In-Depth Report: Independent Chair
Why are public companies facing shareholder proposals calling for an independent board chair?
Research suggests that combining the positions of chair and CEO may hinder a board’s ability to dismiss an ineffective CEO. One study found that “the sensitivity of CEO turnover to firm performance is significantly lower when the CEO and chair responsibilities are vested in the same individual.” It is the board’s responsibility to select a chief executive who can best serve the company and its shareholders and to replace this person when his or her duties have not been appropriately fulfilled. Further, a 2009 study regarding corporate governance practices at U.S. corporations found that companies with combined chairs and CEOs tend to follow fewer positive corporate governance practices such as having declassified boards and calling frequent board meetings.
Some empirical evidence suggests that firms with separated CEO and chair roles outperform companies in which a single individual serves in both capacities. Beyond the potential performance-related improvements of an independent chair, the cost of compensation is significantly lower despite increased headcount. A 2012 study shows that CEOs who are not chairs earn 44% less than those that serve combined roles. Additionally, it is 25% less expensive to compensate a CEO and independent chair than a combined position.
However, there isn’t a consensus, and the research isn’t conclusive. Some studies indicate that separating the roles of chair and CEO may have negligible or negative impacts on corporate performance. Some critics claim that separating the two roles leads to confusion and power struggles between management and the board.
With strong opinions on both sides, independent chair proposals have long been one of the most common shareholder initiatives at annual meetings in the United States. This proxy season, boards and management with combined chair/CEOs or otherwise non-independent chairs will once again be asked to adopt policies ensuring a transition to an independent chair. Investors will be asked to vote — and will need to understand the issues involved. Glass Lewis’ newly updated Independent Chair report provides crucial context, including an overview of academic research and a rundown of recent controversies that have shaped the discussion. The report is part of Glass Lewis’ “In-Depth” series, a growing library of ESG-focused literature that illuminates the topics at the top of the agenda for investors and public companies.
In-Depth: Independent Chair is available now. Glass Lewis customers can access the report on Viewpoint via the Help & Resources menu, or Governance Hub, or contact their Glass Lewis Representative for more information.
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