---

Key Findings

This study of current board leadership practices at S&P 1500 companies finds that most large U.S. companies have one person simultaneously serving as the chief executive officer (CEO) and the chairman of the board. Findings include the following:

• 51.3 percent of the S&P 1500 companies studied have combined the roles of CEO and chairman of the board
• Large-cap companies are more likely to combine the roles of CEO and board chair than are mid-cap and small-cap companies; in fact, the majority of small-cap companies studied have separated the roles of CEO and board chair
• The Services and Technology industries are the only industries in which the majority of companies separate the roles of CEO and chair
• 59.3 percent of the companies studied have named a lead director to serve as the independent leader of the board

Introduction

2011 is the second year that companies have had to include a discussion regarding board leadership structure in their proxy statements. The SEC added this new disclosure requirement in Release 33-9089, effective February 28, 2010. Specifically, the requirement calls for a board to disclose whether it has chosen to combine or separate the positions of chief executive officer and board chairman, and to provide the reasons the board believes that this leadership structure is the most appropriate structure for the company at the time of the filing.

Armed with the information provided in the new disclosures, shareholders' focus on the issue of board leadership has intensified. According to Georgeson's "2010 Annual Corporate Governance Review", shareholder proposals calling for independent board chairs or for the separation of the CEO and board chair positions received average support from 27 percent of the votes cast last year. So far this year, more than twenty companies have received shareholder proposals regarding board leadership. One of the first of these proposals to be voted on at a 2011 annual meeting received strong support from shareholders: a majority (57 percent) of Moody's Corporation's shareholders supported a non-binding proposal calling for the board to "adopt a policy that, whenever possible, the board's chairman should be an independent director who has not previously served as an executive officer of Moody's" at the company's annual meeting held on April 19, 2011.

This article summarizes the findings of an Equilar study of board leadership practices, as reported in proxy statements filed by S&P 1500 companies. In June 2011, when this study was conducted, 1,185 of the companies had available data for fiscal years ending between December 31, 2009 and December 31, 2010; the remaining 315 companies are not included in this analysis.

Study Findings

The chart below presents the board leadership structure in place at the S&P 1500 companies for which data was available. Among these large U.S. companies, it continues to be very common for the chief executive officer of the company to simultaneously hold the position of board chair. In fact, 51.3 percent of the S&P 1500 companies studied have this leadership structure. 33.6 percent of the companies studied have a non-executive chair, while 13.2 percent have an executive chair. The following chart shows the breakdown of board leadership structure (as of the most recent annual meeting date) at S&P 1500 companies.

Company Size and Industry

The chart below indicates that board leadership structure differs by company size. Large-cap companies are more likely to combine the roles of CEO and chairman of the board than are mid-cap and small-cap companies. In fact, the majority (54.5 percent) of small-cap companies studied have separated the roles of CEO and board chair, and nearly half (49.7 percent) of mid-cap companies have done so.

A similar analysis was conducted to determine if board leadership structure varies by industry. The table below indicates that a majority of companies in nearly all industries combine the positions of CEO and board chair. The Services and Technology industries are the only industries in which a majority of companies separate the roles of CEO and board chair. Companies in the Technology industry are the most likely to have a non-executive chair leading the board.

Lead Director

Governance advocates have called for those companies which have a combined CEO and Chair position, or otherwise have a non-independent director serving as board chair, to name an independent director to serve as the lead or presiding director1. This approach allows for an independent director to serve as the leader of the board at those times when independent leadership is required. Among the S&P 1500 companies studied, more than half (59.3 percent) have named a lead director to serve as the leader of the board.

The most common usage of the lead director approach is found when the company has combined the roles of CEO and board chair. The chart below shows that 82.2 percent of the studied companies that combine the roles of CEO and board chair have named a lead director.

Non-Executive Chairs

Calls over the last decade for boards to be led by independent directors have also resulted in a rise in the prevalence of the position of non-executive chair. Even though a non-executive chair is not an employee of the company, he or she may not always be completely independent from the company. In fact, 19.6 percent of the non-executive chairs identified in this study do not fall into the classification of "Outsiders", or independent directors. Equilar categorizes these non-independent directors as "Insiders" or "Affiliates," depending on the type of relationship the director has with the company. In this case, an "Insider" is not an employee of the firm, but rather owns or is associated with an entity that owns the majority of shares in the company. An "Affiliate" is an individual that is deemed not independent by the company due to a material relationship with the company, including board appointment by a major (but less than majority) shareholder, significant transactions with the company, or former employment at the company.

In the case of the non-independent non-executive chairs, these directors are often former CEOs, major shareholders, or have some other relationship with the company which prevents them from being considered truly independent. In these cases, the board often appoints a Lead Director in addition to the Non-Executive Chair. Nearly one in five (17.1 percent) of the S&P 1500 companies studied which have a Non-Executive Chair of the Board also have a Lead Director. For example, at Tyson Foods, Inc., John Tyson — a member of the company's controlling family — is currently serving as board chair, and an independent director is serving in the position of Lead Director. The board provides the following description of this approach in their most recent proxy statement:

At the present time, the Board believes that separation of the positions of Chief Executive Officer and Chairman, combined with the role of the Lead Independent Director, improves the ability of the Board to exercise its oversight role over management, provides multiple opportunities for discussion and evaluation of management decisions and the direction of the Company, and ensures a significant role of the Board's non-management directors in the oversight and leadership of the Company.

Executive Chairs

Even in companies where the roles of CEO and board chair are separated, the person serving as chair of the board may also be an employee of the company. These individuals are known as "Executive Chairs." More than three-quarters (75.6 percent) of the companies which have an executive chair have also named a Lead Director. Presumably, this is because the executive chair cannot be considered an independent board leader, due to their employee status. For example, at ResMed, Inc., the founder of the company and former CEO, Dr. Peter Farrell, is now serving as the Executive Chairman, and an independent director serves in the newly-created position of lead director. The board provides the following description of the lead director position in its most recent proxy statement:

The primary responsibilities of the Lead Director are to preside over board meetings in the absence of the Executive Chairman, call, establish the agenda for and preside over meetings of the independent directors, act as a liaison between the independent directors and Executive Chairman, guide the Chairman on board meeting agendas as well as the adequacy of information to be presented, communicate with stockholders, and such other duties as may be delegated by the board, independent directors, Executive Chairman or the Nominating and Governance Committee.

---

1 Equilar does not distinguish between the titles of Lead Director and Presiding Director. Throughout this report, the term Lead Director is used to reference people serving with either title.