Independent board chairs may no longer be absolutely de rigueur from a corporate governance perspective—even ISS has a somewhat nuanced view on the subject—but the percentage of independent board chairs has been increasing these days. So why is that? According to a recent report from The Conference Board, it's not, as you might have expected, because of shareholder proposals requesting a separation of these roles to shore up board independence; rather, "it's likely driven by CEO succession events, as well as the growing workloads of boards and management."

SideBar

For 2022, ISS states that it will generally vote for shareholder proposals requiring an independent board chair,

"taking into consideration the following:

  • The scope and rationale of the proposal;
  • The company's current board leadership structure;
  • The company's governance structure and practices;
  • Company performance; and
  • Any other relevant factors that may be applicable.

The following factors will increase the likelihood of a 'for' recommendation:

  • A majority non-independent board and/or the presence of non-independent directors on key board committees;
  • A weak or poorly-defined lead independent director role that fails to serve as an appropriate counterbalance to a combined CEO/chair role;
  • The presence of an executive or non-independent chair in addition to the CEO, a recent recombination of the role of CEO and chair, and/or departure from a structure with an independent chair;
  • Evidence that the board has failed to oversee and address material risks facing the company;
  • A material governance failure, particularly if the board has failed to adequately respond to shareholder concerns or if the board has materially diminished shareholder rights; or
  • Evidence that the board has failed to intervene when management's interests are contrary to shareholders' interests."

The Conference Board, in collaboration with ESG data analytics firm ESGAUGE, collected data as of June 8, 2022 for approximately 400 companies in the S&P 500 and 2350 companies in the Russell 3000. The data showed that, among the S&P 500, the percentage of companies with a combined CEO/board chair declined from 49% in 2018 to 44% in early June 2022, while the percentage of companies with an independent board chair increased from 31% in 2018 to 37% as of early June 2022. In contrast, voting support for shareholder proposals for separation of the CEO and board chair roles declined from 35% in 2020 to 28% in the 2022 proxy season. According to proxymonitor.org, for the S&P 250, there were only about 30 shareholder proposals for independent board chairs during 2022. Among companies in the Russell 3000, separation of the two roles is more common, and the percentage of companies with a combined CEO/chair role fell from 37% in 2018 to 35% in 2022.

Could the burden of all the crises that boards and company managements have faced in the last few years—a worldwide pandemic, war in Ukraine, supply chain issues, inflation, not to mention all of the demands related to ESG—be the catalyst for this move toward independent board chairs? That's the theory posited by The Conference Board. The Conference Board suggests that dealing with these crises has increased the workloads of boards and managements, leading many companies to see the benefit of "having two leaders at the helm," with a board chair focusing on the board and the CEO focusing on management. Another driver identified by the Board is "CEO succession, which has increased recently and provides an opportunity for the board to reconsider its leadership structure. For example, of the 27 CEO succession announcements through June 21, 2022, only one firm chose to replace a departing CEO/board chair with someone who will assume both positions. By comparison, nine firms (33 percent) chose to have the former CEO remain as a non-independent chair—which is often for a transition period of a few years, after which some boards will name the current CEO as chair, while others will choose to name an independent chair."

According to the executive director of The Conference Board's ESG center, as reported in Fortune, "It takes a lot of time to manage the board and lead the board, and if you're doing that at the same time that you're trying to lead the business through crises or transformations, that's hard....It can really help to have two people doing it...and you get extra points with investors." On the other hand, he observed, there are "a lot of synergies by having one person do both roles," including that "the person who is overseeing the board agenda is the person who knows the business best: the CEO." In his view, the decision as to the occupant of the board chair position depends on "[t]he clear allocation of responsibilities between the CEO and the chair, and the chemistry between the two."

The Conference Board indicates that larger companies are more likely to combine the CEO/chair roles than smaller companies. About 55% of companies with annual revenues of at least $50 billion had a CEO who also served as board chair, while that was true for only 25% of companies with annual revenues under $100 million. Although, the Board reports, almost all companies have a policy about board leadership structure, in 2022, 74% of companies in the S&P 500 and 68% of companies in the Russell 3000 provided flexibility about separating the roles. The reason most cited (66% of the Fortune 500 and 76% of the Russell 3000) for separating the roles was that the CEO and board chair roles have different responsibilities. According to Board data, 60% of companies in the S&P 500 and 31% in the Russell 3000 that required a combined role stated as a reason for that practice that independence of board leadership could be achieved through a lead independent director. Companies also stated that they believed that, based on industry experience and company knowledge, the CEO was best suited to set the board's agenda.

SideBar

In a 2015 paper, "Seven Myths of Boards of Directors," two academics from Stanford Business School set about debunking some of the most common and persistent expectations regard best practices—one of them being that the board chair should always be independent—contending that the myth is "not substantiated by empirical evidence."The argument has been that an independent chair without ties to management will provide more vigilant oversight, acting as an effective counterweight to management when required. Nevertheless, the authors contend, "the research evidence does not support this conclusion." The authors cite various studies finding "no statistical relationship between the independence status of the chairman and operating performance," "no evidence that a change in independence status (separation or combination) impacts future operating performance," and some evidence that "forced separation is detrimental to firm outcomes: Companies that separate the roles due to investor pressure exhibit negative returns around the announcement date and lower subsequent operating performance." Accordingly, they argue, the costs and benefits of requiring an independent chair depend on the circumstances, and quote the former head of the FDIC, Sheila Bair: "Too much is made of separating these roles. ... It's really more about the people and whether they are competent and setting the right tone and culture." (See this PubCo post.) The same authors made the point again in a 2019 article, contending that the research does not support the conclusion that independent board chairs are necessarily beneficial. Several studies showed no correlation between chair status and performance, or on attributes of governance quality such as managerial entrenchment, organizational risk taking, or executive pay practices; one study even showed that compelled separation of chair and CEO positions was detrimental to performance. (See this PubCo post)

In this article, Board Gatekeepers, a law professor at the University of Wisconsin contends that board gatekeepers—independent board chairs and lead independent directors—are intended to add a "second layer of protection to the independence of the board" and signal and ensure "the existence of proper monitoring of management by the board."" But, he suggests, the inventory of recent scandals raises the question of whether these board gatekeepers are really just window dressing? The article examined board gatekeepers' independence and powers in 900 publicly traded companies to assess their "functional independence." The author found that many gatekeepers viewed as independent "are tightly connected to the companies in which they serve in ways that cast doubt on their willingness to truly act independently." In addition, he concludes, board gatekeepers often lack "concrete tools...to exert independent monitoring," highlighting the concern that gatekeepers may not have the types of substantive enumerated powers that would allow them "to truly act independently even if they are willing" and to permit accountability for failures notwithstanding appropriate powers. In the end, the author questioned whether the positions of independent board chair and lead independent director might perhaps be more ceremony than substance. (See this PubCo post.)

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