Gary Wilson, the chairman of Northwest Airlines, has penned a plea for the end of the "Imperial CEO," the chief executive who also serves as the chairman of the board. Because of Wilson's respected position as a board member of Yahoo and, until recently, Walt Disney, his article has the potential to be very influential.
Wilson argues that a conflict of interest arises when a chairman also serves as chief executive. Since a key role of the chairman is overseeing a board charged with hiring, overseeing and, if necessary, firing a CEO, the combining of the posts undermines a board's independence from management, Wilson writes.
After the jump, we get all cynical about this proposal.
Fully 65 percent of the S&P 500 have CEOs who serve as chairmen of their boards. A number of blue chip companies, including General Electric, Coca-Cola, Exxon Mobil, UPS, Deere, Caterpillar, CSX and Johnson & Johnson, have bylaws that require the CEO to also serve as chairman. Over at Portfolio's Market Mover blog Felix Salmon points out how odd this arrangement is. "By adopting such a bylaw, the board is tying one hand behind its back when it comes to the CEO succession process," he writes.
What's the purpose of such requirements? Our first reaction was completely cynical: the purpose is the entrenchment of management. It's simply a way for corporate management to control the board.
That's unsatisfactory because it doesn't answer the question: how would a board adopting such a bylaw justify it? To understand this answer we have to flip our cynical answer on its head. Instead of looking at it as managerial capture of the board, look at such a bylaw as the board's capture of management.
Having your chairman serve as chief executive could be viewed as an important check on managerial overreach. The chairman would have a duty of loyalty to the shareholders, and could be thought of as ensuring the company continues to serve the interests of shareholders rather than employees or other special interests. In short, it's easy to see how this could have been viewed as an important part of corporate governance by shareholder advocates of a bygone era.
Wilson himself is a former chief financial officer and is currently on an alternate director slate for transportation company CSX, proposed by an activist hedge fund. CFOs are precisely the kind of entrenched top-level management that might be checked by a chariman-CEO. Activist hedge funds notoriously have different agendas, often based on short-term gains, than other shareholders who are in it for the longer term. We can squint our eyes a bit and see Wilson's proposed corporate governance reform as yet another way to entrench special interests at shareholder expense.
Although Wilson peppers his essay with shareholder friendly rhetoric and anecdotes about improved performance from dividing the chairman and CEO posts, we'd like to see some real data before changing a model accepted by such an overwhelming super-majority of S&P companies. Would shareholders profit from this move? Or would it simply be another instance of cosmetic corporate governance that actually benefits special interests and management?
How to Rein in the Imperial CEO [Wall Street Journal]
Why Force Your CEO to be Chairman? [Portfolio]
Posted by StMarc , Jul 10, 2008 10:14AM
And this, kids, is why we like to work for closely-held private companies. When the same group constitutes the shareholders, the board, and the corporate officers, so long as they're not collectively brain-dead, things get DONE and there's none of this wasting time on conflicts crap.
M
Posted by diablo , Jul 10, 2008 10:44AM
Carney is full of nonsense. What a stretch!
Is Carney saying that a CFO can't be replaced by a CEO unless the CEO happens to be chairman also? CEOs and CFOs have to be the closest of buddies. In fact, when fraud is discovered and prosecuted, those 2 usually end up in court. A combined Chairman-CEO is not going to help in that situation.
Next.
Posted by guest , Jul 10, 2008 10:50AM
Um, officers have fiduciary duties too, and there have been suggestions in recent years that they're often the same as those of non-management directors. So making the CEO chairman doesn't add much in this respect. Wilson's argument sounds much more plausible than yours.
Posted by guest , Jul 10, 2008 1:30PM
Carney, there HAS been a lot of empirical research showing that CEO's shouldn't be Chairmen. Look up it up on JSTOR.org if you have an account or Google scholar if you don't (you won't be able to access most journals without paying).
Seems like the consensus now is that there are both costs and benefits to have a CEO chairman. The debate is on for what kind of firms are the costs larger than the benefits. See Tirole 2007 for a summary of empirical research on this.
Posted by John Carney , Jul 10, 2008 1:40PM
I read a bunch of the research last night and it seemed inconclusive. I'll follow up with the article you recommended.
Like I said, I'm not sure Wilson is wrong. What I was trying to get at is that his argument was more ideological and anecdotal, and there were shades of self-interest.
What's more, I'm suspicious when a position so widespread in the market (65% of S&P) is treated as completely irrational. This doesn't mean it isn't irrational. But it at least makes sense to explore what the justification for the combined Chair-CEO could be.
In my experience it pays to view calls for corporate governance reform with a skeptical eye. All too often they mask the operations of special interests seeking out-sized influence.