By Alan Porter, Fund Manager, Sanlam Investments
Around 60% of the companies held in our fund have a joint CEO/Chair role on their boards. Of these, over 80% are US companies. Only three of our holdings outside of the US are in such a position. In a recent dialogue, when we asked a US company why they thought the joint CEO/Chair role was a good idea, they prefaced their answer with “Ah, the question we get from all European investors”!
Our belief is that the CEO runs the company while the chairman leads the board’s oversight of the executive. In addition, we think having two leaders reduces risks in times of crisis, complexity, and increased regulation.
We vote on behalf of our clients at all the AGMs of our holdings. In 2021 we voted against the election of all CEOs that held the Chair role. So, on this one item alone, we voted against the Board recommendations for most of the companies we own.
There is a geographic divide here that reflects the US company response to our earlier question. According to MSCI, 43% of companies in the MSCI USA Index have the CEO/chair roles combined versus 10% in the MSCI Europe Index. This makes sense. In the UK, for example, one of the provisions of the Corporate Governance Code is that “the roles of chair and chief executive should not be exercised by the same individual”.
The argument for the dual role appears to be that it allows for quicker execution of the board’s decisions and helps leadership maintain a unified front. But do shareholders want quick decision making over a system checks and balances? We think not. Do shareholders want leaders to be more unified because they have more power? We think not. In our engagement with US companies a common riposte is that that the lead independent non-executive director performs a similar function to that of a chair. If that is the case, why not have a chair instead?
There is evidence that the proportion of companies in the US with combined CEO/chair roles is declining. This is a good thing. In the meantime, this anomaly will remain a key focus of engagement for us and we will continue to vote against the appointment of CEOs that retain both roles.
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Fund risks
The Fund has holdings which are denominated in currencies other than sterling and may be affected by movements in exchange rates. Consequently the value of an investment may rise or fall in line with the exchange rates.