Companies and investors continue to grapple with what constitutes the optimal board leadership structure, effectively acknowledging that there is no one-size-fits-all solution.
Still investors are pushing for changes. Shareholder proposals seeking to split the CEO and chair roles or requesting an independent board chair were again among the most common governance proposals in 2018.
As in prior years, the proposals fared well, averaging 32% support, but none passed.
The results highlight that investors have mixed views on board leadership. They also demonstrate that having a lead director--an independent director who serves as the representative of the independent directors and as a counterweight to a combined chair/CEO--can satisfy investors seeking independent board leadership if the lead director has robust, well-defined responsibilities.
Combined roles raise complicated conflict of interest issues on matters such as executive compensation and CEO succession, since the primary role of the board is to oversee management. Yet, it is not clear that splitting the roles leads to better performance or governance quality, according to research published by Stanford; and it creates the potential for the CEO and chair to duplicate efforts or work at cross purposes, while sowing internal confusion.
Notably, the decision to combine or split the roles is often situational, and the board may change its view in response to changing circumstances. For example, the board may split the roles in response to a crisis or when hiring a new CEO, and combine them after a new CEO has proven him or herself and made the case for having both roles. Many companies' corporate governance guidelines are flexible on the issue, stating that the board has not adopted a formal policy on splitting or combining the roles.
While splitting the roles has become more common, it does not automatically mean having an independent chair. For example, when a company appoints a new CEO, the outgoing CEO may serve as chair for an interim period. According to Spencer Stuart, 51% of S&P 500 companies split the roles in 2017--the first time that a majority did so--but only 28% had an independent chair. Comparable percentages in 2007 were 35% and 13%.
An analysis of S&P 1500 companies published by Institutional Shareholder Services shows small- and mid-cap companies split the roles more frequently than their large cap counterparts. In 2017, 89% of S&P 1500 companies had some form of...