Another View: Improving Corporate Governance

The New York Times, June 11, 2010

Jonathan F. Foster, managing director of Current Capital, explains that while splitting the leadership of a company and its board generally improves governance, the quality of the people is the key factor for success.

The financial regulatory bill, which has reached its final stage in Congress, represents the most ambitious attempt since the New Deal legislation of the 1930s to regulate and reform not only the financial services industry, but also corporate governance. Both the House and the Senate bills include a provision requiring public companies in the United States to disclose in their annual proxy statements why they have or have not chosen to separate the roles of chairman and chief executive.

The separation of the leader of the board of directors (its lead director, presiding director or non-executive chairman) and the leader of a company (its chief executive) is becoming increasingly prevalent — and rightly so. This step, however, is not a cure for all corporate ills.

The most important single action that an effective board generally takes is to set an effective agenda. The agenda should help a board accomplish its primary objectives: appointment, oversight and compensation of senior management; review of budgets and strategy; and oversight of financial reporting and capital structure. An independent board leader, whose primary task is to manage the board and facilitate its work, can usually set an appropriate agenda more easily than the most senior operating executive or chief executive. Also, given a board’s responsibility for oversight of management, the separation of the leader of the board and the leader of the company is logical.

The 2009 Spencer Stuart Board Index reports that 95 percent of companies have a lead or presiding director. In addition, it reports a substantial increase in independent or non-executive chairmen: from none 10 years ago to 9 percent five years ago to 16 percent in 2009. The Spencer Stuart index is a comprehensive summary of issues and actions of the boards of companies in the Standard & Poor’s 500-stock index.

The increasingly popular position of lead or presiding director is the outgrowth of an earlier wave of federal corporate reform that came after Enron, Worldcom and other turn-of-the-century corporate scandals prompted Congress to pass the somewhat controversial American Competitiveness and Corporate Accountability Act of 2002, commonly known as the Sarbanes-Oxley Act.

American stock exchanges require a lead or presiding director when the chairman is not independent of management. While the formal responsibilities of the lead or presiding director are defined by each company, they typically include organizing and heading meetings of the independent directors, acting as a liaison between the board and the chairman/chief executive, helping to set the board’s agenda and facilitating an appropriate flow of information to the directors.

The lead or presiding director serves in a meaningful role to separate the leadership of the board from the leadership of the company. However, a non-executive chairman typically brings more authority, a wider scope and less ambiguity.

Yet, the question remains as to how effective the separation of the roles of chairman and chief executive truly is. Consider the fact that one of the most iconic business leaders today, Warren E. Buffett, acts as both chairman and chief executive of Berkshire Hathaway. Rather than be criticized, Mr. Buffett attracts thousands of shareholders each year in Omaha to hear his sage advice. On the other hand, Steven P. Jobs of Apple is one of the most successful chief executives, yet he functions very well, thank you, in that role under the implicit guidance and support of non-executive chairman, Bill Campbell, a former chief executive of Intuit and a onetime Columbia University head football coach. And much has lately been made of the fact that BP has separated the two roles with little apparent positive effect on its crisis-management capabilities.

There have been a number of catalysts for improved governance over the past decade, including increased pressure from more aggressive shareholders, examples of excessive pay uncorrelated with stock price performance and major corporate failures. For a board of directors to provide effective oversight of a company and its senior management, it is logical that the leader of the board is a different person than the leader of the company. A lead or presiding director is a strong step in this direction. A non-executive chairman is a stronger, broader step in this direction.

However, is there any hard and fast lesson of corporate governance to be learned from all this? Absolutely — no one size fits all. The reality is that even the worthiest regulatory fixes and policy enhancements are not nearly as significant as the quality of the people involved.