Risk & Governance Weekly

Wachovia Appoints an Independent Chair

By Ted Allen

Investors praised the decision by Wachovia to appoint an independent chairman and are calling on Morgan Stanley, ExxonMobil, and other firms to take that step.

Wachovia, the fourth-largest U.S. bank, announced May 8 that lead independent director Lanty Smith had been elevated to chairman, a title that was held by CEO Ken Thompson. The Charlotte, N.C.-based firm has lost almost 30 percent of its share value in the past year as it coped with mortgage-related losses.
 
The CtW Investment Group, which threatened a “vote no” campaign at Wachovia earlier this year, praised the company’s decision to separate the roles of chairman and CEO and appoint an independent chair.

“The failure of boards of directors to challenge aggressive risk taking by their CEOs contributed to massive subprime losses at many banks. By naming an independent chairman, the Wachovia board has taken a much needed step to restore appropriate checks and balances on the power and risk taking of its CEO,” William Patterson, the executive director of CtW--the investment arm of the Change to Win labor federation--said in a May 9 press release. “The onus is now on the boards at Morgan Stanley and other banks that suffered similar failures to stop stonewalling their shareholders and adopt this critical governance reform.”

While an independent chair proposal wasn’t on the ballot at Wachovia’s April 22 annual meeting, the policy change comes as shareholders are giving greater support to this reform this year. Independent chair proposals so far have averaged 33.3 percent support at 14 meetings where results have been reported, as compared with a 26.9 percent average over 42 meetings last year, according to RiskMetrics Group data. Those proposals averaged 30.2 percent support in 2006 and 29.2 percent in 2005.

Wachovia is one of the first major U.S. financial firms to appoint a fully independent chairman. Most financial companies continue to combine the roles of CEO and chairman; many of those firms have appointed a lead or presiding director. In November, Citigroup appointed Sir Winfried Bischoff as a non-independent chairman after the departure of Chairman and CEO Charles Prince. Prior to its collapse, Bear Stearns divided its leadership when James Cayne stepped down as CEO in January but retained his chairmanship. At Morgan Stanley’s April 8 meeting, CtW urged investors to vote against Chairman and CEO John J. Mack to prod the board to appoint an independent chair, but Mack received just 5.5 percent opposition.    

While an independent chair is the prevailing practice in the United Kingdom and many international markets, most U.S. firms have been reluctant to embrace this reform. Nevertheless, a significant number of U.S. companies have moved to separate the roles. Forty-five percent of S&P 1,500 firms now have separate chairmen and CEOs, up from 30 percent in 2003, according to RiskMetrics’ 2008 Board Practices study. However, just 17 percent of those firms have independent chairs, and the prevalence of separate chairs is higher among small-cap and mid-cap firms. Among the well-known companies that appointed independent chairs in response to shareholder demands are Borders Group and Walt Disney.  

The appointment of an independent chair is Wachovia’s latest governance improvement. In 2007, shareholders approved management proposals to declassify the board and to provide for majority voting in uncontested director elections. These reforms, coupled with the company’s healthy financial performance at the time, may have dampened support for a shareholder proposal seeking to separate the positions of CEO and chairman. That resolution, filed by investor Richard Dee, received 16.3 percent support, according to RiskMetrics data.

This year, Wachovia directors did not face significant opposition and were re-elected with 92 to 97 percent support. However, Thompson has been criticized by some investors over Wachovia’s $24 billion purchase of Golden West, a leading provider of adjustable rate mortgages, at the height of the U.S. housing boom in 2006. Wachovia reported a $393 million first quarter loss following an $818 million loss in the final quarter of last year.
 
Echoing one of the arguments made by shareholder advocates of independent chairs, Thompson said the appointment of a separate chairman would give him more time to focus on running the company.

“At this challenging time for the financial services industry and for Wachovia, my management team and I are pleased that Lanty [Smith] agreed to assume the role and responsibilities of chairman, freeing me to focus 100 percent of my time and attention on guiding the company through the current environment and building and delivering enhanced value for the benefit of our shareholders, customers, and employees," Thompson said in a press release. 

Smith, a director since 1987, has served as the lead independent director since 2000 and previously chaired the audit committee, according to Wachovia’s press release.  He is chairman and CEO of Tippet Capital, a merchant banking firm based in Raleigh, N.C. He previously was a partner with the law firm of Jones Day. 

ExxonMobil Investors Call for an Independent Chair

Meanwhile, investors are preparing for a high-profile vote on an independent chair proposal at ExxonMobil’s May 28 meeting. That resolution, filed by shareholder activist Robert A.G. Monks, is backed by California Controller John Chiang, Connecticut Treasurer Denise Nappier, Maryland Treasurer Nancy Kopp, the California Public Employees’ Retirement System, and 69 descendants of John D. Rockefeller, who founded the company that became Exxon.

In a May 13 letter to shareholders, the proponents argue that an independent chair would: “create greater independence and objectivity” on the board; promote “a more coherent, long-term corporate response to the challenge of replacing reserves;” improve communications with shareholders; and help the company improve its reputation. For more on this campaign, click here. In 2007, an independent chair proposal won 40 percent support at ExxonMobil.

On May 12, the oil company e-mailed a letter to institutional investors that urged them to oppose the independent chair resolution and a separate proposal that seeks an annual advisory vote on executive pay, The Wall Street Journal reported. The letter noted that the board has concluded that it would be best for CEO Rex Tillerson to continue to serve as chairman. 

Independent chair proposals also will be on the ballot at Xcel Energy and AMR on May 21 and at Chevron on May 28. The best showing this season for an independent chair proposal was 51.5 percent support at Washington Mutual; the worst result was an 18.3 percent vote at Citigroup, according to RiskMetrics data.  

Staff Writer L. Reed Walton contributed to this article.