The chairman of Nortel and MDU Resources likes the idea of a board independent of the CEO — and is putting that philosophy to work.

Harry Pearce remembers joining the board of MDU Resources Group a decade ago only to watch John Schuchart, the chairman and former CEO of the Bismarck, North Dakota–based natural-resources company, rule in imperial style. “Schuchart would challenge directors openly on issues I thought were best resolved among the independent directors,” he recalls. “That’s not healthy. The board can’t do the oversight it is designed to do.”

After Schuchart stepped down in 2001, the board elected as chairman Martin White, who had succeeded him as CEO, sticking with the combined model. But as White’s own retirement neared, the board bucked tradition: While Terry Hildestad, COO and head of one of MDU’s subsidiaries, got the CEO slot, the board named Pearce non-executive chairman.

Pearce, the former chief counsel and vice chairman of General Motors, thinks there’s a model there: a board, which honors its oversight role, run by a director not tied to the company. MDU, he says, is a good example of how both roles are evolving.

The concept of the non-executive chairman isn’t new to global corporate governance; it’s the standard model in both the U.K. and Canada. (Pearce also serves as non-executive chairman at Nortel, the Canadian telecom giant.) But U.S. companies have largely resisted — fewer than 20 percent of Fortune 500 firms are led by a non-executive chairman. “With people in those dual roles,” Pearce says, “who’s going to take the initiative to solve the problem?”

Pearce says the decision to split the CEO/chairman roles was not controversial at MDU, which had sales of $4 billion last year, and he credits White: “He really had an extraordinary understanding of governance, even though he held both positions.” The idea even received the blessing of the incoming CEO.

What made the change work smoothly, Pearce adds, is that the board discussed succession regularly, tracking potential heirs at nearly every board meeting and allowing for a debate on the split CEO/chairman model to transpire gradually.

Pearce, who convenes meetings just for independent directors (“people really say what they’re thinking”), gets good marks from his peers. “He’s open to everyone’s perspective,” says John Wilson, president of Durham Resources and an MDU director since 2003, “but he’s not just a consensus seeker. He truly listens to everyone’s opinions and then makes decisions.”

Most U.S. companies have appointed a “lead director” from among the independents to serve as a counterweight to the CEO/chairman. That’s a half-step, Pearce predicts, toward the non-executive-chairman model. CL

Executive Summary

• Harry Pearce slowly led MDU Resources to a non-executive-chairman model of governance.
• The key was making this discussion part of the CEO-succession planning.
• Pearce argues that his board now fulfills its oversight function; he also convenes separate meetings of independent directors.

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