Independent board chairs may no longer be absolutely de rigueur from a corporate governance perspective—even ISS has a somewhat nuanced view on the subject—but the percentage of independent board chairs has been increasing these days. So why is that? According to a recent report from The Conference Board, it’s not, as you might have expected, because of shareholder proposals requesting a separation of these roles to shore up board independence; rather, “it’s likely driven by CEO succession events, as well as the growing workloads of boards and management.”
The Conference Board, in collaboration with ESG data analytics firm ESGAUGE, collected data as of June 8, 2022 for approximately 400 companies in the S&P 500 and 2350 companies in the Russell 3000. The data showed that, among the S&P 500, the percentage of companies with a combined CEO/board chair declined from 49% in 2018 to 44% in early June 2022, while the percentage of companies with an independent board chair increased from 31% in 2018 to 37% as of early June 2022. In contrast, voting support for shareholder proposals for separation of the CEO and board chair roles declined from 35% in 2020 to 28% in the 2022 proxy season. According to proxymonitor.org, for the S&P 250, there were only about 30 shareholder proposals for independent board chairs during 2022. Among companies in the Russell 3000, separation of the two roles is more common, and the percentage of companies with a combined CEO/chair role fell from 37% in 2018 to 35% in 2022.
Could the burden of all the crises that boards and company managements have faced in the last few years—a worldwide pandemic, war in Ukraine, supply chain issues, inflation, not to mention all of the demands related to ESG—be the catalyst for this move toward independent board chairs? That’s the theory posited by The Conference Board. The Conference Board suggests that dealing with these crises has increased the workloads of boards and managements, leading many companies to see the benefit of “having two leaders at the helm,” with a board chair focusing on the board and the CEO focusing on management. Another driver identified by the Board is “CEO succession, which has increased recently and provides an opportunity for the board to reconsider its leadership structure. For example, of the 27 CEO succession announcements through June 21, 2022, only one firm chose to replace a departing CEO/board chair with someone who will assume both positions. By comparison, nine firms (33 percent) chose to have the former CEO remain as a non-independent chair—which is often for a transition period of a few years, after which some boards will name the current CEO as chair, while others will choose to name an independent chair.”
According to the executive director of The Conference Board’s ESG center, as reported in Fortune, “It takes a lot of time to manage the board and lead the board, and if you’re doing that at the same time that you’re trying to lead the business through crises or transformations, that’s hard….It can really help to have two people doing it…and you get extra points with investors.” On the other hand, he observed, there are “a lot of synergies by having one person do both roles,” including that “the person who is overseeing the board agenda is the person who knows the business best: the CEO.” In his view, the decision as to the occupant of the board chair position depends on “[t]he clear allocation of responsibilities between the CEO and the chair, and the chemistry between the two.”
The Conference Board indicates that larger companies are more likely to combine the CEO/chair roles than smaller companies. About 55% of companies with annual revenues of at least $50 billion had a CEO who also served as board chair, while that was true for only 25% of companies with annual revenues under $100 million. Although, the Board reports, almost all companies have a policy about board leadership structure, in 2022, 74% of companies in the S&P 500 and 68% of companies in the Russell 3000 provided flexibility about separating the roles. The reason most cited (66% of the Fortune 500 and 76% of the Russell 3000) for separating the roles was that the CEO and board chair roles have different responsibilities. According to Board data, 60% of companies in the S&P 500 and 31% in the Russell 3000 that required a combined role stated as a reason for that practice that independence of board leadership could be achieved through a lead independent director. Companies also stated that they believed that, based on industry experience and company knowledge, the CEO was best suited to set the board’s agenda.