The Corporate Library Blog

GM Combines Roles of CEO and Chair

We learned yesterday that the GM board has approved the combining of the roles of CEO and Chair of the Board as the government-named board chair Edward E. Whitacre, Jr., will assume the position of permanent CEO. Whitacre had been serving as interim CEO since early December. 

I could go on and on here about my continued surprise at the number of “interim CEOs” in place at US companies.  This is something that has always bothered me because of the clear indication it gives that the boards of these companies have not focused on one of their most important responsibilities: succession planning for the CEO position. 

But, with GM, there is a more disturbing issue to discuss – the combination of the roles of CEO and Chair of the Board.  As Kristin Gribben of Agenda noted, “The government is still the largest GM shareholder and was involved in splitting the roles at the company. It’s somewhat surprising, therefore, that the GM board would decide to combine the positions.”

If ever there was a company which would benefit from an independent leader of the board of directors, GM is one such company.  Historically, The Corporate Library has rated the governance risk of GM as very high,with our last rating for the company being an F – the highest level of governance risk. GM now has the opportunity to develop a new governance and board leadership structure as they prepare to return to the public markets.  The GM board should have considered the message they are sending to potential GM shareholders by combining these two roles and deciding not to have an independent Chair of the Board.  When the company files its IPO documents they will have to comply with the SEC’s new disclosure rules requiring a discussion of the reasons the board considers the current board leadership structure to be the most appropriate for the company at this time.  I look forward to reading that discussion. 

While we at The Corporate Library do not argue that a separation of these two roles is the right board leadership structure for all companies at all times, we have found that companies with the roles combined tend to have less shareholder-friendly governance structures in general.  In March, 2009 we published a study comparing the governance practices of the 52% of the more than 3000 companies in our database where the positions of CEO and Chair of the Board were combined with those of the companies where the roles were separated, and concluded:

“While structural characteristics may not be an unfailing guide to governance quality at every individual firm, it is striking that, as a group, companies with a combined CEO and Chair are more likely than others to have a number of features suggesting less vigorous representation of shareholder interests (including long CEO tenure, fewer board meetings, board classification, and executive committees). These companies are thus likely to benefit from the increased scrutiny of managerial decisions that an independent Chair would provide.”

Annalisa Barrett - Senior Research Associate

New SEC Disclosure Rules on Board Leadership Structure

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

New Report: Larger Cap Firms Less Likely to have Independent Board Chairs

Fewer than 15 percent of S&P 500 index companies have an independent board chair, according to a new report from The Corporate Library. The report examines trends in board leadership over the past five years and is the second in a series examining corporate governance practices in the S&P 500, Russell 1000 and Russell 3000.

In recent years, companies increasingly have placed an independent director in the role of chairman of the board, with more than 22 percent of Russell 3000 firms having what The Corporate Library defines as an independent chair.  However, in sharp contrast, only 14.8 percent of S&P 500 companies have independent chair positions.

The report also discusses trends in the numbers of companies with a combined chair/CEO position, a lead independent director position, and a chairman who previously served as CEO.

It was found that many directors who meet listing exchange requirements for independence have significant relationships with companies in addition to their board service. For example, a director may be a relative of a company founder or current executive and still be considered independent by listing exchange standards. To provide a nuanced assessment of director independence, The Corporate Library has developed a three-category system, under which directors who have such significant relationships with the companies on whose boards they serve are not counted as independent.

The report, “2009 Governance Practices Series: Board Leadership,” is available for $45 from The Corporate Library’s online store.

No More Exxon Annual Meetings For Bob Monks

The Corporate Library Co-Founder Bob Monks won't attend any more Exxon annual meetings, according to an essay posted on his blog Friday. He cites a disappointing lack of interaction between shareholders and management as a main reason.

Elizabeth Souder, a Dallas Morning News reporter writing for the Texas Energy and Environment Blog, writes about Bob's decision and her experience at Exxon's recent annual meeting here.

BankUnited Bankruptcy: Corporate Governance That Never Was

As reported on Footnoted.org last week, on May 21, 2009, BankUnited FSB was closed upon the order of The Office of Thrift Supervision, leading to a Chapter 11 bankruptcy filing by parent company BankUnited Financial Corp. Regulators seized the failed bank and transferred assets to a private investment group, led by John Kanas, who are investing $900 million into the new BankUnited and ending a four-month auction process by the FDIC. According to the Wall Street Journal, taxpayers will still bear the brunt of the bank’s rebuilding process however, as the FDIC is assuming the vast majority of billions of dollars in potential losses still on the books. The emerging bank will be well funded, and the potential for growth could be enormous over the next few years, but Mr. Kanas and company would be well served to avoid some of the potential corporate governance pitfalls that have begotten BankUnited in the past.

The Corporate Library issued an analyst alert in the summer of 2008 citing numerous ways in which the corporate governance revolution appeared to bypass BankUnited. Purchase our company governance profile for BankUnited for US$50 (down from $US850) to see how The Corporate Library rated them for governance risk. As of 2008, BankUnited Financial Corporation was more than 42 percent owned by the Camner family, with Alfred R. Camner serving as the rather extended CEO of the company. In addition to serving as the Chairman and CEO of BankUnited Financial AND BankUnited, FSB, he also served as head of Camner, Lipsitz and Poller, P.A. (“CLP”), where his daughter Errin served as a Managing Director. Between 1998 and 2008, BankUnited Financial Corporation and BankUnited paid more than $30 million in retainer fees to the firm as General Counsel, including $4.9 million in 2007 alone. Another of Alfred’s daughters, Lauren Camner, served as a Senior Vice President and director of both BankUnited Financial Corp and BankUnited FSB. The Camner family also owned Series B Preferred Stock at the former Bank United Financial Corp., which had 25 times the voting power of its publicly-tradeable common stock.

Other concerns included a classified board and plurality voting for directors, which make it difficult for shareholders to remove or replace under-performing directors as they did not come up for election every year and did not require a majority vote for election. CEO pay was also wrought with governance blunders. Mr. Camner was eligible for quarterly bonuses of up to $800,000 in 2008, despite having strategic responsibilities that should not be focused on such short term performance. Additionally, this quarterly bonus was based on the same set of performance metrics as his annual cash bonus and performance-restricted stock award, ostensibly rewarding him three times for the completion of the same short-term achievements. The CEO also received super-voting stock options, generous perquisites, and even director fees for serving on the board of the company subsidiary.

The former BankUnited was a family firm and in the end, the interests of the family were misaligned with those of its shareholders. It will be up to Mr. Kanas and others who bring the new BankUnited to light to avoid such non-shareholder friendly practices in the future. The partnership between the government and private equity must also have room for a clear voice from the shareholders, and for the interests of all three parties to be aligned.

Greg Ruel—Research Associate

A 'Real' Board for Exxon

Exxon has long had its own way of doing things – from exploration policy to public, government and shareholder relations. Exxon invites comparison with other companies based on its record. The company says simply – we are better than everyone else according to every system of measure, why should we listen to anybody telling us to do anything different. This line of argument compels the ancient wisdom – he who knows what he knows knows, he who knows not what he knows not knows not. The experience of participating in Exxon’s Annual Meeting is a classic of people talking past each other – Exxon management simply does not comprehend what its shareholders are trying to tell them. And, here’s the rub – lack of understanding results in failure to try to understand and that is why I persist.

The Yale School of Management has recently concluded that best practice for American corporations is to have a separate individual as Chairman of the Board from the Chief Executive Officer. Senator Schumer of NY has recently introduced legislation that would require as a matter of federal law that all corporations should separate Chair and CEO. There is, therefore, much current wisdom learning and agreement on this subject – enough that I will not attempt anything beyond the very simple question – how can you have a “real” board without having an energy separate from the management to compile its agenda, assure availability of appropriate information, conduct the meetings? How can you monitor CEO conduct? One size does not fit every company, but American publicly traded companies universally are required to have boards of directors in order to represent the interests of owners. Does this not necessarily mean a “real” board?

Robert A.G. Monks — Co-Founder

Exxon: Mutual Fund Voting Should Be Informed By Investors

The AP reports on Salon.com on the website set up by TCL board member Bob Monks and Neva Rockefeller Goodwin in support of the shareholder proposals on climate control, renewable energy, and splitting the chairman/CEO at Exxon.  To my knowledge, this is the first time shareholder proponents have called on beneficial holders to put pressure on their mutual funds to vote against corporate management.

The site allows investors to click on a fund company and send a message that says, in part, "As a mutual fund shareholder, I am concerned about both the future of the environment and the future of my retirement nest egg."

"We intend to watch how these mutual funds respond to this feedback from their customers and then let mutual-fund investors know whether their input was heeded or ignored," Monks and Rockefeller Goodwin said in a statement.

Activist groups often petition funds to vote certain ways, but "it's unusual for activists to try to work through the fund's shareholders," said Mike McNamee, spokesman for the Investment Company Institute, the mutual fund industry's biggest trade group.

TCL reports have consistently shown that mutual funds vote contrary to the interests of investors on executive compensation and other issues.  While the SEC now makes the mutual funds disclose their votes, the information is still difficult to get and holders have very little idea of how the votes of the shares they own are being cast and even less idea of how to direct a better vote.  Instead of (or in addition to) petitioning the funds directly, the people filing these proposals have set up a very user-friendly site that lets investors send their views on to the companies that manage their money.  I hope this starts a trend – and that future such sites disclose how the funds voted on previous votes.

Nell Minow — Editor