The Real Volcker Rule

The Dodd-Frank Bill signed today by President Obama incorporates what most legislators and market participants would admit is a watered-down Volcker Rule — the former Federal Reserve chieftain's proposal on restricting proprietary trading by banks.

Bank CEOs are glad about that, but what they might really be glad about is that another Volcker Rule did not get written into the legislation: a mandate to separate the chairman and CEO positions at banks and financial institutions.

"My favorite idea on corporate governance is that I like the idea of separating the chairman and chief executive officer" Volcker told Directors & Boards lead columnist Hoffer Kaback when being interviewed for a cover story in the journal in 2000. Here is more of what he said:

"Chief executive officers like to be chairmen. There's no question about that. But, most specifically, when a company gets into trouble, and if there's some question about the CEO in terms of his tenure, responsibility, the need for new blood, or whatever, it's just much more difficult to make the change when you don't have an alternate source of leadership on the board other than the chief executive himself.

"A bank gets into trouble. As the bank regulator, you at least raise the question whether part of the trouble isn't the management. Who do you talk to without using a two by four? You look for some leadership in the bank to change policies or change direction, and board members say, 'That's not me. I don't have any responsibility. All I am is a poor board member. Go to the chairman.' Well, the chairman is the problem."

Volcker did not think much of the lead director as an alternate source of board leadership — "in a lot of situations it may be a second-best solution." The best option, one he liked both as a regulator as well as a director — he was at the time of the interview with the James Wolfensohn boutique investment bank and serving on several corporate boards — is separating the top roles.

His firm conclusion: Having "a [nonexecutive] chairman who can set the agenda for the board and stay in close contact with the chief executive, and be simpatico but nonetheless bring independent judgment that doesn't always come out very clearly in a board meeting because of the collegiality involved and the reluctance to speak out, is useful."

Bank chairmen-CEOs may feel they dodged a bullet on the Volcker Rule's intent to separate out their proprietary trading arms. Little do they know what kind of bullet they dodged had a Volcker Rule to separate their titles been embedded into the Dodd-Frank Bill.

Goldman: What Might Have Been

There is no surprise that Goldman settled with the SEC yesterday. The firm would have been foolish not to, and the sooner the better. Two surprises did come out of the settlement, one minor and one major:

• The minor surprise was the settlement amount of $550 million. I thought the SEC would peg the fee to get out of the penalty box at $1 billion, a number that would memorialize for the ages the whole reason it brought its case against Goldman. In my opinion, at its core this case was never really about Abacus. It was a statement by the SEC that the ethos of Wall Street, from the head firm (Goldman Sachs) down through the tentacles of every trading outfit, was poisoning the capital markets and jeopardizing the soundness of the economic system. The lower number dialed down that statement, but the SEC accomplished its intended and appropriate "come to Jesus" moment.

• The major surprise was that Lloyd Blankfein kept his hold on the firm. "Some had speculated the legal dustup would at least cost him his chairmanship," noted New York Times reporter Graham Bowley in his account of the leadership implications of the SEC deal for Goldman.

I never expected that the SEC would force Blankfein out. I did anticipate that, in allowing him to stay on as CEO, the agency would insist on the firm having an independent nonexecutive chair. This would not have to be a permanent split, but long enough — perhaps two years — for the firm to rebuild its battered reputation.

This is the action that would have made a substantial statement to a nation still suffering from the ill effects of a Wall Street gone amuck that the leading firm in finance is indeed serious and committed about finding its "true north" again.

I use that phrase deliberately, because here is the thing — Goldman Sachs has sitting on its board the one person who could step into the nonexecutive chair role and get the firm perceived as being regrounded in a sense of ethical leadership. That person is Bill George (pictured). Mr. "True North" himself.

A passing glance at Bill's career — his business accomplishments and contributions to the thought leadership of "doing the right thing" — would persuade that Goldman had taken a decisive step in addressing its defaced image. That should have been a desired outcome of the settlement, one that the firm fully embraced — meaning that Goldman might have proactively taken this action, with or without SEC prompting. It certainly could live with shared leadership, as there is a legacy of shared leadership (albeit insiders) of the firm, as witness the eras when John Whitehead and John Weinberg shared the reins, and then when Robert Rubin and Stephen Friedman were co-leaders.

So, a major surprise in the Goldman SEC settlement, and a major missed opportunity for the firm to restore a sacred reputation for trustworthy and far-sighted leadership.

A First

Before the Second Quarter edition of Directors & Boards rolls off the presses tomorrow, let me note a first in our 35-year publishing history — Bob Monks is the first person to appear twice on the cover of the journal.

Granted, we did not start picturing lead authors on our covers until 1996, some 20 years after the publication's founding. Yet, that makes his dual appearance all the more worthy of recognition.

Bob joined a melange of authors pictured on the cover of the Governance Year in Review special edition published in the spring of 2009, and then again some nine months later in the First Quarter 2010 edition, also in a photo montage of debaters on "The Great Divide" — our panel discussion on whether to separate the chairman and CEO positions. (Accompanying photo is from this debate held at the Weinberg Governance Center at the University of Delaware in November 2009.)

I first published Bob in 1989, a co-authored article with his longtime business partner and collaborator in shareholder activism, Nell Minow. Since then he has written frequently for Directors & Boards and has become a cherished colleague in advancing good governance. He can always be counted on for bringing clear thinking — and, I like to think, right-minded thinking — to the often complex issues of board leadership.

His most recent weigh-on on whether to separate the chairman and CEO roles is a perfect example of the cooly rational mind at work on one of the thorniest issues confronting boards today. It is an issue that he is personally close to — having bumped up against the daunting powers that be at ExxonMobil in presenting a proposal for the energy giant to make the split. He lost in that initiative. But let me share one of his keen comments made at our panel that is worthy of deep consideration as other managements, boards, and shareholders continue to wrestle with this "great divide":

"We are getting to the point now where the size of corporations is a major factor in the political and social life of countries. ExxonMobil, for example, a company that many know I have had a particular involvement with as an activist shareholder, is the 14th largest enterprise — and that includes countries — in the world. What corporations of that size do has a huge impact on society. They have to be concerned not only with meeting their numbers but also meeting their responsibilities to society. This raises very complicated questions for them — questions of global warming, questions of hiring practices in different parts of the world, and many other difficult issues. With the legitimacy of corporations constantly on people's minds, you need leaders who are sensitive to the company's impact on society. That requires a range of skills that is not impossible to find in a single person, but if you can't get that in a single person then that is another reason you may have to separate the roles at the top."

Well said — especially considering the less-then-deft treatment he received from ExxonMobil management in presenting his proposal, this is not a vituperative charge against the company but a statesmanlike projection of a future leadership requirement.

I trust we will have more opportunities to present the wisdom of Bob Monks to the Directors & Boards audience. That might even mean the prospect of a three-peat appearance on the cover.

The 'Great Divide' II: It Is Inevitable

Here is round 2 of the debate on separating the chair-CEO roles, as explored in an eight-page cover story in the Directors & Boards First Quarter edition just off press.

The first shot highlighted in this blog came from former American Express Chairman and CEO James Robinson, in the posting of March 4th below. Now we turn to panel member Reuben Mark, who retired from Colgate-Palmolive Co. at the end of 2008 after having served as chairman of the board for 22 years and CEO for 23 years. His outside directorships have included Cabela's Inc., Citigroup Inc., the New York Stock Exchange Inc., Pearson PLC, and Time Warner Inc. Listen to what his long tenure of holding down both the chair and CEO positions has led him to conclude:

"Now having stepped down from both positions I have become convinced that separation is required. During the last three or four years of my tenure as chairman-CEO, I was devoting an increasing amount of my time to board management — eliciting directors' opinions, bringing them together on issues, and so on — and less time perforce on the CEO job. The president ended up absorbing more of my CEO duties. It became clearer and clearer that being chairman was virtually a full-time job.

"Also, let me acknowledge this. People who serve as CEOs, and I certainly include myself among them, tend to have a touch of megalomania or a leaning toward tyrannical action. After all, a corporation is a kind of benevolent dictatorship. If there is a separation, and assuming good faith and assuming the right people are in place, the board has an additional conduit of information and oversight that they would not have had. So even though my personal experience is contrary to this conclusion, I believe that separation of the roles not only should happen but inevitably will happen."

When one of the nation's most respected business leaders has convinced himself that there is a new and better way of running a corporation and its board, attention must be paid. A recommendation like this can kick the "great divide" debate into a higher gear.

Reuben Mark, in white shirt, is pictured above at the Weinberg Center on Corporate Governance at the University of Delaware, where the debate was held in November 2009; also in photo are (l. to r.) shareholder activist Bob Monks, HealthSouth Corp. Nonexecutive Chairman Jon Hanson, and Charles Elson (standing), the center's director who moderated the panel discussion.

The 'Great Divide' I: 'Do No Harm'

The First Quarter edition of Directors & Boards has come off press today. Our lead story is a debate on the wisdom of separating the chair and CEO positions. Our commentators are a panel of business leaders assembled at the Weinberg Center for Corporate Governance at the University of Delaware. Under the deft moderating by the center's director, Charles Elson, the group was tasked to think through the many critical dimensions — from governing theory to practical applications — of splitting these two top leadership roles.

Charles and I did not decide willy-nilly on this topic. This is a vastly important subject that is transcending the normal debate over governance best practices. Capitol Hill pols are eyeing this structure of board leadership — legislation that would separate the roles has been introduced in Congress — and, as Prof. Elson warns in the article, a mandated separation "is an issue that the courts ultimately may deal with as well." So we assembled a superb group of thinkers to tackle the pros and cons while this issue is still on the cusp of decisive action. I commend the article to you as a distinctive examination of board leadership.

Here is a taste of the flow of the debate. We'll first turn to James D. Robinson III, and then in the posting on March 5 to follow I will highlight a comment by Colgate-Palmolive's retired chairman and CEO, Reuben Mark.

Robinson was chairman and CEO of American Express Co. from 1977 to 1993. He has been general partner of venture capital firm RRE Ventures since 1994 and also president of JD Robinson Inc., a strategic advisory firm. He is presiding director of the Coca-Cola Co. board, and from June 2005 until February 2008 he was nonexecutive chairman of Bristol-Myers Squibb Co. A superb background to make this statement:

"I have been an independent director. I have been a nonindependent director. I've been a chairman and CEO. I've been a nonexecutive chairman. There are times when the best course of action is to split the roles. There are times when it's best to combine them. My conclusion is a simple one: Do no harm.

"Beware the simplicity of saying that two heads are better than one. What about the 12 heads of the full board? You have to be careful that you don't create a passive attitude among directors who think they can just sit back and watch while the chairman and the CEO run the show. You want all board members to be actively engaged. Once you start separating the duties and acknowledging that two heads are running the shop, you risk disenfranchising the other board members and not getting the active contribution you want from each and every director."

Beware the simplicity of saying two heads are better than one. That's an important insight to carry forward as this separation debate heats up.

A Flashback

The announcement this week of a leadership change at the J. Paul Getty Museum sparked a memory of a former leading figure in the evolution of modern-day corporate governance, Harold Williams. Williams was chairman of the Securities and Exchange Commission when I first got into the business world in the 1970s. After he stepped down as SEC chair in 1981 he became president and CEO of the J. Paul Getty Trust, a cultural and philanthropic institution that includes the museum among its operations.

When people want to know about the history of Directors & Boards, I tell them that it was founded, in 1976, during a time of great trouble in the boardroom. Corporate America was caught in the ugly glare of the foreign payoff scandals, when boards seemingly were unaware of the behavior of their managers in illegally bribing foreign agents for contracts and were oblivious to the legerdemain in the corporate accounting. (Does that last part sound familiar?) Congressional hearings ensued, and a new law was enacted — the Foreign Corrupt Practices Act.

The SEC began putting the pressure on boards to act more responsibly, and independently. The SEC had two activist chairmen in the 1970s — first with Roderick Hills and then with Harold Williams — who strongly moved the needle in the direction of boards rethinking their role, their behavior, and their composition. A new era in the evolution of corporate governance got underway.

During his reign in Washington, Williams table thumped for separating the chairman and CEO positions. Yes, a topic that is still much debated today, some 30-plus years later, was a hot subject then at the SEC and in boardrooms – maybe I should say a "hot potato."

And that's why a remembrance of Williams comes so readily to mind with the news out of the Getty organization. I am about to publish a major piece on the wisdom — or folly — of separating the chairman and CEO jobs. Look for this as the cover story in the First Quarter edition of Directors & Boards, off press next month.

In a way, this separating the roles analysis returns the journal to the era of its roots — when boards were in big trouble for improper risk management and financial oversight, when the government was making life in the boardroom less comfortable, and corporate governance was about to enter a new phase in its evolution toward independent leadership.

Ken Lewis, Non-Chairman

Bank of America CEO Ken Lewis can't be happy about being forced to give up the chairman's role. In an article for Directors & Boards in 2006 on governance best practices, here is what he had to say on the separation of the roles:

"The idea that separating the chairman's function from the CEO's might provide stronger oversight is not new. And, in some circumstances, it could be correct. But there is also the risk that companies with an independent chairman can end up with ambiguous leadership, split allegiances on the board and in management, and an incoherent vision for the company's future.

"What is helpful when the chairman and CEO are the same person is to have an independent lead director, who can chair meetings and coordinate other activities of the other nonmanagement directors. This is a model our company adopted [earlier in 2006]. It provides an important communications link between the other independent directors and our shareholders.

"In working with a chairman and CEO, members of any board must be able to do their job, which is to provide guidance and support as long as the CEO has their confidence, and to remove the CEO when he (or she) has lost it. If they can't do that, the company doesn't need a new chairman; it needs new directors."

Well, guess what? The Wall Street Journal is reporting today that BofA is on the hunt for new directors. Oy vey!