According to a new report from ISS, the structure of board leadership plays a significant role in relative levels of CEO compensation. Combining the CEO and board chair titles is still the most prevalent leadership structure among S&P 500 companies, with 51% of companies combined the roles in 2015, a slight decline from 54% in 2014. However, the study found, when it comes to CEO compensation, having an independent chair makes a difference.

In the study, ISS analyzed companies in the S&P 500 over a three-year period. The study looked at CEO compensation in the context of four board leadership structures: combined CEO/chair; “insider chair,” where the board chair is a current employee or officer (other than the CEO) – most commonly an executive chair – a beneficial owner of more than 50% of the company’s voting power or named in the Summary Compensation Table; “affiliated outsider,” typically former CEOs/interim officers, non-CEO executives, immediate family members of current or former officers, transactional or professional relationships, or non-employee founders; and “independent outsider” with no material connection to the company other than board service.

Analyzing final data for 484 companies, the study found that CEOs on boards with a separate “insider” as chair averaged annual compensation over the three-year period that was about 13% higher than CEOs with a combined chair role, 38% more than CEOs with an affiliated outsider chair and 42% more than CEOs with an independent board chair. One caveat, however, was that CEOs at four companies with insider chairs received dramatically higher compensation, which skewed the mean average; when the comparison was instead based on the medians for each category, compensation was highest for CEOs who served in a combined role as CEO/chair median.

To provide another perspective, the study also aggregated CEO compensation in the three non-independent categories – combined CEO/chair, insider chair and affiliated outsider chair – and compared the result to CEO pay at companies with an independent outsider chair. CEOs in the resulting non-independent group had average annual compensation that was 26% higher than the group of CEOs with an independent outsider chair.

The study also performed regression analyses using four other variables: three-year “indexed” TSR of the company versus the S&P 500; company revenues; CEO tenure; and whether there was a change in CEO during the three-year period. Only two of the five variables – first revenue and then board leadership structure – were found to have significance. Using the same variables, the study also analyzed CEO pay for only two categories of board leadership structure: the combined CEO/chair and the independent outsider chair. This comparison had the highest level of significance, indicating that the difference between the two types of board leadership structure accounted for $2.51 million of the difference in the CEO pay levels for those two structures. To examine whether the difference might be attributable to the additional work associated with the dual role, the study also performed a similar analysis comparing CEO comp for the combined non-independent group with the independent chair group; the results were similar.

The study concluded that

“the fact that, on average, a CEO’s pay is generally higher when that post is held in conjunction with the board chair role or with an insider chairman provides some confirmation to suspicions that insiders are not the best monitors of shareholder interests in the board room, at least as measured by CEO pay. Further, the fact that CEOs with an insider board chair received, on average, the highest compensation packages regardless of relative shareholder returns indicates that the reason for higher pay to individuals in a combined CEO/chair role may not be due to high performance or to boards recognizing the increased workload involved in holding both positions, as further supported by various regression analyses. While this analysis does not establish cause and effect, one speculation is that companies that have more independent oversight are able to provide a more effective check to the CEO, including pay determination, as evidenced by the much lower average CEO compensation under the independent outsider structure.”

It’s worth noting that views about the benefits of separation of the CEO and chair roles are far from uniform. In “Seven Myths of Boards of Directors,” two academics from Stanford Business School viewed the concept that board chairs should always be independent as a myth that is “not substantiated by empirical evidence.”The authors contended that activists have pressured companies to separate the positions of CEO and board chair based on the argument that an independent chair without ties to management will provide more vigilant oversight, acting as an effective counterweight to management when required. Nevertheless, the authors contend, “the research evidence does not support this conclusion.” The authors cite various studies finding “no statistical relationship between the independence status of the chairman and operating performance,” “no evidence that a change in independence status (separation or combination) impacts future operating performance,” and some evidence that “forced separation is detrimental to firm outcomes: Companies that separate the roles due to investor pressure exhibit negative returns around the announcement date and lower subsequent operating performance.” Accordingly, they argue, the costs and benefits of requiring an independent chair depend on the circumstances, and quote the former head of the FDIC, Sheila Bair: “Too much is made of separating these roles. … It’s really more about the people and whether they are competent and setting the right tone and culture.”(See this PubCo post.)

Similarly, a 2013 Director Notes paper from The Conference Board argues that, while the debate over separation of the CEO/chair roles has “raged for at least 20 years and shows no signs of abating,” research on the issue “has yielded only one overarching conclusion: a CEO who also serves as board chair is no better or worse for company performance than an independent director serving as board chair. To study the impact of CEO/board chair separation on company performance, the authors studied companies in the S&P 1500 that underwent a CEO-board chair separation between 2003 and 2005. The results of the study demonstrated that the context for the separation of roles had a significant impact on the outcome: the study showed that a CEO-board chair separation would promote strong future performance only when it followed weak performance, [and] that a separation following strong performance would hurt performance going forward.” Once again, circumstances matter.

Interestingly, while the policies of ISS and Glass Lewis generally favor shareholder proposals to separate the CEO/chair role, ISS’s view is somewhat nuanced: under its current approach, in assessing whether to recommend in favor of the proposal, ISS takes the position that “any single factor that may have previously resulted in a ‘For’ or ‘Against’ recommendation may be mitigated by other positive or negative aspects, respectively. Thus a holistic review of all of the factors related to company’s board leadership structure, governance practices, and performance will be conducted under the new approach.” And, notwithstanding the views of these proxy advisory firms, the efforts of governance activists to separate the CEO/chair roles have not exactly caught fire. CFO.com reports that “shareholders have proven largely comfortable with the combined role: They have voted on 372 proposals to separate the roles at S&P 500 companies over the past decade, but approved only about 6% of them, according to ISS.” It remains to be seen whether the results of this new study will lead ISS to enhance the level of its resistance to combining these roles, galvanize governance advocates to promote more separation proposals or cause shareholders to take a fresh look at these proposals.