Schumer's Shareholder Bill of Rights: Separating the CEO and CoB

Jay Brown links the text of Senator Schumer's proposed Shareholder Rights Bill (scroll down for earlier commentary by yours truly).

Second, it uses listing standards, much the way SOX did, to impose additional governance requirements. Thus, they apply only to listed companies. This effectively limits the requirements to large companies (not, for example, those traded in the OTC Bulletin Board). It also means that, based upon the current state of the law, there is no private right of action for violations. Enforcement is, instead, left to the exchanges, regulatory bodies that do not have a history of robust enforcement. The listing standards include the separation of chairman and CEO. Specifically, the Chairman must be an independent director. While the legislation specifically references the independence standards of the exchanges, it also notes that independence may otherwise be determined "by rule of the Commission".

Unlike the shareholder access and federalization aspects of the bill, which I oppose outright, I am merely skeptical of this provision. 

As detailed in a McKinsey survey, most US corporations have an executive chairman of the board of directors; typically, the CEO serves as chairperson. The US is relatively unique among major economies in this regard; in most, companies generally separate the CEO and board chair roles by law or practice.

Nonexecutive board chairs (and/or so-called lead independent directors) have been one of the major corporate governance "reform" proposals in recent years. Curiously, however, I can't find much evidence that separating the two roles improves corporate performance and/or has a positive stock price effect. Holmstrom and Kaplan's major survey of the corporate governance literature, for example, cites but a single study, which looked at the impact of various UK corporate governance rules on CEO turnover. The study found that the beneficial results "appear to have been driven by the increase in the fraction of outsiders on the board rather than the separation of the chairperson and CEO."

So will splitting the posts matter? In the absence of compelling evidence, count me as a skeptic. My intuition is that this sort of thing is mostly window dressing.

That was the case with the comparable change a few years ago to the mutual fund governance standards, which required mutual funds to have an independent chairman (if they want to rely on certain impossible-to-ignore rules). The change was made in order to serve as a check against an Investment Adviser's interested director that typically serves as the chairman of a mutual fund's board of directors.

But it was mere window dressing. The "independent" chairman basically says: "begin the meeting," and then the CEO/interested director takes it from there. Nothing, absolutely nothing,changed. In fact, by making an "independent" mutual fund director act as a chairman, it arguably made it more difficult for him to serve as a judge of an investment advisor's performance because he invariably relies more on the advisor that he's supposed to be judging, in order that he can do his job as chairman better. All in all, it's a stupid rule that makes no sense in the real world.

One is also reminded of the fact that Enron, prior to its collapse, had separated the offices of CEO and CoB. Much good it did them.