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Aug 03

Dodd-Frank punts on separating chair, CEO

Posted by SherylNash01 in Dodd-Frankcorporate governanceCEOcareer/managementboard chair


The Dodd-Frank Act may have gone a little further on some issues than many people had anticipated. But one potential issue that did not see meaningful change is the separation of the chairman and CEO functions.

The Act requires that the SEC issue rules requiring each public company disclose in its annual proxy materials the reasons why the company chose to have either the same person, or separate people, serve as the Chairman and CEO.

However, the Act does not bar combining the two roles, which no doubt would have brought much satisfaction to shareholder activists.

The activists claim having one person function in both capacities can inhibit open and honest discussions regarding a company's (and its executives') performance when the same person who is running the company is also leading and conducting board of director meetings, setting agendas, recommending board committee appointments, leading corporate strategy and serving as the primary source of contact for other board members.  
Activists like to point out that separating the two roles is much more common in the UK.

US companies are warming up to this practice. According to The Corporate Library, today 39 percent of Fortune 500 companies have different individuals serving as chairman and CEO, compared with 27 percent in 2004.

Several academic studies have found benefits from separating the roles of CEO and chair of the board.  One study (Bhagat & Bolton, 2007) found that the separation of the roles of CEO and chair of the board is "significantly positively correlated with better contemporaneous and subsequent operating performance."  another study (Farber, 2005), found that companies that committed fraud have a higher percentage of CEOs who are also chairmen of the board of directors.

One favored alternative to separating the two positions is to name a lead director.

Sarbanes-Oxley requires NASDAQ and NYSE listing standards mandating that independent directors meet without management present, and NYSE requires a lead director to preside at these meetings.

Earlier this year the SEC amended Regulation S-K to require public companies to describe the leadership structure of their board.  If one person serves as both principal executive officer and chairman, current SEC rules require a public company to disclose whether the company has a lead independent director and what specific role that lead independent director plays in the leadership of the board.  In addition, a public company is also already required by the SEC to disclose why the company has itself determined that its leadership structure is appropriate. "Accordingly, what initiative the SEC will take in response to the Dodd-Frank Act is an open question," says Craig Miller, a partner with the law firm of Manatt, Phelps & Phillips.




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