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July 02, 2012
Separating CEO and Chair Provides Financial Benefits
    by Robert Kropp

A report from GMI Ratings finds that companies with a combined CEO and chair pay far more compensation for the positions, are more likely to pursue aggressive accounting practices, and are twice as likely to receive a failing grade for environmental, social, and corporate governance performance.

A 2009 policy briefing by the Millstein Center for Corporate Governance and Performance states that the presence of an independent board chair, as opposed to a CEO or other corporate executive holding the position, "curbs conflicts of interest, promotes oversight of risk, manages the relationship between the board and CEO, serves as a conduit for regular communication with shareowners, and is a logical next step in the development of an independent board."

A new report from GMI Ratings summarizes the several distinct advantages to splitting the two positions.

From a financial perspective, the analysis of 180 North American corporations with market capitalizations of more than $20 billion found that a combined CEO and chair received a median compensation of over $16 million. Yet the combined salary of a separate CEO and chair was only $11 million. And when the chair is independent, the combined compensation decreases even more, to $9.3 million.

Also, "Five-year shareholder returns are nearly 28 percent higher at companies with a separate CEO and chair," the report found.

GMI assesses the quality of governance at corporations by applying an Accounting and Governance Risk (AGR) Rating, "an entirely quantitative, statistical process to identify accounting items associated with fraudulent financial statements, as well as governance characteristics associated with firms prosecuted by the US SEC for accounting fraud." The report found that companies with a combined CEO and chair were 86% more likely to receive an aggressive rating, indicating a greater likelihood of experiencing "negative events—not only regulatory actions, but shareholder litigation, material restatements and other related events—which have a clear impact on investment risks and returns."

GMI also rates companies according to their environmental, social, and corporate governance (ESG) performance. Noting that "Many notable corporate failures have been driven by non-financial issues," GMI also observed, "Traditional fundamental financial analysis does not fully address the quality of the financial disclosures, or the broader set of risks addressed through ESG research."

The report found that twice as many companies with combined leadership roles—almost 32%—received a failing grade on ESG performance as those that separated the positions. The number becomes even more meaningful when GMI reports that only five percent of its total coverage universe receives a failing grade.

"It is far more expensive to combine the roles of CEO and chairman," the report concludes. Furthermore, "there appears to be very little benefit to long-term shareholders in having a combined CEO and chair. The only benefit seems to be an economic one to those CEOs who have convinced the board to allow them to serve as chair."

Sustainable investors and other governance advocates have received increasing support for shareowner resolutions calling for the separation of the two positions. Resolutions at JPMorgan Chase and Chevron this year both received about 40% of shareowner support, and Chesapeake Energy agreed to separate the two positions before the resolution came to a vote.

Investors argue that the separation of the positions has become the norm in most of Europe, and in the aftermath of the financial crisis it has been increasingly adopted by corporations in the US as well. GMI's research demonstrates that companies resistant to a key governance reform are endangering the holdings of their long-term investors.


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