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Only once or twice in the 20-year history of the Cypress Semiconductor Corp. has his board flat-out told him no, says T.J. Rodgers, founder and CEO of the company. He wasn’t pleased at the time, of course, but he says he later came to understand the board’s decisions — and even agree with them. “Once, during the height of the dot-com boom, we had $l billion in the bank, and I wanted to invest it in the stock market,” says Rodgers. “I figured we’d get a higher interest rate than in a money market fund.” But board members put the kibosh on the idea. Now he’s glad they stopped him: “That ended up saving us a lot of money.” One major reason that Rodgers’ board can stand up to him is that Rodgers is one of the rare U.S. chief executive officers who is not also chairman of the board. In most publicly traded companies, the CEO and the chairman are the same person. But a growing number of shareholders are saying that more companies should be run like Cypress. The D.C.-based Investor Responsibility Research Center (IRRC) is currently tracking 40 resolutions aimed at splitting the chairman and CEO roles — at companies such as Xcel Energy Inc., the Kimberly-Clark Corp., the Boeing Co., and the Bristol-Myers Squibb Co. — compared with just four in 2002. Although such resolutions are nonbinding, they can have a considerable impact on public perception and, consequently, on a company’s stock price. Why the spike? Scandal-weary shareholders are ticked off. The problem, say some, is that American corporations have too much power concentrated in too few hands. While it’s common for European companies to have a separate chairman and CEO, a recent IRRC study on board structure and practices found that out of 1,200 U.S. public companies surveyed, a mere 27 percent had separate individuals holding the two positions. And even that’s a deceptively high percentage: Only a quarter of those companies — or 7 percent of all companies sampled — had a truly independent chairman who wasn’t a current or former employee or otherwise affiliated with the company. Recent legislative and regulatory changes — including the Sarbanes-Oxley Act of 2002 and amendments to listing requirements at the New York Stock Exchange and the Nasdaq Stock Market Inc. — are aimed at increasing the authority and independence of a company’s board. Splitting up the roles of chairman and CEO would likely have a similar impact. Activist pension funds for labor unions are at the vanguard of filing resolutions calling for chairman/CEO separation, says William Patterson, director of the AFL-CIO’s office of investment. “CEOs routinely dominate the board,” he charges. “And the result has been weak performance, conflicts of interest, and runaway executive pay. And shareholders are left holding the bag.” A VIRILITY SYMBOL? Voices from corporate America have called for change, too. Last January, a commission sponsored by the Conference Board, a business research group, urged companies to consider separating the two offices. Where those positions are combined, the commission — which included then-CSX Corp. Chairman and future Treasury Secretary John Snow, former Securities and Exchange Commission Chairman Arthur Levitt, former Federal Reserve Chairman Paul Volcker, and Intel Corp. Chairman Andrew Grove — recommended appointing an independent “presiding director” to balance the chairman/CEO. As a practical matter, according to shareholder activist Robert A.G. Monks, it’s hard to find one person who can successfully perform both as CEO, the executive responsible for actually running the company, and as chairman, the leader of the board of the directors who must sometimes challenge the CEO. “Unless you have someone quite extraordinary, it’s virtually impossible for one person to be both the actor and the judge of the acting,” says Monks. “You have to think of the board as having an independent energy of its own, its own agenda and sense of relevancy. How someone does that for themselves is obscure.” The underlying problem, he observes, is the extent to which companies are really committed to having boards that act as true overseers versus boards that are just another department to be run by the CEO. “The latter seems to be the pattern,” Monks says. Many corporations — and chief execs in particular — are resistant to any such challenge to the CEO-chairman model. Part of the reluctance comes from the psychological power of the dual role. When the Sprint Corp. recently settled shareholder litigation by making extensive corporate governance changes, one change sought by plaintiffs was to separate the chairman and CEO functions. But Sprint balked. Monks, who advised plaintiff Amalgamated Bank during settlement talks, says that negotiators for newly appointed Sprint CEO Gary Forsee were prepared to give up the substance of the chairman position, but not the title. “It almost seemed like a virility symbol,” says Monks. “The board determined that creating a strong ‘lead director’ role and continuing the combined CEO and chairman role represented the optimal corporate governance approach for Sprint,” says company spokesperson David Gunasegaram. Historically, when companies recruit CEOs, candidates often demand — and receive — the chairmanship as well. Usually, even when the roles are filled by separate people, the chairman isn’t truly “independent.” Often, he’s a former CEO or someone otherwise connected with the company. Indeed, the chairman position can be a CEO’s first step toward retirement or a way to step away from day-to-day operations and think “big picture.” For example, Bill Gates became chairman of the Microsoft Corp. after ceding CEO duties to longtime associate Steve Ballmer. And although the General Motors Corp. now splits the two jobs, current CEO G. Richard Wagoner Jr. will also become chairman when former CEO and current Chairman John Smith Jr. retires in April 2004. DOUBLE DIPPING Thomas Stickel knows well the allure of the double-dip designation. Stickel used to serve as chairman and CEO of PCS Enterprises, a financial services company that has since been acquired. He currently serves as chairman — but not CEO — of the Onyx Acceptance Corp., an automobile financing company. Filling both roles, says Stickel, is “really about ego and power, the concern for being able to control everything related to your company.” If another person serves as chairman to your CEO, he says, “someone else is able to introduce to the board subject matter you don’t want brought up.” Unwelcome topics might include sensitive information on executive compensation: how the CEO’s pay matches up with the rest of the industry, how it relates to the company’s earnings per share, and how it compares with the average mean compensation of all other employees. But Stickel says that shareholders are better served when two people are responsible for the company’s direction. He adds, “I have matured into that thought process through a combination of real-world experience and observing the corporate governance disaster of the last three years.” Could a chairman/CEO split cause delays in decision making? Stickel says, “It’s a simple matter of the board giving direction and the CEO executing.” An independent chairman doesn’t necessarily slow things down, agrees Rodgers of Cypress Semiconductor. “My board is very responsive,” he says. “If you were about to offer your company to my company for a really low price, I could have my board convene by the end of today.” And if the two-person arrangement creates some seeming inefficiency, that actually adds value, says Rodgers. “You have to do extra work. You really have to prepare and strategize on how to get [board members] to agree with what you want to do. It forces you to look at it the way they would look at it. Instead of just the CEO perspective, you have to look at what’s going to be good for the company.” Like many other venture-backed companies, Cypress had a venture capitalist — in this case, L.J. Sevin of Sevin Rosen Funds — as its first chairman. After 10 years, Pierre Lamond, at the time also of Sevin Rosen, stepped into the chairman slot. In 1998, Eric Benhamou, formerly of the 3Com Corp., took over. Rodgers admits that each time the chairman position turned over, he briefly considered taking the title himself. But in retrospect, he’s glad that he didn’t. “I think boards work better when the chairman is independent from the president,” he says. “I think the chairman in effect becomes the CEO’s boss, and that’s a useful thing. Companies need a ruling body that acts like a ruling body as opposed to just rubber-stamping whatever the CEO says.” A COSTLY SEPARATION Still, many executives remain unconvinced that separating the roles is a good idea, including John Biggs, former chairman, president, and CEO of pension fund TIAA-CREF. Biggs served on the Conference Board’s blue-ribbon commission, but filed an opinion dissenting from its recommendations, noting that he regarded the separation of chairman and CEO as unwarranted and likely to impose unnecessary costs. “I’m not talking about costs in terms of salary,” he says. “It’s the risk that you’ll have a divisive relationship, which is very great. I consider that a cost.” As a CEO-chairman, Biggs says that he considered it a major part of his job not only to manage the company, but also to work with the board on meeting agendas and information flow. “To say that those are separate jobs seems to miss the whole point of company leadership,” he says. “I know academics state regularly that they are two different jobs, but I don’t buy that duality. I think it’s a single job.” Another person uneasy about the trend to separate is Alan Shugart, who founded disk-drive manufacturer Seagate Technology in 1979, left in 1998, and currently serves on the board of Cypress Semiconductor. That’s right, Cypress Semiconductor. Although the company has both a chairman and a CEO, Shugart isn’t so sure that’s a good thing. “If I had my druthers, T.J. Rodgers would be both the CEO and the chairman,” says Shugart. “I think he’s a wonderful guy, and I’d have him be chair in a microsecond.” Splitting the two functions overcomplicates company governance, Shugart argues: “Now you have two people who have to be guaranteed to be there for the meetings. It really gets in the way.” Shugart has experienced the chairman/CEO split firsthand. When he was still chairman and CEO of Seagate, the company’s president left. The board insisted that Shugart become president and made another director the chairman. “I went along with it at the time, but it was a pain in the butt,” Shugart recalls. “I had to get ahold of the chairman when I wanted to have a meeting, but I was the guy who had all the information. After a year of that, we agreed I would be given back the chairmanship.” Rodgers of Cypress Semiconductor agrees that no company should be forced to separate the chairman and CEO functions. “I don’t want to prescribe what other companies should do,” he says. “It may well be that, in other businesses, combining the roles works well. For outsiders to force companies to reorganize based on some new management whim brought on by Enron, that’s bullshit. If shareholders don’t like what you’re doing, they should sell and go buy stock in someone else.” One might think that if any company would be open to reform in whatever guise, it would be one of the high-profile, headline-making disasters of recent years. Tyco International Ltd., for example, faces allegations that former CEO L. Dennis Kozlowski and others siphoned off hundreds of millions in corporate assets. (Kozlowski has denied the allegations and is currently on trial.) An internal investigation also implicated at least three board members — including Kozlowski — in receiving undisclosed payments from the company. (All three men have left the board.) But in March, a 67 percent majority of Tyco’s shareholders voted down a resolution — introduced by two major shareholders, Amalgamated Bank and its LongView Collective Investment Fund — to amend Tyco’s bylaws “to require that an independent director who has not served as CEO of the company shall serve as chairman of the board of directors.” Still, by garnering about one-third of the vote, the resolution did make a strong showing. Tyco spokesman Gary Holmes argues that recent changes in the company’s management and governance, including creating a “lead director” position, made the change unnecessary. “The feeling at Tyco is that we currently have a lead director who fills many of the responsibilities filled by a nonexecutive chairman, including chairing the executive meetings, controlling information flow to board members, and coordinating the activities of the board,” Holmes says. “If the intent was to make sure that directors have the active voice and say in the running of the company, then the position of lead director will facilitate that.” Tyco’s current chairman and CEO, Edward Breen, joined the company in July 2002, amid what Holmes mildly describes as a “severe turnaround situation.” Says Holmes: “At the time, the board thought it made sense to consolidate the responsibilities of chair and CEO in one person so that he could move fast and make the necessary changes.” Then, when John Krol, former CEO of DuPont, joined the board in August 2002, Holmes continues, “it immediately became clear that he would be the new lead director.” Not only had Krol been chairman and CEO of a major publicly traded company, explains Holmes, but he was also highly respected in the investment community. The position was beefed up and given more responsibilities — including setting the board agenda and chairing executive sessions. “Everyone on the board now is considered independent except for Breen,” says Holmes. If the fire of scandal isn’t enough to force a change, what hope does the movement to separate the chairman and CEO functions have? Advocates remain optimistic. Tim Smith, president of the Social Investment Forum and senior vice president at Walden Asset Management, a socially responsive investment company in Boston, says that a testing period for these newly appointed lead directors at Tyco and other companies is necessary. “We need to determine whether the role has enough power — whether it divides the labor sufficiently and provides checks and balances on the CEO,” says Smith. “If it doesn’t, you’ll see more pressure to separate [the roles].” Ultimately, it’s the shareholders who have to call for a chairman/CEO separation, says Patterson of the AFL-CIO. “It has to be important enough to them to demand it and vote for it.” He points to the recent spate of resolutions pushing for restrictions on executive compensation as a possible model. “At first you saw them being voted down, receiving 10 percent to 20 percent of the votes,” Patterson says. “Then shareholders began getting active, and now these proposals are passing for the first time this year and last year.” According to Brandon Rees, a research analyst with the AFL-CIO’s office of investment, companies take these resolutions seriously even though they are nonbinding. “It puts enormous pressure on management to respond to the demonstrated will of the shareholders,” he says. Change remains contingent on building support and awareness among shareholders and investment managers. “The markets have been troubled for the last three years, and shareholders are less patient with the status quo,” notes Patterson. “As the support grows, you’ll start to see the votes turn around.” Corporate governance activist Nell Minow of the Corporate Library agrees. “It normally takes a couple of years for resolutions to reach critical mass,” she says. “I think you’ll find that this issue will build like nothing before it. You’re going to start seeing majority votes very soon.” Christopher Caggiano is a free-lance writer and a former senior associate editor at Inc. Magazine living in Boston. He can be reached at [email protected]. This article originally appeared in the fall issue of D&O Advisor, an American Lawyer Media magazine.

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