Newspaper article The Florida Times Union

PSS Chairman's Promotion Focuses Governance Debate; Some Question If Consolidation of Both Leadership Roles Benefits the Business World

Newspaper article The Florida Times Union

PSS Chairman's Promotion Focuses Governance Debate; Some Question If Consolidation of Both Leadership Roles Benefits the Business World

Article excerpt


When David Smith, PSS World Medical's chief executive, was handed the keys to the chairman's office late last month, the company spun it as a vote of confidence in the 46-year-old's ability to manage the business.

The board "thoroughly agreed that he'd earned it; he was a proven leader," said Delores Kesler, PSS' lead independent director. "We wanted to give him that vote of confidence, and we want to keep him around."

Such consolidation of power, however, is looked down upon by some corporate governance types, who liken it to the fox guarding the chicken coop.

They argue the board is charged with overseeing management - a job that can become tougher if the chairman is also the CEO.

Consolidating the two roles, "inevitably takes away from [the board's] autonomy," John Challenger, chief executive of Challenger, Gray & Christmas, a Chicago-based outplacement firm. "It doesn't give the shareholders an independent voice vis-a-vis management that more separation does."

Proponents of consolidation, meanwhile, argue the arrangement makes for a more informed board, reduces friction between management and the board, and accelerates decision-making.

People familiar with PSS - on Wall Street and Main Street - said Smith has earned his stripes, helping steer the medical products distributor out of the financial dire straits it had found itself in earlier this decade. Smith, who was in China on business, was not available for comment last week.

PSS went on an acquisition binge in the mid-to-late 1990s, that helped nudge annual revenue above $1 billion. But, supplier problems, unexpected expenses related to some of the deals, and reimbursement changes in the nursing home industry hobbled the company, which was put up for sale. PSS found a buyer in mid-2000, but the deal fell through shortly. The negative news panicked investors, who torpedoed the stock from nearly $11 in early 2000 to a smidgen above $2 that fall.

In the midst of this financial mess, PSS turned to Smith, who at the time was chief financial officer. In October 2000, Smith was bumped up to president, from where he steered the corporate turnaround. Since Smith put on the CEO hat in 2002, PSS' stock has nearly tripled, while revenue is up nearly 50 percent to $1.62 billion.

The board has a lot invested in Smith, said Jeffrey Michelman, a PSS shareholder and accounting professor at University of North Florida.

"You go to the altar with the guy who brought you there," Michelman said.


Regardless of whether Smith deserves the CEO and chairman titles, there is a case to be made for keeping the roles separate.

If the CEO, also serving as board chairman, is doing something inappropriate, the board's going to be less likely to ask the difficult questions because the CEO is one of them, Michelman said.

"[The] CEO really should have some independent body looking at his or her performance," he said. "When the CEO is also the [chairman] of the board, you're not getting that independence."

But, just because the same individual shoulders both CEO and chairman responsibility, doesn't make the firm's board a management lapdog.

Having a board with outside directors is more important to protecting its independence and effectiveness, said John McConnell, the Emanuel T. Weiler Distinguished Professor of Management at Purdue University in West Lafayette, Ind.

Fundamentally, the board is dependent upon the CEO and the other corporate officers to provide information, and the board's job is to ask questions of them, McConnell said.

"One could argue," he said, "that ... splitting the positions creates an artificial bureaucratic separation that has no impact in reality."


Consolidating the CEO and chairman roles is a trade-off between control over corporate direction and the perception the company is being run for management's benefit, said Stephen Hoedt, analyst with National City Corp. …

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