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QSR Feature
Chairman or CEO?
The growing trend of separating the roles of chairman and CEO could make its way to restaurant boardrooms.
Is this man the chairman or chief executive officer of a restaurant chain?

The debate over increased board independence in the U.S. is growing. In the second quarter alone, Bank of America Corp.’s CEO Ken Lewis was stripped of his chairman duties and federal regulators began a review to determine if the overlap of directors at Apple and Google violates antitrust laws.

Whether or not scrutiny over board leadership will migrate to publicly traded restaurant companies remains to be seen. Through early May, investors submitted 48 proposals calling for an independent board chairman, including 36 that had reached or were expected to reach a vote, according to proxy adviser RiskMetrics Group.

While these 2009 resolutions include consumer and hospitality names such as CVS Caremark Corp., Office Depot Inc., Whole Foods Market Inc., and Wyndham Worldwide Corp., the restaurant industry remains, for now, untouched.

Not surprisingly, the bulk of public restaurant firms combine the role of CEO and chairman. Of those that do split the jobs, only a slim minority have chairmen that meet RiskMetric’s standards as truly independent, with no affiliations or relationships that could compromise responsible fiscal leadership. They include McDonald’s Corp., Peet’s Coffee & Tea Inc., Ruth’s Hospitality Group Inc., and Texas Roadhouse Inc.

That could soon change. New data from the Chairmen’s Forum, in association with Yale University, shows that in recent years there has been a progressive shift toward separating the roles and filling the chairman’s post with an independent leader.

In 2008 as many as 39 percent of companies in the S&P 500 appointed someone other than the CEO to chair their board, compared with just 16 percent a decade before. Last year 16 percent of these chairs could be considered truly independent, according to the research, compared with just 7.6 percent in 2004. The model has been embraced by Europe, where in some countries it is required by law.

“There’s been a very clear uptick and in the last year or so it’s been even more, rapidly driven by the financial crisis and partly by the bailout,” says Steven Davis, project director at Yale’s Millstein Center for Corporate Governance and Performance.

The Chairmen’s Forum issued a policy briefing in late March calling for all companies to consider separating the roles. It suggests that those with a combined CEO-chairman leader should divide the posts during a natural transition period, such as the incumbent’s planned retirement or departure, or explain to shareholders why they choose not to do so.

Nell Minow, editor and cofounder of the Portland, Oregon–based Corporate Research Library, which provides independent governance research, says restaurant companies might indeed be ripe for reform, as they have had a long history of board-level abuses.

“This is an industry that has had a history of insular boards that have not always been effective,” she says.

It is our belief that combining the chairman and CEO is very often a real positive and occasionally a real negative.”

Separating the roles of chairman and CEO doesn’t necessarily lead to more sound corporate governance, though. What’s most important is the board’s overall effectiveness, which Minow’s firm ranks A through F on factors such as total shareholder returns, executive compensation, takeover defenses, and accounting. On average, she gives the boards of 44 public restaurant companies tracked by the Corporate Library a B rating.

Some investors question the merit of separating the two positions on restaurant industry boards.

“It is our belief that combining the chairman and CEO is very often a real positive and occasionally a real negative,” says Thomas Lynch, senior managing partner for Greenwich, Connecticut–based Mill Road Capital, a value fund that invests in micro-cap companies.

Lynch favors a case-by-case approach, arguing restaurant firms are often better served by a combined chairman and CEO because of the necessary responsiveness called for in a highly competitive consumer sector.

“In a situation where the combined CEO and chairman is a person of high integrity and high skills, what it allows the company to do is be more nimble and more responsive to changing market conditions,” he says.

Matthew DiFrisco, an equity analyst with Oppenheimer & Co. Inc., wonders whether more scrutiny of restaurant company boards might have prevented some of the industry’s more recent problems, including the heady overexpansion that began in 2005.

“Just now managements are coming to the realization that they’ve been growing too fast, that they weren’t really managing the business for the best returns, that they were wasting capital,” he says. “Now all of a sudden everyone is cash-flow and return-focused and there’s greater discipline.

“I think this probably would have come to roost earlier,” DiFrisco says, “had they had a greater level of independence at the board level.”

Deborah Cohen is QSR’s former Finance reporter.