Section 973 of the Dodd Wall Street reform bill mandates new disclosures from all firms -- Main Street as well as Wall Street -- explaining "the reasons why the issuer has chosen— (1) the same person to serve as chairman of the board of directors and chief executive officer (or in equivalent positions); or (2) different individuals to serve as chairman of the board of directors and chief executive officer (or in equivalent positions of the issuer)."
I objected to a previous SEC proposal to impose similar disclosure obligations in an August 2009 post, in which I explained that:
The proposal is a classic example of so-called therapeutic disclosure.I also explained why the underlying substance of the argument against one person serving as both CEO and Chairman of the Board is flawed:
As I explain in Corporation Law and Economics:
Therapeutic disclosure requirements undoubtedly affect corporate behavior. Therapeutic disclosure, however, is troubling on at least two levels. First, seeking to effect substantive goals through disclosure requirements violates the Congressional intent behind the federal securities laws. When the New Deal era Congresses adopted the Securities Act and the Securities Exchange Act, there were three possible statutory approaches under consideration: (1) the fraud model, which would simply prohibit fraud in the sale of secu¬rities; (2) the disclosure model, which would allow issuers to sell very risky or even unsound securities, provided they gave buyers enough information to make an informed investment decision; and (3) the blue sky model, pursuant to which the SEC would engage in merit review of a security and its issuer. The federal securities laws adopted a mixture of the first two approaches, but explicitly rejected federal merit review. As such, the substantive behavior of corporate issuers is not within the SEC’s purview. Second, and even more disturbing, in this case the SEC’s rules overstep the boundaries between the federal and state regulatory spheres.In other words, the SEC uses therapeutic disclosure to effect corporate governance changes it has no authority to regulate directly. It's an abuse of the constraints on the scope of the SEC's authority and a violation of basic federalism principles.
The empirical evidence from studies of firm performance is, at best, mixed. There simply is no unambiguous evidence that splitting the CEO and Chairman positions between two persons has a statistically significant positive impact on firm performance. Although the absence of conclusive evidence--one way or the other—may seem surprising, on close examination it makes sense. Proponents of a mandatory non-executive Chairman of the Board have overstated the benefits of splitting the positions, while understating or even ignoring the costs of doing so. The reality of such costs is confirmed, at least anecdotally, when one recalls that both Enron and WorldCom--the poster children of bad corporate governance in the last decade--had separated the CEO and Chairman positions.For more detailed argument, go read the original post.
