When I sit in meetings with US board directors I am often assumed to be an advocate for the British corporate governance model. Not because I believe the model is any better but because I ask probing questions about the US model in an English accent.

Sometimes it seems that nothing vexes US board directors more than when I ask them whether the role of chairman and chief executive should be separate or combined. The topic will rear its head again during the 2011 proxy season.

Spencer Stuart, the executive search firm, reported that in 2010, 40 per cent of public companies in the US divided the roles of chairman and CEO, up from 23 per cent in 2000 but only up by 1 per cent since the financial crisis in 2008. In many cases these splits are a temporary fix to cope with a newly appointed CEO. Only 19 per cent of the board chairs are independent and only six companies declared in their securities filings that they have an explicit policy to split the roles.

Some activist investors believe that splitting the role would have made a tangible difference in the financial crisis as CEOs at US banks would have been answerable to an independent chairman. However, by that logic, UK banks, with their separation of chairman and CEO roles, should have fared better. They did not.

In fact, there is no evidence that splitting the roles of chairman and CEO has any impact on corporate performance. There is no correlation between the split and business success or shareholder returns.

Yet, the activists think the model is better. Why? In a nutshell, they believe that an independent chairman provides stronger leadership of the independent directors to balance the CEO’s power in the boardroom.

The largest proxy vote adviser, ISS, recommends voting for proposals for an independent chairman unless there is a “counterbalancing governance structure” including a “designated lead director, elected by and from the independent board members with clearly delineated and comprehensive duties.”

This view misses a critical development in the US: in practice, the roles of lead director and chairman have converged. Lead director’s core responsibilities include involvement in agenda setting, chairing executive sessions, providing feedback to the CEO after executive sessions and helping to shape boardroom dynamics.

In a recent report from the Chairmen’s Forum, some US chairmen “made a specific effort to indicate that they do not favour one leadership structure over another, said one, ‘I don’t want to get into any debates about titles – title doesn’t matter to me.’”

The Guidance on Board Effectiveness issued last month by the UK’s Financial Reporting Council contains little in its description of the chairman’s role that would not apply to lead directors in the US, except, perhaps, “ensuring effective communication with shareholders and other stakeholders”.

Of course, there are differences between how a typical US lead director and a typical British chairman meet those responsibilities. US lead directors do not usually have an office at the company. Lead directors do not run board meetings, looking instead to the CEO to lead board discussion.

Other differences are emerging. Geoffrey Owen, a former editor of the Financial Times, noted in his report “Evolution or revolution? – Changes in Britain’s boards of directors from 1960 to 2010”, summarised in the Financial Times last month that: “The chairman needs to be qualified by ability and experience to run the company in an emergency, if for some reason the chief executive is unable to do the job and no successor is yet in place.”

Mr Owen also reported that in the UK, chairmen “are having to work a lot harder, and sometimes they have to take on, as in the BP case, the requirement to be the face of the company, dealing with external stakeholders as well as shareholders.”

A US board chairman says that when he assumed the role, he was shocked at the reaction of the external community. “When I became lead director at another company, nobody called to congratulate me,” he says. “When I became non-executive chairman in this situation, I got all these congratulatory calls, as if I was doing something more important. The external community doesn’t understand that there’s no distinction, and when you talk to employees or shareholders, they don’t either.”

One reason for the difference between the role of chairman in the UK and the US may be in the perception about what is being chaired. One US board director says: “When you are [in] the non-executive chairman role, you are the non-executive chairman of the board, not the company.”

The UK board chairman model contains emerging problems of its own being neither truly non-executive, nor really part-time. Mr Owen noted in his report that the UK board chairman can “no longer accurately described as non-executive”.

Heidrick & Struggles, the executive search firm, noted last year the, “ambiguity surrounding notionally part-time roles that have the potential to become full-time at short notice”.

As I’ve noted in this column before, the Senior Independent Director, formalised in UK corporate governance practice in 2003, was created as a counterweight to concerns about over-mighty board chairmen. So, the tendency towards building empires obviously does not begin and end in the CEO’s office.

The lead director role – an interesting example of “American exceptionalism” – can be just as effective at countering boardroom imperialism.

Source: Anthony Goodman for Financial Times
[posted on 04/06/2011]