Every corporation is unique. It follows that governance arrangements should be tailored to suit. Yet many shareholders, especially indexers, roundly condemn certain governance practices as if one size fits all.
Three corporate practices illustrate this: combining the roles of chairman and chief executive; staggered director terms, and classes of stock with different voting rights. Each is derided for valid abstract reasons, but all persist because they can be suitable at particular companies.
Corporate performance results show that there is no right or wrong answer, only “it depends.” Among 20 best-performing companies over the past decade, the proportion with each practice matched the overall proportion of companies using it. In other words, these practices add or subtract value depending on context, especially the chief executive’s identity and the board’s caliber, even the shareholder makeup.
Take splitting the chair/chief executive roles. Leading indexers and proxy advisers oppose combining the roles because boards appoint and oversee the CEO. Having one person wear both hats creates a conflict, they say.
Yet many corporations thrive when led by an outstanding person serving as both chair and chief, while others have failed amid split roles, as I explained some years back in the Wall Street Journal — think Enron. After all, board chairs get only one vote, so it comes down to the capability of the other directors. Good ones neutralize such a conflict.
The data supports the view that context matters. About half the S&P 500 companies split these functions while the other half combines them. Despite indexer complaints, quality shareholders — buy-and-hold stock pickers — are as likely to own stakes in companies that split these functions as those that combine them, according to data from the Quality Shareholders Initiative at George Washington University (QSI). They look past formal checklists to substantive details.
Yet a staggered board may enable a company to embrace a longer time horizon than one that can turn over completely in any year. Value arises from such binding commitments to long-term strategies, according to research led by Notre Dame Business School Dean Martijn Cremers.
These realities are reflected in historical company practices, which vary. Staggered boards are used at nearly half of Russell 3000 companies, although the figure among S&P 500 companies has fallen to about 60, in response to indexer pressure in recent years. Quality shareholders grasp this point too: they invest just as much in companies with staggered boards as without them, according to QSI data.
