A few years ago there was no such thing as a “lead director” on a public board. Typically the Chairman ruled board proceedings and set the agenda. But when the CEO and the Chairman were the same person conflicts were clearly visible. In fact, in our 2000 HCE Board Survey the CEO was also the Chairman 95% of the time. See chart 1. Many shareholders petitioned the SEC to require the separation of CEO and Chairman roles. While the SEC has tightened the definition of an “independent” director it has dismissed the separation requirement. With that, many activist shareholders took their argument directly to shareholders by offering proposals to require the separation or the adding of a lead director. The affects have been significant.
In our most recent study of hotel industry boards, 25 of 41 Chairman were not the CEO, a vast improvement in seven years. See Chart 1. Unfortunately, 13 of the 25 were deemed as insiders and therefore not independent. See Chart 2. In 6 of the 13 cases a lead director was appointed to counter-balance an inside Chairman. It appears that shareholders are starting to get their way. But is the SEC supporting this trend?
Recently the SEC allowed Schering-Plough and JP Morgan Chase to omit shareholder proposals that would have required the appointment of an independent lead director. The proposals would have required an “independent lead director whenever possible with clearly delineated duties who would be elected by the board’s independent board members and serve at least one year, unless the company had an independent director. The resolutions listed a minimum set of duties, such as, serving as liaison between the chairman and the independent directors and being available for consultation with major shareholders”.
Lawyers for Schering and JP Morgan argued that the proposals were vague and indefinite and could be omitted under SEC Rule 14a-8(i)(3). They also argued that the proposals granted too much power to a single shareholder (an ironic argument because that is the very thing shareholders were fighting against in having the CEO also be the Chairman). The lawyers further argued that the proposals failed to provide sufficient proof of stock ownership, which is a bit of a joke.
The SEC has not been on the side of management in every case. They recently ruled against AT&T and Boeing in similar situations, leaving the proposals on 2008 proxies. But one thing is clear; shareholders are not sitting idle on governance issues. We also think that the SEC could solve the problem by requiring the separation of CEO and Chairman once and for all.