Financial Regulatory Forum

Two hats or one: revisiting the role of board chair in Canada

By Guest Contributor
August 23, 2011

By John Mackie

TORONTO, Aug. 23 (Business Law Currents) For institutions, regulators and investors, executives who wear two hats, such as CEO and chairman, are in an inherent conflict of interest. The situation is complicated further when roles are shared, such as in cases of co-chairs or co-CEOs.

One company that has been the center of this ongoing debate in Canada is Waterloo-based Research in Motion (RIM). In RIM’s case, the complexity is taken to an extreme, with co-CEOs who are also co-chairs.

There is no prohibition against dual role officers in Canada. Many companies continue to combine the roles of chair and CEO, appointing an independent lead director as a means of ensuring appropriate checks and balances in the governance realm.

Many argue, however, that board chairs are responsible to investors, first and foremost, and must necessarily have an objective perspective when it comes to management – particularly hiring or firing decisions – and management’s recommendations as to strategy and the like. While CEO’s are often the primary contact with investors, they report to the board. In instances where the chair and CEO roles are held by one person, then, they are effectively responsible for overseeing their own actions.

Further complications can arise where two individuals hold a single role, or where an “executive” chair is appointed – again blurring the lines between oversight and execution.

Waterloo-based RIM, maker of the ubiquitous Blackberry smartphone, has been the subject of this governance debate for some time, most recently as a result of a proposal by Canadian fund company Northwest & Ethical Investments LP, owned 50 percent by the Desjardins Group and 50 percent by the eight Provincial Credit Union Centrals. At RIM’s most recent annual meeting, shareholders were asked to consider and vote on a proposal that the role of chair of the board of directors be separated from the position of chief executive officer, and to require that the chair be independent.

While Northwest ultimately settled upon an arrangement with RIM which led them to withdraw their proposal, it’s useful to review RIM’s governance structure for some insight into the issue of executives wearing two hats.

In 2007, following an internal investigation into allegations of back-dating of stock options, then-Chairman and Co-CEO Jim Balsillie stepped down as chairman of the company, and a lead independent director was appointed. In the proxy circular disclosing the change, RIM stated that “consistent with current best practices in corporate governance, the roles of Chairman and CEO have been separated.”

Pursuant to a subsequent settlement agreement with the Ontario Securities Commission (OSC), Balsillie also agreed to step down as a director of the company from February 2009 to April 2010. In May 2010, Balsillie was re-appointed as a director. Then, in a paragraph tucked into the company’s third quarter earnings release in December of last year, RIM announced that Balsillie and Lazaridis had been appointed as co-chairmen of the board. The release indicated that the lead independent director continues in his role, “to facilitate the functioning of the board independently of management.” The new structure was seen as an “appropriate and effective leadership structure” for the company.

In the proposal originally tabled before shareholders, Northwest noted RIM’s own acknowledgment in 2007 of the division of roles as being a best practice in corporate governance, and referenced National Policy 58-201 and the position of the Canadian Coalition for Good Governance as support for the view that the two positions should be kept separate.

On June 30, two weeks prior to RIM’s Annual Meeting, Northwest and RIM came to an agreement that resulted in Northwest withdrawing its proposal. RIM agreed that the company’s board would establish a committee of independent directors whose mandate will be to (i) study the appropriate balance between an independent lead director or chair with full and exclusive authority customarily held by such an office holder, (ii) determine the business necessity for RIM’s co-CEOs to have significant board-level titles, and (iii) propose and provide a rationale for a recommended governance structure for RIM, which will include clarifications of the co-CEO and chair roles, as well as the board’s mandate.

RIM has agreed that the Committee will consult with Northwest in developing the specific terms of reference for its mandate and before it issues its report by January 31, 2012. The board will publicly respond to the recommendations of the Committee within 30 days.

It’s an interesting approach which should serve to flesh out some of the very issues at the heart of the two hats debate. RIM has, in the past, commented that the focus on titles is inappropriate, and that its Co-CEOs also hold the co-chair positions “for the purpose of representing the company’s business and operational interests with customers, suppliers, governments, regulatory authorities and other strategic parties consistent with the duties and authority of the office of the Chief Executive Officer” – i.e. “an external facing title to further the company’s business interests in international markets.”

Indeed, in RIM’s words, “the traditional roles and responsibilities of a chair” are vested in the lead independent director.

Certainly, the international prestige argument is one that other companies have used, but consider a few specific examples from companies which are in the same industry. Steve Jobs doesn’t hold both roles at Apple – perhaps the most relevant company from a competitive standpoint for RIM. The company has co-independent lead directors, with no one holding the chairman title. Google – which is a player in the smartphone space because of its Android operating system – separated the roles of chairman and CEO in April. And RIM itself operated with an independent chairman from 2007 to 2010.

On the Canadian front, there are a number of companies that have taken different approaches on the two hats issue. Electronic whiteboard maker SMART Technologies, of Calgary, had co-CEOs until 2007, with one also holding the position of chair. Since then, one of the company’s founders has assumed the role of executive chairman, while the other acts as CEO.

At Magna International, Frank Stronach also held the role of executive chairman prior to surrendering his multiple voting shares in the company (he now serves as honorary chairman). Though the structure does not obviate the need for an independent lead director, it at least resolves the multiple roles concern.

Another company worth noting in any discussion on the two hats issue is Power Corporation, the international management and holding company controlled by the Desmarais family. Power has been consistent in its objections to the notion of separating the chair and CEO roles for some time. In the company’s most recent proxy circular, for example, the company states that it considers it appropriate “that the positions of the chairman of the board and co-CEO overlap,” in large part because of the company’s status as one controlled by a majority shareholder.

The risks associated with the two hats issue will no doubt continue to attract debate among regulators, institutions and issuers seeking the “ideal” governance structure. It remains to be seen whether the appointment of an independent lead director is sufficient to calm these concerns over time, or further separation of the board and management functions is required.

 

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