To split or not to split?

Most top executives at big corporations hold both titles, but the structure is being questioned.

March 19, 2004|By Paul Adams | Paul Adams,SUN STAFF

ROBERT J. Lawless, chief executive officer of McCormick & Co., can think of only one person who has the time, knowledge and experience to serve as chairman of the Hunt Valley spice maker's board of directors.

Himself.

"An outside chairman wouldn't know what's going on" day-to-day, said Lawless, who, like almost every top executive at Maryland's big corporations, holds the title of CEO and chairman.

He isn't alone in his thinking. About 80 percent of the companies in the Standard & Poor's 500 index are headed by a combined chairman/CEO, according to the Corporate Library, an independent research firm based in Maine.

It's a structure dating back more than 50 years. And that has some corporate governance experts and shareholder groups worried that there is a fundamental flaw in the way U.S. companies are run.

In the wake of scandals that have exposed flaws in American-style corporate governance, there is a growing national debate over whether it is too risky to concentrate so much power in the hands of one executive.

Many are calling on U.S. companies to follow the lead of their European counterparts and split the roles of CEO and chairman, as Disney recently did after shareholders rebelled against the leadership of Michael Eisner. Disney's decision mirrored similar moves by Dell, Oracle and WorldCom, which announced its decision Tuesday as part of its efforts to restore shareholder confidence after an $11 billion accounting scandal.

Though advocates of splitting the roles concede no studies support them, some warn that there will be more Enrons and WorldComs in America's future unless additional checks are placed on the power of CEOs. Having a strong outside chairman in control of the board can provide a measure of security for shareholders, proponents say.

"If the same person has both jobs, then the CEO is setting the agenda and determining the quantity, quality and timing of the information that goes to the board," said Nell Minow, editor of the Corporate Library. "It's impossible in those circumstances - particularly with the role the CEO plays in selecting board members - to have any genuine oversight."

Not everyone agrees. Skeptics point out that Enron and WorldCom had a separate CEO and chairman at the time they collapsed. So did Royal Ahold NV, the Dutch owner of Giant Food and other grocery chains that was devastated by an accounting scandal at its Columbia-based U.S. Foodservice unit. And no evidence links improved corporate performance to the separation of the two roles.

"It's being sold as a preventive measure, and that's absolutely false," said Jeffrey Sonnenfeld, associate dean of the Yale School of Management. "There isn't one person on the face of the earth who can tell you they have a shred of data that tells you otherwise."

Leading proponent

Ira M. Millstein, a corporate governance expert and the movement's leading proponent, acknowledged that it's not a panacea but said separating the two functions is the best way to ensure truly independent oversight of management. Millstein, author of The Recurrent Crisis in Corporate Governance, has advised Disney, General Motors, Bethlehem Steel, Tyco and other corporations with management crises.

"Can I prove that it will prevent disasters in the future? No," he said during a forum last Friday on corporate governance sponsored by Institutional Shareholder Services (ISS), a Rockville firm that distributes research on corporate governance to large investors. " ... We didn't legislate against greed and avarice. It's not going to go away, but I think the system we're suggesting is more likely to catch it."

Many corporations will have to confront the issue at their annual meetings, according to ISS. Patrick S. McGurn, the firm's special counsel, said shareholder groups have introduced at least 50 resolutions this year that deal with splitting the CEO and chairman roles.

The Massachusetts State Carpenters Pension Fund is among those forcing the issue. The union pension fund will present a resolution to split the two roles at the Rouse Co.'s annual meeting in May. Anthony W. Deering serves as the Columbia-based development and management company's chairman and CEO. Rouse is advising its shareholders to vote against the proposal, saying it already has a board made up entirely of outside directors, with the exception of Deering.

"I think any reasonable evaluation of our board would conclude that they are, in fact, highly independent," said David L. Tripp, Rouse's vice president of investor relations.

The carpenters fund had planned to introduce a similar resolution at Mercantile Bankshares Corp.'s annual meeting May 11 but backed off after the Baltimore-based bank convinced fund officials that it had enough checks and balances in place to protect shareholders. Edward J. "Ned" Kelly serves as president, CEO and chairman of the bank.

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