It’s time to find out who’s boss at Loblaw
Proposals to split chairperson and CEO roles gives company a chance to rethink its board
Can the CEO be his own boss?
Easy to answer, no? Yet decades have passed and that question is still being asked, posed this spring in a shareholder proposal attached to the order of business for Loblaw Cos. Ltd.’s annual general meeting, being held Thursday.
Not for the first time, the words of Andrew Grove have been deployed to underscore the point that every corporate leader needs a boss, even the CEO. Grove was chairperson of Intel Corp. when he expressed these views to Jeffrey Garten, then the dean of the Yale School of Management: “The separation of the two jobs goes to the heart of the conception of a corporation. Is a company a sandbox for the CEO, or is the CEO an employee? If he’s an employee, he needs a boss, and that boss is the board. The chairman runs the board. How can the CEO be his own boss?”
At Loblaw, that trick is being per- formed by Galen G. Weston, who has shaken off the G2 moniker, having been trained up in the company before taking on the dual roles of chairperson and CEO last year. The family firm, George Weston Ltd., is the largest Loblaw shareholder.
In the Loblaw shareholder proposal, the B.C. Government and Service Employees Union General Fund asks the board to adopt a policy that the chair of the board be independent, and urges shareholders to vote in favour. “In our view, shareholder value is enhanced by an independent Board Chair who can provide a balance of power between the CEO and the Board and support strong Board oversight.”
Independent board leadership “would be particularly useful,” the proposal states, “in light of disclosures in 2017 that Loblaw participated in a price fixing scheme.” That reference, of course, is to the bread-gate price-setting scandal.
A similar attempt in shareholder reform was made last year at Facebook, and failed, of course. Mark Zuckerberg controls the stock and remains CEO and chairperson of the social-media giant. That, surely, is a big part of the problem. But 31 per cent of minority investors voted in favour of the proposal, and that was before the Cambridge Analytica scandal. The proposal put to Facebook investors, by the way, was introduced by the corporate watchdog SumOfUs, which will be presenting the Loblaw resolution in collaboration with the B.C. union.
In the case of Loblaw, Glass Lewis, the influential shareholder advisory firm, is throwing its weight behind the pro- posal. That should be worrying for Weston but encouraging for investors. The San Franciscobased company includes in its client list asset managers and pension plans that manage more than $35 trillion (U.S.) in assets. In 2007, the Ontario Teachers Pension Plan purchased Glass Lewis. Alberta Investment Management Corp. partnered five years ago, buying a 20-per-cent stake.
Governance experts have had the splitting of the chairperson/CEO roles under study since at least the early 1990s. We still hearken back to the Cadbury Report in the U.K., borne from sudden corporate collapses and inadequate oversight, and the way in which Sir Adrian Cadbury drew a clear road map for governance reform. That a majority of the board be comprised of outside directors was a Cadbury rule. Separating the chairperson from the CEO was another. Otherwise, he wrote in 1992, the dual function represents “a considerable concentration of power.”
So Europe has been ahead on this for decades, followed by Canada, albeit with far fewer fully independent chairs, defined broadly as having “no direct or indirect material relationship with the issuer.” A material relationship is one that could be “reasonably expected to interfere with the exercise of a member’s independent judgement.”
In the U.S., change was spurred by crisis, specifically the collapse of Enron. Dual functioning leaders at S&P 500 companies declined to 52 per cent in 2015 from 71 per cent a decade earlier and, last year, the balance at last shifted in favour of separate roles, if only by one per cent.
Does corporate performance improve when the roles of CEO and chairperson are separate? The research does not conclusively support this belief. Glass Lewis acknowledges the contradictory and inconclusive performance studies in its general discussion of the issue, concluding that it nevertheless “generally favours the installation of an independent chairman in order to ensure independent board leadership on behalf of shareholders. We believe that the presence of an independent chairman fosters the creation of a thoughtful and dynamic board, not dominated by the views of senior management. Further, we believe that the separation of these two key roles eliminates the conflict of interest that inevitably occurs when a CEO is responsible for self-oversight.”
In the case of Loblaw specifically, Glass Lewis acknowledges the company’s appointment of a lead independent director. Nevertheless, it states in its proxy paper, adopting a policy requiring an independent chairperson sets a pro-shareholder agenda and may serve to protect shareholder in- terests “by ensuring oversight of the Company on behalf of shareholders is led by an individual free from the insurmountable conflict of overseeing oneself.”
In recommending that shareholders vote against the proposal, the Loblaw board argues that “combining the Chair and Chief Executive Officer positions under the strong leadership of Mr. Galen G. Weston benefits all stakeholders,” allowing for “one person to represent both the Corporation and the Board.”
At the general meeting, the controlling Weston interests will stand strong and win on this. But young Weston would do well to tread carefully here. He needs to connect to a younger generation of investors who expect progressive, diverse values. (If we take Weston out of the mix, the average age of the slate of directors is 66. And as far as I can figure, they’re all white.) Proactively reforming the board would be a good first step.
Weston interests will stand strong and win. ... But young Weston would do well to tread carefully