Some of the biggest and best-known corporations in America are resisting shareholder pressure to improve checks and balances at the top by splitting the roles of their chairman and CEO.
Both Cisco Systems Inc. and Goldman Sachs Group Inc. recently had the chance to set an example when they announced top-level management changes. Instead, each tapped a single person to fill both positions.
That’s disappointing. When companies of that stature choose the status quo, it doesn’t help improve governance practices anywhere else.
Following the business scandals of the past, shareholder activists have argued convincingly that having an independent chairman leading the board should make corporate malfeasance more difficult. Their logic: Increasing the power of the chairman and directors raises accountability throughout organizations and positions them to better rein in CEOs and other top executives.
Already, there are some signs of progress. About 32 percent of companies in the Standard & Poor’s 500 index now have split positions, up from the 22 percent that did so three years ago, according to The Corporate Library’s Board Analyst database.
Still, only 7 percent of companies have fully independent chairman, according to the proxy advisory firm Institutional Shareholder Services Inc. That doesn’t just mean bumping up the CEO to chairman as retirement nears, but bringing in someone from the outside with no previous link to the company.
Plenty of work still needs to be done to make this a more widespread trend. It will take a big move by some big companies to make that happen.
Cisco isn’t leading by example. Even though the network equipment maker had split those roles before, it announced earlier this month that its longtime CEO John T. Chambers would take on the duties of chairman when John P. Morgridge steps down in November. When that transition takes place, Chambers will relinquish his role as president, though no one has been tapped to fill his spot just yet.
Cisco spokeswoman Penelope Bruce defended Chambers promotion, saying that his “experience, combined with Cisco’s diverse, independent board provides solid management and oversight of the company.” She also noted that 75 percent of the board is made up of independent directors.
Chambers became CEO of Cisco, one of the largest U.S. technology companies, in 1995, and since then, the company’s annual sales have jumped from $1.2 billion to nearly $25 billion in 2005. But the company’s stock today trades around $20 a share, down nearly 75 percent from its tech-bubble high in 2000.
Goldman Sachs has seen similar growth, with revenues in 2005 at nearly $25 billion — more than three times what it was in 1997 — fueled by big gains in both its investment banking and trading operations. Goldman is the nation’s largest securities firm by market value.
Lloyd Blankfein is taking over as chairman and CEO from Henry Paulson, who President Bush has nominated to be the next U.S. Treasury secretary. Blankfein has been president and chief operating officer at the investment bank since January 2004 and a director since April 2003. On Monday, Goldman announced two company insiders — one heading the firm’s investment banking and one in charge of trading — would replace Blankfein as co-presidents and co-COOs.
Goldman spokesman Lucas Van Praag said that structure — with a strong chairman/CEO combined with leading presidents/COOs — makes most sense from an operational and corporate governance prospective. “The board takes matters of corporate governance very seriously,” he said.
But even though both Chambers and Blankfein are surely qualified to lead these corporate giants, that’s not the point. An independent chairman would allow each CEO to focus on running the business, without being burdened by such tasks as managing the board, navigating complex governance issues or dealing with regulatory concerns.
That might not seem so important in good times, but should performance wane or allegations of wrongdoing turn up, a focused CEO and independent chairman could together help steer a company back to health a whole lot faster.
So why then would a company decide not to separate the two? It might have to do with CEOs resisting diluting their power by having to share their position with someone else.
In fact, 58 percent of the 100 board members — including CEOs, chairman, presidents and independent directors — who participated in the recent survey by executive recruiter Russell Reynolds Associates said it was easier to recruit CEO candidates to a combined CEO/chairman role. In addition, 46 percent said that having separate chairman and CEOs invited power struggles, and 39 percent said that succession planning was simpler if there was only one top job.
Those responses show that this issue is really about ego — the same ego that has led to bloated executive pay, over-the-top perks and in some cases, poor oversight of corporate accounting and operations.
And that seems reason enough to press for this single-handed leadership to come to an end.