How To Raise A Lead Director In Post-Sarbanes Era

The days of the imperial chairman and chief executive officer in American business are waning, as corporate governance practices increasingly separate power over management from power in the boardroom.

That division is often embodied in the person of the “lead director,” the chief among independent board directors who can act as a shadow chairman. And, it seems, all of Corporate America is embracing that ideal.

A recent study by Spencer Stuart found that 94 percent of all S&P 500 boards had a lead or presiding director in 2005, with only 36 percent in 2003. To be sure, much of that has been driven by requirements from the New York Stock Exchange; in the wake of Enron and similar scandals, the NYSE pushed for more independent directors, and for those directors to meet regularly without management present. The person assigned to oversee that new governance subdivision and convey its concerns to management: the lead director.

Wardell

“The purpose of the lead director is to separate management from the board,” said Thomas Wardell, a partner with McKenna Long & Aldridge in Atlanta. “A lead director is not management while, of course, a CEO is. That provides separate leadership for non-management directors. It also allows a check on the CEO.”

A soon-to-be-released survey by Deloitte & Touche and the Society of Corporate Secretaries & Governance Professionals will support the trend, according to Stephen Wagner, national leader of Deloitte’s Center for Corporate Governance. Early results show 51 percent of companies had a lead or presiding director in 2005, up from a scant 13 percent in 2002, he said.

“It would appear that the trend is increasing,” Wagner said. “The role is evolving into much more than just leadership over executive sessions.”

Eliminating Imperial CEOs

Kase

Aaron Kase, a partner with the law firm of Levenfeld Pearlstein, also cites another reason for the surge in lead directors: they serve a useful purpose, to “eliminate imperial chief executive officers who serve on boards.”

“Disney was a prime example,” Kase says, where intermingled relationships among management and directors led to turbulence, confrontations and ultimately the departure of longtime chairman and CEO Michael Eisner and some board members. “If Disney had had a strong, non-officer lead director, that person might have been a counterweight to Eisner’s influence—critics would say undue influence—on board members.”

Board members like the idea of splitting control so that management is focused on running the company while directors control the boardroom, according to a recent poll by Russell Reynolds. It found that 59 percent of 100 directors who participated in the survey said they favored separating the roles of chairman from chief executive officer. Nearly half of the 100 directors said they believe a separate chairman creates a better channel for board members to express their views on management.

IN THE LEAD

The excerpt below is from Spencer Stuart's 2005 Board Index:

More Companies Appoint Lead Or Presiding Directors

94% of all S&P 500 companies (447) have a lead or presiding director, compared with 85% last year.

Just 36% reported having this position in 2003.

Of these 447 companies, 144 have lead directors and 303 have presiding directors (including those

identified as “chair” of executive sessions).

The prevalence of lead or presiding directors varies depending on whether the chair is independent:

For the 338 companies where the chairman is the CEO, 96% have a lead or presiding director,

compared with 88% in 2004.

For the 94 companies where the chair is not the CEO but also not independent, 91% have a lead or

presiding director, compared with 77% last year.

For the 43 companies where the chair is independent, 77% have a lead or presiding director, versus

73% in 2004. In 22 of these 43 companies, the same person serves as chairman and lead/presiding

director.

Source:

Spencer Stuary 2004 Board Index (From The Section On Board Composition; Page 11)

For many companies that have appointed a lead director, the job description reads much like Pfizer’s, which recently appointed its first lead director, Stanley Ikenberry (see box above, right, for related Phizer charter). The lead director presides over executive sessions of independent directors, which are required for companies listed on the New York Stock Exchange, and helps set the board’s agenda and control the flow of information to board members.

The lead director position doesn’t necessarily create a clean break between board duties and management duties, however. At Pfizer, as with most companies, the lead director interfaces with a president or chief executive officer who also holds the chairman title. The Spencer Stuart study says less than 10 percent of the S&P 500 have a chairman who is truly independent of the chief executive.

Richson

Cynthia Richson, corporate governance officer for the Ohio Public Employees Retirement System (OPERS), says the lead director position is considered by investors to be “a good alternative to an independent chairman, assuming the lead director has real responsibilities like an independent chairman.”

Commercial Metals, a $6.6 billion metals producer based in Irving, Texas, appointed its first lead director just last week. Anthony Massaro will serve as a liaison between the chairman and independent directors.

Opening The Closed Loop

David Sudbury, vice president, secretary and general counsel for CMC, said the requirement for independent directors to meet in executive session and the “sheer volume” of communication among board members drove the decision to modify the corporate governance guidelines and create the lead director position.

Previously, CMC assigned directors on a rotating basis the duty of presiding over independent director executive sessions—an arrangement Sudbury said proved “a little awkward” because of the logistics involved. The single lead director going forward eliminates confusion over who is responsible for certain director duties.

It can be awkward, however, to relieve the chairman of his duty to manage the board. One corporate executive who requested anonymity said despite the common practice in Europe, many U.S. executives are still resistant to the establishment of a lead director position. “I suspect a lot of CEOs are concerned about having to report to, yet not have control over, the board,” he said.

That wasn’t the case at CMC, Sudbury said, where no one felt squeezed out or marginalized by the move. “That was not the intent,” he said. “It wasn’t taken in that fashion at all.”

The placement of a lead director is meant to balance power and facilitate the flow of useful information to directors, not drive a wedge between management and directors, said Nell Minow, a shareholder activist with the Corporate Library.

Without a lead director, boards can find themselves caught in a “closed loop” of information, she said, constantly being “spun” by management. “It makes it possible to have healthy oversight,” she said.

Jorgenson

Mary Ann Jorgenson, a partner with Squire, Sanders & Dempsey, said the potential certainly exists for the lead director position to create a sense of division between the board and management, but it depends on the person holding the position.

“It works only if the person in the job is secure and confident in the role and definitely not a micromanager,” she said. “The job is one of oversight and advice, not meddling. When you get into the watchdog mentality, there’s this fear of missing something. That’s a recipe for disaster.”

PolyOne recently appointed its first lead director, but as part of a larger changing of the guard at the company, not necessarily to achieve a particular governance objective. The company’s president and CEO stepped down in October and the position was filled in the interim with William Patient, who was already onboard as non-executive chairman.

Now the company has brought in a new chairman, president and CEO in Stephen Newlin, shifting Patient to the title of “lead director.” As a recent member of management, however, Patient doesn’t qualify as an “independent” director, and therefore doesn’t fit the evolving definition of a lead director who would head up the independent directors on the board.

A spokesman said Patient has already announced his intention to retire the position in May and he’s not aware of whether the board will appoint a new lead director at that time.