In November the Association of British Insurers asked 20 large U.K. companies to end the practice of allowing their chairmen to also serve as their CEOs. Backed by a few recent, egregious examples of abuse of power by corporate titans, ABI believes that an independent board of directors, with its own leader, gives a company credence with investors and helps prevent executive excesses.
With one exception, the companies, answer has been a resounding no. Mining giant Billiton and record producer EMI, among others, argue that a combined chairman-CEO aids shareholder value by creating a more decisive, unified management structure. Outside directors will keep a corporate leader in check, regardless of who’s in charge, the companies say. Influential newspapers including The Times of London and The Independent sided with the companies, pointing out that many of their stocks outperformed the markets last year.
Into the breach stepped Hugo Dixon, former Financial Times columnist and founder of Web-based financial commentator BreakingViews.com. To test whether ABI had a legitimate grievance, Dixon and BreakingViews colleague John Paul Rathbone came up with the badly arranged directors index, or BADI, a market-weighted five-year performance chart of the 20 offending companies. They found that BADI underperformed the FTSE all-share index by 20 percent during that time.
“BADI performs well in boom years, when investors cut companies slack,” says Dixon. “But when the markets are not doing well, BADI underperforms.” So far only one of the 20, JJB Sports, has agreed to split its executive positions. No word yet on whether other BADI companies will change in the interest of good corporate governance.
