Are We Seeing the End of the Country Club Board?

By Cydney Posner

With the recent abrupt "departures" of various high-profile CEOs, this article from Reuters discusses whether this wave of new assertiveness by boards, and particularly independent board chairs, reflects an end to the "board as virtual country club" for friends of the CEO. CEO terminations orchestrated by independent directors could become increasingly common, the article observes, particularly as "companies increasingly split the roles of chairman and CEO, and heed regulatory pressure to police their companies, U.S. public company directors said in interviews….'There is a growing sense of responsibility by the board that they are indeed in charge of the company. They are not just there as friends of the CEO giving advice. They are, in fact, responsible for making sure that the company is on the right track,'" commented one board chair, who stepped into his role after a clash between his predecessor and the company's CEO led the former board chair to quit. The article cites a number of reasons for "boards to take their jobs more seriously, directors say. These include the lessons from the financial crisis of 2008, increased regulatory scrutiny, investor demands to split the roles of chairman and CEO, and fear of investor lawsuits."

Governance experts view these changes favorably. According to GMI Ratings, a corporate governance ratings agency, companies that split the chair and CEO roles "post five-year returns that are 28 percent higher than companies where the same person holds both jobs. GMI also found that companies with a combined chairman and CEO role pay that person nearly double the average for someone who is only CEO."

Separating the roles of CEO and chair continues to be a growing trend.  "In its most recent annual report on corporate governance among the S&P 500 companies, executive search firm Spencer Stuart found that 21 percent of the companies' boards had an independent chairman in 2011, up from 10 percent in 2006….'They (boards) are becoming more assertive because you have non-executive chairmen who are taking leadership roles,' a long-time director at a major financial services company said. ‘There is an accountability factor that to the shareholders and to other stakeholders is very important.'"

Some argue, on the other hand, that the new scrutiny can "make CEOs uncomfortable, directors say, and force them to look over their shoulders while setting corporate strategy. That may mean fewer bold decisions, which, for a business, can sometimes be damaging."  Abrupt departures can also lead to uncertainty and impair employee morale.  In addition, the hostility that is sometimes played out in the press can be used by some CEO/chairs to "justify the status quo at their companies by pointing to examples of open warfare in other companies where the roles are split." Nevertheless, although CEOs may try to buck the trend, a director commenting for the article viewed that effort as ultimately "futile."

One board chair identified the Enron collapse in 2001 as the "watershed moment." The article suggests that that failure "prompted directors across corporate America to learn from the mistakes made by the board of the one-time energy trading giant. ‘I look at those board members, and they were some of the best and the brightest people I have ever run into in my business life. And somehow they let that situation get away from them…. Enron was a big spur to improvement in the behavior of boards, and it wasn't because some regulator wrote it down; it was the 'oh my god' factor.' "

Other factors cited include increased regulatory scrutiny after the financial crisis of 2008 and the presence of institutional and investor nominees on boards, who bring more of an activist perspective. Regulatory pressures can lead to public embarrassment: according to one director, "[y]ou don't want government coming down on you feeling that you are not discharging your duties. It's the press exposure. There is a sunlight to all of this that's very fascinating.'"

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