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]