Firms face new calls to reduce CEO power

NEW YORK (Reuters) - Investors seeking to rein in domineering chief executives plan a renewed push to bar CEOs from also serving as chairmen of the board, though they may face a tough task in getting a key bloc of investors to join their cause.

Shareholder proponents hope mutual funds, whose customers have seen portfolio balances wither amid the market slide, will be so fed up with companies' performance that they will take a new look at ballot measures seeking to divide the chairman and CEO jobs between different people as a way to promote greater boardroom independence.

The support of mutual funds can make or break a shareholder ballot proposal, because they hold about a quarter of all U.S. stocks.

Corporate governance activists, who are preparing now for next spring's annual meeting season, argue that the financial crisis underscores the need for a chairman who is independent of management.

Many business leaders say companies are most effective with one leader who is clearly in charge, but activists disagree and say a CEO should run the company day to day while the chairman should look out for shareholders.

Supporters of splitting the top jobs point to banks at the center of the financial storm, such as now-bankrupt Lehman Brothers Holdings Inc (LEHMQ.PK), Merrill Lynch & Co Inc MER.N and Morgan Stanley (MS.N), which all are headed by CEOs who also chair their boards.

"All of those banks ramped up risk-taking very aggressively," said Michael Garland, director of value strategies at Change to Win Investment Group, an adviser to union pension funds. "One factor that contributed to that is that CEOs dominate their boards."

Many fund groups, such as Fidelity Investments and Vanguard Group, only rarely support proposals to split the CEO and chairman roles, according to voting data compiled by Change to Win. Big institutional investors often say they do not want to impose broad dictates on what companies must do.

POPULAR IN EUROPE BUT NOT IN U.S.

Governance groups have long criticized what they see as the all-powerful U.S. CEO, who holds great sway over the board when he or she is also chairman.

Dividing the jobs is common in Europe, but the roles are combined at about 52 percent of U.S. and Canadian companies, according to The Corporate Library, a governance researcher. Some U.S. firms have named a presiding director to lead the independent board members, but many activists view that type of structure as inadequate.

Efforts to install independent chairman may draw more support, but that doesn't mean the separation is a good idea for every company, said Rhonda Brauer, senior managing director at Georgeson Inc, a proxy and corporate governance consultant.

"I generally have been one to say there is no one-size-fits-all," she said. "But in light of all of the recent economic turmoil, I think it's going to be harder to make that argument."

The proposals could get a boost if policy changes being considered by influential proxy adviser RiskMetrics Group Inc (RMG.N) are adopted. The group, which says it generally supports proposals to split the top jobs unless companies already have an adequate governance structure, is considering raising the bar on companies to show that their performance is so strong it makes the split unnecessary.

Still, getting mutual funds on board is considered critical for the union pension plans, public retirement systems and other investors who routinely support these measures.

Change to Win's voting analysis shows that many mutual funds have rarely backed these proposals in the past. Even without their support, however, the proposals have recently averaged about 30 percent support -- relatively strong backing for a shareholder measure.

Fidelity, for example, has a proxy voting policy of generally opposing such measures, though it says it will consider voting for them in limited cases.

Change to Win questions whether some fund groups, including privately held Fidelity and Capital Research & Management, and State Street Corp (STT.N) oppose the concept because their own chief executives also chair the board.

"I have to believe that influences the way those institutions vote," Garland said.

State Street supported the proposals 5.1 percent of the time last year, while Capital Research backed them 12 percent and Fidelity 9.6 percent, according to Change to Win. In contrast, Barclays Plc (BARC.L), a UK firm with an independent chair, backed the measures nearly 40 percent of the time.

Fidelity says its corporate structure has no impact on how it votes. "I really don't think there is a relationship there," said Fidelity spokesman Vincent Loporchio. "Our company is structured this way but our proxy voting process really is a separate process."

(Reporting by Martha Graybow; Editing by Tim Dobbyn)