The SEC’s enhanced proxy disclosure rules related to corporate governance and executive compensation matters will be effective for proxies filed after February 28th. The part of these new rules I am most excited about is the enhanced disclosure regarding board leadership. Companies will have to provide detailed information regarding their board leadership structure, including “whether and why it has chosen to combine or separate the principal executive officer and board chairman positions, and the reasons why the company believes that this board leadership structure is the most appropriate structure at the time of filing.” If the roles of principal executive officer (AKA CEO) and board chair are combined, the company will have to discuss its decision regarding the designation of a lead independent director. In July when I blogged about the proposed rules regarding the lead director disclosure, I wrote:
A positive change that we would see if these rules are adopted is more meaningful information about the roles and responsibilities of the lead independent director. However, companies should also have to disclose their reasoning if they have combined the roles of CEO and Chair of the Board and NOT created the position of lead independent director (or a similar position). Surprisingly, there are many US companies which fall into this category.
Now that the rules are finalized and soon we will see proxies with these discussions regarding board leadership structure, I wanted to see how many companies with a combined CEO and board chair will be in the position of explaining why they do not think it is “appropriate” to name an independent director as lead director. I was amazed when I searched our Board Analyst database and found that, as of December 28, 2009, more than 700 companies in the Russell 3000 index have one person serving as both CEO and board chair and have not named an independent director as lead director.
To be fair, I should point out that we at The Corporate Library have a high standard for what we consider the designation of a lead director. We only consider a company to have a lead director if they specifically provide the name of a single lead (or presiding) director for the board. Only when shareholders are provided the name of an individual who has been given the title of lead (or presiding) director and will be held accountable for serving as the ongoing leader of the independent directors of the board is a company considered to have a lead director in our database.
For example, we do not consider a board to have a lead director if they report that the independent directors or chairs of the board committees rotate in the role of lead director. This is the case at several large US companies. Similarly, if the board designates someone to be the lead director simply because of their role as the chair of the board or a certain committee, we do not consider that board to have a lead director. Some boards select the person who will serve as lead director, by leading the executive session meeting, by stating that it will be the person who chairs the committee which has responsibility for the issue to be discussed at that particular meeting.
Our concern with these and other similar approaches is that while they only effectively determine who will lead any given executive session; they do not name a person who is consistently responsible for truly serving as an independent leader of the board and who can be held accountable by shareholders.
Of the more than 1,500 companies in our database which have combined the roles of CEO and board chair, we consider only about half to have named a lead director. When I narrowed the search in our database to consider only S&P 500 companies, I found that more than 100 companies with a combined CEO and board chair had not named a lead director as of December 28, 2009. We will be watching these companies as they file their proxies in the coming months to see how they justify this lack of independent board leadership.
Annalisa Barrett - Senior Research Associate
