Since the introduction of Say on Pay, shareholders have maintained a larger degree of influence over CEO compensation. The ability to vote in an advisory capacity on the matter strengthened their voice.

However, a particularly interesting case arises when the CEO also occupies the position of board chair. Potentially, this could create a conflict of interest between the board and management, where the CEO-chair has significant leverage over compensation decisions.

It is partly for that reason, in combination with boards’ desire for independent oversight of management, that shareholders often take an active stance regarding decisions about CEO-chairs.

For example, the Washington Post recently reported that the CEO-chair of Tesla, Elon Musk, is continuing to occupy both roles after a single investor proposed separating the two positions. The proposal was rejected, with 83.3% of shareholders voting against it.

Similarly, Allergan investors pushed for independent occupants of the CEO and chair roles after a year in which the company’s stock price dropped by 20.3%.

Joseph Kieffer

An analysis of such shareholder proposals within the Equilar 500 — the 500 largest companies by revenue trading on one of the major U.S. stock exchanges — suggests that they are generally unsuccessful.

In fact, between May 2, 2017 and May 1, 2018, among 38 companies in the Equilar 500 that received a shareholder proposal regarding the implementation of an independent chair, all 38 proposals were rejected.

Additionally, many of those proposals, like those at Chevron, Walmart, and Exxon Mobil, were similar to those submitted in previous years. At Walmart there has been a shareholder proposal requesting an independent board chair for each of the past five years.

For a more in-depth analysis of such shareholder proposals and why they are brought to the forefront of annual meetings, Equilar examined the cases of a few other companies in the group.

In the case of Pfizer, a shareholder proposal submitted by the Sisters of Philadelphia and other co-filers suggested that a single person who serves as both the CEO and chair “weakens a corporation’s governance structure,” as found in Pfizer’s 2018 proxy statement.

The proposal cited a question posed by Andrew Grove, Intel’s former chair: “Is the company a sandbox for the CEO, or is the CEO an employee?”

The purpose of separating the two roles is to prevent “excessive management influence” that may unduly result from having a CEO participate in the corporate governance and oversight process. However, the response by Pfizer’s board highlighted the need for a flexible leadership structure, in which the two positions are combined or separated based on the company’s needs at any particular time.

In the case of General Electric, veteran shareholder activist Kenneth Steiner submitted a proposal claiming that the lack of a strong lead director role creates an imbalance in the corporate governance structure. He cited the examples of Caterpillar and Wells Fargo, both of which had recently appointed independent board chairs after their boards initially strongly opposed separating the roles.

The GE board recommended that shareholders vote against the proposal: “In the view of the Board, splitting the roles of chair and CEO would 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 proven offsetting benefits.”

A third example, from Bank of America’s most recent proxy, was also presented at the request of Kenneth Steiner. This proposal too referenced the Caterpillar and Wells Fargo examples.

Bank of America provided a lengthy response, mentioning both the need for flexibility and evidence showing that separation of the two positions does not result in improved financial performance for companies.

The bank’s board noted that its total shareholder return has significantly outperformed its peer group over the prior three years. It also cited a 2015 study finding that only 4% of companies in the S&P 500 had adopted a policy of separation where a CEO-chair previously existed.

And according to a more recent survey from the same source, only 28% of chairs at S&P 500 companies are independent.

Further, a historical look at the results of shareholder proposals related to separating the CEO-chair position at Equilar 500 companies over the last five fiscal years shows that the recent flurry of rejected proposals was no fluke. Only three companies have approved CEO-chair separation proposals during that time.

A recurring theme in 2018 proxies is that, even though particular shareholders see an apparent need for split positions, companies are not noticeably affected where the positions are joined.

While the diversification of power for governance is the main argument for separating the two positions, another potential negative outcome addressed by proponents is the sheer difficulty of shouldering the responsibilities of both positions.

Verizon, for example, is preparing to launch a major digital media initiative that may occupy a large part of the CEO’s attention over the next few years. Shareholders may be concerned that the initiative will draw the CEO away from the duties associated with the board chair role.

However, board responses to such concerns tend to reference the significant governance capabilities of the lead independent directors, who collectively buttress the company against excessive CEO-chair influence. In any case, the Verizon board opposes the appointment of two separate individuals as a staunch, written policy.

Additionally, a board may have other reasons, such as length of CEO-chair tenure and industry influence, for consolidating the two positions. An example of the latter is the board of Gilead Sciences, which makes the case that its CEO-chair has a depth of industry knowledge and substantial relationships in the scientific and medical communities.

The widespread rejection of these separation proposals suggests that, while they may be trying to address genuine leadership concerns, when it comes to voting, shareholders opt for stability and maintenance of consolidated leadership.

Joseph Kieffer is a research analyst at Equilar, a governance research firm. This article was originally published Equilar.com. It is republished here by permission.