Some recent board issues

We thought we’d get two short posts out together rather than torture them into longer posts.

Chairman/CEO split. A Breakingviews.com piece published in the WSJ’s May 10-11 Weekend Edition described Wachovia’s recent split of the Chairman and CEO roles. Appparently, they decry the notion that it’s being framed as a punishment of sorts for the CEO Ken Thompson (who is apparently on his way out as of today in any case) and suggest that “the separation makes sense in both good times and bad.” They note that Thompson said that he would “now” be freed up to spend 100% of his time on running the company. It’s unclear to us what would constitute the Chairman’s drain on his time separate from his duties as a director. WaMu just made the same move today, “stripping” the CEO of his chairman title.

In the interest of stirring things up, we did a quick search in some relevant portions of the DGCL (Delaware General Corporation Law) for “Chairman”: it’s conspicuously absent. While the split of these two titles may make sense from an optics perspective, we are neither in favor nor opposed to the concept, and we’re not sure whether the arguments about splitting militate in favor of or against the issues that we see.

People seem to believe that the chairman has special powers. And it’s true, a company’s bylaws may grant some power to a person holding that title. As an example, Dow’s bylaws identify the Chairman of the Board as presiding over meetings of the stockholders. While that may be important, those same bylaws all any vice-president to also serve, which is probably a much larger group.

We think that the chairman issue is a red herring; to state that CEOs have too much power because of the dual titles is to necessarily imply that the other directors are either weak, disinterested, or incompetent. Directors have independent fiduciary obligations. There is no “but the Chairman said” defense, no “I was only following orders” excuse for breaching fiduciary duties. If the board as a whole isn’t operating the way a specific director believes is required, not merely advisable, then the hard right is required over the easy wrong. The director can basically either raise the issue formally, noting disagreement and asking for a resolution at least in terms of additional advice on the issue, whether from outside counsel or even independent counsel for the board or resign. Being a director shouldn’t consign one to a Pyrrhic victory; but we do believe that the withdrawal should be We don’t believe that any thing that confuses directors or shareholders about the responsibility and powers of the board is a good thing.


Say on Pay: We have a similar feeling about say on pay. Getting shareholder input on pay may be useful to the board, as long as the board is cognizant of external factors where a shareholder may have different interests than the board (e.g., union pension funds holding shares, ESOPs, or hedged investors) and that shareholders do not have fiduciary duties generally. However, we oppose the say on pay structure if the board uses it as a reverse rubber stamp to avoid actually engaging in its required analysis of the issues: if shareholders approve a pay structure, that should be almost meaningless to the board technically since it does not mean that the structure is in fact fair or wise, and the board’s higher standard of care should not allow them to even use the “approval” as a defense to later complaints or claims.

While it seems at first like a good idea to let shareholders give feedback to the board on compensation (or any other issue), it shouldn’t water down either the board’s efforts or its responsibility. Directors get paid to serve the interests of the shareholders, including developing, implementing, and supervising executive compensation plans.Clouding the issue doesn’t help anyone remember whose job is what.

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