufacturing and non-financial services areas. The range for financial services by assets was 14.3 percent ($100 billion and over) to 63.6 percent ($10-99 billion). But when it comes to the presence of a lead director, the analysis shows that the larger the company the more likely it will have such a director while the inverse is true for the smallest companies. (As many as 71.4 percent of the largest companies have a lead director compared to 42.1 percent of the smallest companies.) The 2009 U.S. Directors’ Compensation and Board Practices Report, which was based on a sample of proxy samples as of May 2009, found the presence of a non-CEO chair by company size by revenue ranged from 28.7 percent (more than $9.33 billion) to 58.8 percent (less than $102 million). Once again, the inverse was true for those companies with lead directors. (Of the largest, 78.7 percent have lead directors compared to only 28 percent of the smallest companies.) The Korn/Ferry report sparked many comments in the blogosphere as well as online discussion groups, such as the one I belong to LinkedIn (Corporate Governance Leaders). Interestingly enough, the most critical comments on the lack of separating the Chair and CEO came from foreign corporate governance consultants. “The Korn-Ferry report touched a very important subject, but did not go very deep into the core issue of splitting the roles of Chair and CEO,” wrote Olli V. Virtanen, CEO of Virtanen Associates Oy in Finland. “In the Nordic countries (including my country Finland) companies took a serious look at different roles and responsibilities of shareholders, board and management with the purpose to avoid confusing overlap and conflict of interests. Conclusion was that if the board is responsible for oversight and risk management, appointment and remuneration of CEO, approving strategy, etc, it is difficult to justify members of the top management as also board members. Therefore listed Nordic companies typically have totally non-executive boards.” Patricia A. Olah, founder and principal of The Olah Group in Canada, points out how Canadian companies follow regulatory guidance that calls for appointing a lead director when a CEO/Chair would have an apparent conflict of interest. “I have never understood the U.S. model of CEO serving as Chair,” she wrote. “He is in effect leading himself, judging himself, and using two roles to sway the board to his will. This is not a model of good governance, and in my view sets the stage for the CEO to inappropriately (and consciously or unconsciously) assert his will and utilize his position of power in a way that undermines the independent judgment of otherwise intelligent board members. “In my opinion, the U.S. should be regulating this area as U.S. companies seem completely unwilling to adopt this model, despite organizations such as the NACD releasing studies and reports urging the split model for quite some time now, but this has been ignored by corporate America.” All in all, I think it is safe to say that no matter what kind of board leadership structure a U.S. company has, the non-executive board leader is going to play a big part in the governance of the board. While such a structure is being adopted by larger companies that continue to have a dual CEO/Chair, those companies may pick up some pointers from the smaller companies that have been separating the two positions. No matter how the board leadership structure is set up, many experts and studies show the key is that power to run the board is not left in the hands of one person.
  • About the Author:Gary Larkin

    Gary Larkin

    Gary Larkin is a research associate in the corporate leadership department at The Conference Board in New York. His research focuses on corporate governance, including succession planning, board compo…

    Full Bio | More from Gary Larkin

     

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