Higher stock returns at companies with split chairman, CEO

Posted: Friday, October 22, 2004

NEW YORK (AP) Corporate executives always say they are looking for ways to boost shareholder value, which makes it all the more interesting when they are opposed to things that would help them do just that.

Case in point: Many companies have resisted calls for them to split the roles of their chairman and CEO so one person doesn't hold both titles. They say that division of power would be bad for business.

But there is evidence that contradicts that argument. It turns out that those companies with different people at the helm tend to see their stock outperform those that don't, at least according to new research tracking returns over the last decade.

So much for those corporate claims that they always try to put investors' interests first.

The new data comes from Merrill Lynch chief U.S. market strategist Richard Bernstein, who based his findings on the returns of the 100 largest stocks in the S&P 500 index based on market capitalization from 1994 through the second quarter of this year. The portfolio was rebalanced every quarter over the decade, and companies that split the two top executive jobs made up about a fifth of the sample.

Those companies with a ''split'' strategy had an average annual stock return of 22 percent, while investing in stocks with a single chairman and CEO had an average return of 18 percent.

Yet dividing the chairman and CEO roles isn't something most companies seem willing to do. Only about a quarter of the companies in the Standard & Poor's 500 stock index split those roles, according to The Corporate Library, a governance watchdog group.

Contrast that with practices in other parts of the world. In the United Kingdom, for instance, about 95 percent of the 350 largest companies on the London Stock Exchange require those roles be held by different people, according to recent issue of the McKinsey Quarterly, a publication put out by the consulting firm.

In the wake of all the corporate scandals, shareholders have been pushing for more U.S. companies to embrace such a change. They have a simple reason why: Dividing those roles would put checks into the corporate system that they hope would better protect against mismanagement and rogue behavior.

Companies have come up with a laundry list of why that wouldn't work. They say that CEOs would then have to work with chairmen who aren't involved in the day-to-day operations of their businesses, and claim that CEOs would feel stifled in their decision-making should someone be watching their every move. They are also quick to point out companies where the division of power didn't work, like the scandal-plagued Enron Corp. where Ken Lay was chairman and Jeffrey Skilling served as CEO.

It may also be largely a matter of ego and control, with executives unwilling to give up part of their power.

Still, investor advocates believe that this is the way to go and they have been pressing companies to switch their views. During last spring's proxy voting season, they put forth proposals at dozens of companies to make such a change.

Most of their attempts failed, though there was an occasional victory. Among the most noteworthy was at Walt Disney Co., which agreed to split the two posts in March after shareholders delivered a resounding vote of no confidence in chairman and CEO Michael Eisner by withholding 45 percent of their votes for his re-election.

But now investors may have new ammunition in their arsenal to back their case.

Not only have the ''split'' shares done better overall in the last decade, but there were times when their returns were significantly superior, according to the research by Merrill's Bernstein.

The first run was from 1996 to 2000, led by the gains in technology stocks. During that time, those that ''split'' their executives' roles saw their stock rise nearly 37 percent vs. about a 25 percent gain in those that did not. When tech shares were excluded, the ''split'' gains plunged to about 26 percent while the gains in the ''same'' stocks fell to about 20 percent.

A rally in the ''split'' portfolio also began again in April 2002, which came as shareholders called for improved governance practices as the number of companies involved in fraud and other misdeeds grew.

Of course, there is no guaranteeing that split-company stocks will always lead, but they seem to be providing investors superior returns over the last 10 years. That's something that corporate America shouldn't ignore.

Rachel Beck is the national business columnist for The Associated Press. Write to her at rbeck(at)ap.org

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