If you studied your proxy materials carefully this year, you noticed several new disclosures, including one explaining why a company combines the CEO and Board Chair in one job, or not. Companies have indeed risen to the occasion to defend one or the other. The new disclosure, and the defense, misses the point, though: CEOs don’t even belong on the Board of Directors.

Late last year the SEC began requiring this new disclosure, heavily abbreviated here:

Briefly describe the leadership structure of the registrant’s board, such as whether the same person serves as both principal executive officer and chairman of the board, or whether two individuals serve in those positions... If one person serves as both principal executive officer and chairman of the board … disclose whether the registrant has a lead independent director and [the] specific role [of] the lead independent director... [I]ndicate why the registrant has determined that its leadership structure is appropriate…

Incidentally, for a brief time Sen. Schumer’s proposed Shareholder Bill of Rights legislation would have required a separate CEO and Board chair. It appears that this legislation has yielded to the financial services reform bill from Sen. Dodd, which has a range of other governance reforms.

Not surprisingly, only some companies have split these roles. According to research from The Corporate Library, 38% of the companies in the S&P 500 have done so, and 44% of the Russell 1000. Interestingly, 52% of the Russell 3000 have split the roles, so small cap companies embrace this more than large cap. In any event, it might make news when it does happen, and generate an interesting and persuasive explanation.

So, proxy materials now have so much verbiage about why one or another structure makes sense for that company. At General Electric, Jeff Immelt does both CEO and Board Chair, with a lead independent director:

[I]t allows one person to speak for and lead the company and the Board, while also providing for effective oversight by an independent board through an independent presiding director. For a company as large and diverse as GE, we believe the CEO is in the best position to focus the independent directors’ attention on the issues of greatest importance to the company and its shareowners. Our overall corporate governance policies and practices combined with the strength of our independent directors minimizes any potential conflicts that may result from combining the roles of CEO and Chairman. In our view, splitting the roles would potentially have the consequence of making our management and governance processes less effective than they are today through undesirable duplication of work and, in the worst case, lead to a blurring of the clear lines of accountability and responsibility, without any clear offsetting benefits.

On the other hand, at Berkshire Hathaway, Warren Buffet does both jobs, well, just because:

It is Mr. Buffett’s opinion that a controlling shareholder who is active in the business, as is currently the case and has been the case for Mr. Buffett for over the last 40 years, should hold both roles. This opinion is shared by Berkshire’s full Board of Directors. The Board of Directors has not named a lead independent director.

What about some recent activist targets? Denny's just won a notable proxy battle. They separated the jobs eight years ago, as “it allows the Board to effectively develop and oversee its business strategy and monitor risk. The separate positions also allow the Board to freely perform its management oversight function.” Doesn’t seem to have done them much good.

Another current target, P&F Industries, whose largest shareholder just withheld votes for all directors, combines them:

[I]ts CEO is most familiar with the Company's business and industry, and most capable of effectively identifying the Company's priorities and leading the execution of its strategy. The Company's independent directors bring experience, oversight and expertise from outside the Company and industry, while the CEO brings company-specific experience and expertise. Combining the role of Chairman and CEO facilitates information flow between management and the Board of Directors.

None of these examples really provide a specific reason why one structure benefits investors over another, although Denny’s comes closest: “freely” oversee management.

Yet, these elaborate explanations sidestep the critical issue: how to maintain the utmost independence of the directors as a group. The directors represent investors in overseeing management, and the Board Chair represents the directors. Hard to see how the Board Chair can effectively, and independently, oversee him or herself.

Stated differently, all four companies, and most others, would enjoy the same benefits they proudly enumerate (one voice, effective and free oversight, focused attention, no conflicts, clear accountability, familiarity with the business and industry, information flow, and so on) if the CEO didn’t even serve as a director. The CEO could attend Board meetings, work pursuant to an effective reporting and monitoring structure, and provide company and industry insights. The Board Chair and all the directors avoid all (or most) doubt of their independence from management, while the Board still benefits from a good relationship with the CEO. Not a great, cozy, mutually-entrenching relationship, just a good, independent one.

Why most doubt, and not all? Because independence is a tricky attribute, and even without the CEO on the Board, directors may not enjoy quite the independence that investors would like. A recent case illustrates this, which we’ll take up next post.