Response to Bainbridge Critique of Lead Director Commentary

In his post, Separating the CEO and Chairman of the Board, Prof. Stephen Bainbridge of UCLA Law School takes issue with my post on this site of 9-14 (Lead Directors: 2nd Best or A Valuable Tool?) in which I advise readers to consider the discussion of lead directors contained in Joann Lublin’s WSJ article of 9-13-10.

The dialogue continues, I take issue with Prof. Bainbridge for several reasons:

• Contrary to his assertion, I did not say that splitting the CEO and Chairman roles is best practice, but merely that it is considered by many to be.
• He correctly notes that studies go both ways as to the benefits of such a split. However, I suggest that in today’s environment where missteps at large firms may have such severe external consequences, such studies conducted during prior periods are less probative than would have been the case even a few years ago. Indeed his own reference to the Coates study indicates that the case for such separation is likely to be greater at large firms than at smaller firms.
• Contrary to his apparent understanding, the purpose of my post was not to advocate for splitting the roles, but simply to indicate the potential benefits of lead directors as an alternative method of improving governance in situations where a complete split is not desired or not possible and illustrate how the concept has worked in practice.
• Prof. Bainbridge correctly argues that an independent chairman may acquire too much power of their own:

Turning from the benefit side to the cost side of the equation, even if splitting the posts makes it easier for the board to monitor the CEO, the board now has the new problem of monitoring a powerful non-executive Chairman. … In other words, if the problem is “who watches the watchers?,” splitting the two posts simply creates a second watcher who also must be watched.

A lead director structure may be an intermediate step which mitigates this risk while still enhancing oversight of a CEO holding both positions, and reducing the likelihood of large companies going out of control in the manner which we have recently seen in the financial industry.