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The founder and CEO of Cypress Semiconductor Corporation, T.J. Rodgers, says that only once or twice in the 20-year history of the company has his board flat-out said no to him. 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,” Rodgers says. “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,” he says. One major reason the board could stand up to him is that Rodgers is one of the rare U.S. CEOs who is not also chairman of the board. In most publicly traded companies, the CEO and chairman are the same person. But a growing number of shareholders are saying that more companies should be run like Cypress, a San Jose-based semiconductor manufacturer. The Washington, D.C.-based Investor Responsibility Research Center is currently tracking 40 resolutions aimed at splitting the chairman and CEO roles � at companies such as Xcel Energy Inc., Kimberly-Clark Corporation, The Boeing Company, and Bristol-Myers Squibb Company � compared with just four for all of 2002. (Although the resolutions are nonbinding, they can still 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 of them, 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, just 27 percent had a separate individual holding the CEO and chairman positions. But 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 proposed 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 CEO-chairman separation, says William Patterson, director of the office of investment of the American Federation of Labor � Congress of Industrial Organizations. “CEOs routinely dominate the board,” charges Patterson. “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 non-profit business group the Conference Board, which included former Federal Reserve chairman Paul Volcker and Intel Corporation chairman Andy Grove, urged companies to consider separating the offices of chairman of the board and CEO. If those positions are combined, the commission recommended appointing an independent “presiding director” to balance the CEO-chairman. As a practical matter, according to shareholder activist Robert 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 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,” Monks says. The underlying problem, he says, is really the extent to which companies are committed to having boards that truly act as overseers versus just another department to be run by 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 powers of the CEO-chairman. Part of the reluctance comes from the psychological power of the dual role. When Sprint Corporation recently settled shareholder litigation by making extensive corporate governance changes, one of the changes sought by plaintiffs was to separate the CEO and chairman functions at the company. 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 and power of the chairman position, but not the title. “It almost seemed like a virility symbol,” Monks says. “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 Sprint 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 it’s a former CEO or someone otherwise connected with the company. In fact, 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 Microsoft Corporation after ceding CEO duties to longtime associate Steve Ballmer. Thomas Stickel knows well the allure of the double-dip designation. Stickel used to serve as CEO and chairman of PCS Enterprises, a financial services company that has since been acquired. He currently serves as chairman � but not CEO � of Onyx Acceptance Corporation, an automobile financing company. Filling both roles, Stickel says, 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, that “means someone else is able to introduce to the board subject matter you don’t want brought up.” Shareholders are better served when two people are responsible for the company direction, Stickel says. But could that split cause delays in decision making? “It’s a simple matter of the board giving direction and the CEO executing,” he says. “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.” Moreover, an independent chairman doesn’t necessarily slow things down, says Cypress’s Rodgers. “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.” If the arrangement creates some seeming inefficiency, that actually adds value, Rodgers says. “You have to do extra work,” he says. “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 venture-backed companies, Cypress had a venture capitalist � in this case L.J. Sevin of Sevin Rosen Funds � as its first chairman. After ten years, Pierre Lamond, at the time also of Sevin Rosen, filled the chairman slot, until 1998, when Eric Benhamou, formerly of 3Com Corporation, took over. Rodgers admits that each time the chairman position turned over, he briefly considered taking over 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, including John Biggs, former chairman, president, and CEO of pension fund TIAA-CREF, remained unconvinced that separating the roles is a good idea. Biggs served on the Conference Board’s blue-ribbon commission, but filed an opinion dissenting from the commission’s recommendations, noting that he regarded the separation of the roles 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.” 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 � like Tyco International Ltd. The company faces allegations that former CEO Dennis Kozlowski and others siphoned off hundreds of millions in corporate assets. (Kozlowski has denied the allegations, and a criminal case is currently pending.) 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.) In March a 67 percent majority of Tyco’s shareholders voted down a shareholder 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 a third of the vote, the resolution made a strong showing. Tyco company 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,” he 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.” “At the time,” says Holmes, “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.” When John Krol, former CEO of E.I. du Pont de Nemours and Company, joined the board in August of 2002, “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. The Fire of Scandal If the fire of scandal isn’t enough to force a change, what hope does the movement to separate the CEO and chairman functions have of succeeding? Advocates remain optimistic. Tim Smith, senior vice president at Walden Asset Management, a socially responsive investment company in Boston, says that a testing period of newly appointed “lead directors” at Tyco and other companies is necessary. “We need to determine whether the role has enough power,” says Smith. “Whether it divides the labor sufficiently and provides checks and balances on the CEO. If it doesn’t, you’ll see more pressure to separate [the roles].” “Ultimately, shareholders have to support [the 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 calling for restrictions on executive compensation as a possible model. According to Brandon Rees, a research analyst with the AFL-CIO office of investment, although these resolutions are usually nonbinding, companies still take them seriously. “It puts enormous pressure on management to respond to the demonstrated will of the shareholders,” he says. Change remains contingent upon building support and awareness with shareholders and investment managers. According to corporate governance activist Nell Minow of The Corporate Library, “It normally takes a couple of years for resolutions to reach critical mass. I think you’ll find that this issue will build like nothing before it. You’re going to start seeing majority votes very soon.” This article originally appeared in Corporate Counsel‘s sibling publication D&O Advisor.

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