Should the CEO and Chairman be the Same Person?

Standfirst: It’s a question that just won’t go away: should Banks Split the roles of the Chairman and the CEO?

In 2014, Bank of America Merrill Lynch gave its CEO Bryan Moynihan another title: Chairman. In doing so they reversed a policy of separation which has been in place since 2009, and angered a large section of its shareholder base. After the financial crisis, shareholders had stripped the then CEO Ken Lewis of his dual responsibilities in a bid to boost the independence of the board. However, Bank of America simply waited a few years before unilaterally changing its mind and returning the two roles to the same person.

Ever since they have been locked in a internal battle with groups of their own shareholders. In April, of this year a proposal to split the roles received 33% of the vote. Defending their stance BoA said there was no evidence that splitting the two roles led to better governance.

A prevailing trend

So, are they right?

The prevailing trend of opinion would say ‘no’. Institutional Shareholder Services and Glass Lewis had both advised the bank to keep the two roles separate.

Wells Fargo voted to split the two roles in 2016 whilst more and more US corporations are following suit. Although a majority still combine the two roles, it currently stands at just over the 50% mark and is falling. According to a report by Russell Reynolds Associates in 2014, the USA is reaching the point when more S&P Companies will have separate chairmen than not.

An early version of the Dodd Frank Act intended to make separation mandatory and although it didn’t make it through. In the UK, it is already standard practice and part of the Corporate Governance code 2014.

The overwhelming trend, then, is to split, but is that the right thing and is there any evidence that it improves corporate governance?

Supporters say separation is vital when improving the independence of the board and helping it better oversee corporate activities thus standing up for shareholder interests. Key issues such as votes on executive pay would be compromised by an inherent conflict of interest if the chairman is voting on his own pay.

It ensures audit commission independence. Under Sarbanes Oxley, the audit committee can only be comprised of board members, but they report to the Chairman. So, if he or she is also the CEO, its own independence will be critically undermined. A board led by an independent chair is better able to identify areas of operations which are drifting away from the company’s mandate than if he is a part of those operations.

They can also point to some high-profile scandals. All of the five biggest banking fines of all time – as listed by Business Insider earlier in the year – were committed by Banks who had combined the roles of chairman and CEO. Bank of America are highlighted as they are credited with three mentions inside the top nine: The $16.65bn fine imposed for packaging mortgage backed securities which were not as financially sound as they seemed, $11.8bn from the National Mortgage settlement and $8.5bn in 2008 for the mis-selling of subprime mortgages by its recently acquired Countrywide. The fines were one reason why the shareholders voted to split the role of Chairman and CEO in 2009.

Why stay together?

Banks, though, have fought hard against the measure. There is little evidence that suggests splitting the roles improves corporate governance. Instead it’s down to the quality of the individuals involved. A weak chairman against a strong CEO, for example, could dramatically reduce the independence of the board.

Banks who split the roles are not immune to their own problems. Take the example of Deutsche Bank which was fined $7.2bn for selling toxic products in the run up to the housing crisis and Credit Suisse was also fined $5.3bn for selling toxic investments.

The prevailing sentiment, though continues towards dividing the two roles. Banks fight it as they try to retain as much control as possible, but they are pushing against a growing tide.

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