Just as separating the fox from the chickens with a strong fence and a sharp eye is a wise course of action for a farmer, keeping the chief executive officer position of a public corporation separate from that of the company's chairmanship is the prudent thing to do. If the CEO and the CEO's boss are one and the same, then who is watching the corporate henhouse?
That question is of such importance to the oft-referenced independent investment research firm Morningstar (MORN) that it has made the separation of the CEO role from that of chairman a part of its corporate stewardship checklist.
To quote from Morningstar's own criteria for grading corporate governance, "Insider-controlled share classes, takeover defenses, and related-party transactions would detract from a firm's Stewardship Grade, as would the holding of the CEO and chairman of the board roles by the same individual." (Emphasis added.)
Just take a look at what can happen when there is no effective oversight mechanism at all between a chief executive's poor decision-making and investor losses:
- Countrywide Financial's former Chairman and CEO Angelo Mozilo is a poster boy for the separation of the top corporate jobs. He made Countrywide into the nation's leading loan servicer, with over $1.4 trillion in its portfolio. Unfortunately, many analysts see Countrywide's predatory subprime lending practices as a primary catalyst that ignited the mortgage lending meltdown. Mozilo was the fourth-highest paid corporate executive in 2008, pulling in $103 million. His performance-to-salary efficiency rank, however, according to Forbes.com, was only 175, the least efficient score.
- Former Lehman Brothers' Chairman and CEO Dick Fuld earned the No. 1 spot on the Rediff Business world's worst CEO list, because he "... ignored warnings from experts on several issues ... and finally the company had to declare bankruptcy." CNN also said that Fuld was one of the top 10 "Culprits of the Collapse."
- Gerald Levin, the chairman and CEO of Time Warner (TWX), oversaw one of the most ill-fated corporate mergers of all time when he led the way for his company to merge with AOL (AOL) back in 2000. At the time of the merger, the combined market value of both companies was over $300 billion. Today Time Warner and Time Warner Cable (TWC) can together garner only $59.5 billion. AOL, which was spun off from Time Warner in 2009, has a market cap of $2.3 billion.
But, Morningstar, You Said...
So it seems the separation of CEO and chairman roles on Morningstar's good corporate stewardship checklist would be a wise one for investors to consider. But what stewardship grade could Morningstar give itself?
If it did it in a truly objective manner, I think the grade should be an "F" -- at least for this part of the corporate stewardship checklist, for it has failed to keep the two positions separate on its own organizational chart. Morningstar's founder, Joe Mansueto, is both chairman and CEO.
At least one of the company's shareholders has noted this and proposed a resolution challenging Mansueto's dual roles, noting, "When a CEO serves as our board chairman, this arrangement can hinder our board's ability to monitor our CEO's performance."
Morningstar's response: "The Board believes that the company is currently best served by having Joe Mansueto, the company's founder, occupy the positions of chairman and chief executive officer."
Morningstar also cited a book on corporate governance as further reason for shareholders to reject the resolution. The book's conclusion, according to the company, was that separating the roles of chairman and chief executive officer has not been shown to lead to "... improved corporate outcomes."
Footnoted, a website devoted to pouring over the fine print of proxy statements and such, is the organization that discovered Morningstar's little proxy tidbit. What piqued Footnoted's attention was that the proxy resolution was the first ever since Morningstar went public in 2005.
Reporting this must have led to a bit of soul-searching on Footnoted's part because the website was bought by Morningstar a bit over two years ago. Nevertheless, Michelle Leder of Footnoted wrote, "[W]riting about one's parent company is always a little awkward ... but we felt it was important to look at Morningstar's proxy with the same skepticism we would any other company's."
Morningstar does get an "A+" for this aspect of good corporate stewardship: The CEO/chairman has a lot of skin in the game. Mansueto owns about 50% of Morningstar's shares. Of course, that also gives him, as the company's 2011 annual report states, "the ability to control substantially all matters submitted to our shareholders for approval, including the election and removal of directors" and that this may "result in actions that may be opposed by other shareholders."
Editor's note: A previous version of this article overstated the importance of separating the CEO and Chairman roles on Morningstar's corporate stewardship checklist. We regret the error.
Motley Fool contributor Dan Radovsky has no financial position in any of the companies mentioned above. Motley Fool newsletter services have recommended buying shares of Morningstar.