198 InManagersWeTrust
chairman. This manifested the same rationale of independence pre-
scriptions, a need to chec kthe boardroom power of the CEO. Only
about 5% of Fortune 1000 companies succumbed to this formula,
probably with good reason.
As an empirical matter, as with board independence, most evi-
dence shows that companies that split these functions do not per-
form better than those which do not.^5 As an abstract matter, it is
hard to justify giving a company governance credit for this separation
of function, for putting a watchdog on the CEO suggests as many rea-
sons to be suspicious of the CEO as reasons to trust him. For a com-
pany whose CEO is not to be trusted, this may be a good step, but
it sounds more like probation than probity and is a strong warning
signal for investors to run from rather than embrace the business.
Only a fool, after all, thinks trust can be purchased or structured.
One aspect of this reform makes sense, however, and many com-
panies adopted a version of it by providing for a nonexecutive board
chair for critical functions such as CEO, board, and director eval-
uations. After all, letting the CEO grade herself and her board does
pose a ris kof self-delusion. An independent grader is in a better
position to evaluate performance objectively, and so some gover-
nance credit is justified for a company that takes this step.
Director independence is frequently encouraged for some com-
mittees and often required for audit committees. Audit committee
independence is consistent with the structure of U.S. audit practice
that requires an auditing firm to be independent of the company and
its management. Independence on compensation committees re-
flects the logic of a nonexecutive overseer for key functions such as
CEO and board performance review.
However, the argument for requiring independence on other
committees, such as nominating, ethics, and governance, is the same
as that for independence overall. If a corporation needs those kinds
of things, it has problems anyway. The mere fact that a corporation
has various independent board committees does not guarantee that
problems arising from collusion or delusion will be absent or dis-
appear.
Periodic and formal evaluations of the CEO and other directors
are often recommended and do seem sensible and worthy of praise.
To deserve credit, however, the CEO reviews should be conducted
outside the presence of the CEO, something that is not easily or
commonly done. A more general way to implement this practice is
to supplement such periodic reviews with regular director meetings