This bank governance reform idea failed before. Will now be different?

Bloomberg

The debate over splitting the chairman and CEO roles at banks is back.

Shareholders at JPMorgan Chase , Bank of America and Goldman Sachs will vote soon on whether those banks' chief executives should also chair their boards. Big banks have mostly fended off those pushes in the past, and they're arguing now that the addition of lead independent directors who fulfill chairman-like duties provide an effective check on CEOs.

Backers of the split say that's not enough. Much like the U.S. government, corporate leaders need to have proper checks and balances, said Paul Chesser, director of the corporate integrity project at the conservative-leaning National Legal and Policy Center. The group has put the issue up for a vote at Goldman Sachs.

"If it's a chairman and a CEO, there really is no counter to them unless there's some real egregious conduct going on," Chesser said.

The proxy advisory firms Glass Lewis and Institutional Shareholder Services are backing the shareholder proposals at Bank of America and Goldman Sachs. Their recommendations aren't yet available for the vote at JPMorgan Chase, where Chairman and CEO Jamie Dimon this week criticized the "constant battle" over the issue and decried the "undue influence" of proxy advisers, noting that Glass Lewis and ISS are owned by foreign companies.

"There is no evidence this makes a company better off," Dimon wrote in his annual letter to shareholders.

Some researchers who study the issue say Dimon has a point. Studies have shown "quite consistently" that there's no correlation between splitting the chairman-CEO role and a company's financial performance, said Ryan Krause, a professor at Texas Christian University's business school.

There is, however, some evidence that companies with a separate chairman are less prone to instances of wrongdoing, Krause said.

That issue proved salient in 2016, when a series of consumer abuse scandals unfurled at Wells Fargo, which was led at the time by Chairman and CEO John Stumpf. Stumpf would soon be out, and the bank would split the chairman and CEO roles.

Many large U.S. banks still have joint chairman and CEO positions. Citigroup is a notable exception, as is the auto lender Ally Financial.

But more companies are shifting toward splitting the roles, with 59% of S&P 500 company boards reporting that they had a separate chair and CEO last year, according to the executive search firm Spencer Stuart. That's up from 45% a decade ago and from just 16% in 1998, the firm said in an annual report on board trends.

In the banking industry, support for splitting the chairman and CEO jobs has ebbed and flowed at different times.

Cincinnati-based Fifth Third Bancorp stripped the chairman title from then-CEO Kevin Kabat in 2010, amid fallout from the 2008 financial crisis. But eight years later, the bank gave the chairman job to then-CEO Greg Carmichael, pointing to improvements in profitability and technology during his tenure as chief executive.

Bank of America shareholders also split the CEO and chairman roles after the financial crisis, which meant that Brian Moynihan was simply the CEO when he was hired in 2010. By 2015, Bank of America's board decided to bestow him the chairman title. Since then, BofA investors have shot down proposals to split the roles in 2017, 2018 and 2023.

The question will come up again at the bank's annual shareholder meeting on April 24.

John Chevedden, a BofA shareholder who's putting the issue up for a vote, said in his proposal there's "clearly a need for a change" due to the company's lagging stock price. Bank of America and other large companies' complexities "increasingly demand that 2 persons fill the 2 most important jobs in the company." The proposal says that the change could be phased in the next time there's a new CEO.

The bank's board is recommending that shareholders vote against the proposal, saying that its current structure provides "robust and effective independent board oversight." That setup includes a strong lead independent director — former Pepsi executive Lionel Nowell — who regularly meets with other independent directors, Moynihan, shareholders and regulators.

The board at JPMorgan Chase, which is facing a similar vote at its May 21 meeting, also pointed to the "strong, effective counterbalance" provided by its lead independent director, former NBCUniversal Chairman Stephen Burke. In recommending that shareholders oppose the push to split the duties, the board noted a lack of "empirical evidence demonstrating a significant relationship" between a separate chairman and CEO and strong company performance.

"With Mr. Dimon serving as both Chairman and CEO, the Firm has delivered ROTCE that has consistently and substantially outperformed" its peers, the bank's board wrote, referring to return on tangible common equity, which is a common measure of shareholder returns.

Goldman Sachs' board also pushed back on the idea. It said that its lead director is active, setting the agenda for meetings, focusing on the effectiveness of the board, being a liaison for independent directors and management and repeatedly meeting with shareholders and regulators.

"We are committed to independent leadership on our board," the Wall Street bank stated, adding that it has repeatedly disclosed it would "not hesitate to appoint an independent chair" if its governance committee decided that step was necessary.

Goldman also argued that the combined role has provided for "strong and effective leadership" from Chairman and CEO David Solomon, particularly during turbulent times in the economy and the regulatory environment.

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Walter Gontarek, a visiting fellow at the UK's Cranfield University who has studied the corporate governance reform proposal at U.S. banks, said that combining the two roles can offer "handsome benefits as firms can navigate fast moving developments."

Gontarek found in a recent paper that firms with a dual chairman and CEO can take on greater risk, but that linkage broke down when companies were subject to heightened regulatory supervision.

"The so-called agency costs of CEO duality can be mitigated when regulatory reach is greater," said Gontarek, a former banker who is CEO and chair of the London-based business lender Channel Capital Advisors.

Bank regulators in Europe generally don't permit the industry to combine the CEO and chair roles.

"The next few years will tell us if the U.S. market moves towards the European model in discouraging CEO and chair combinations or reverses course," Gontarek said.

One relevant factor is that big banks' investors are from all over the world, and combined chairman-CEOs are almost "unheard of' in parts of Europe, said Courteney Keatinge, senior director of ESG research at the proxy advisory firm Glass Lewis.

Keatinge, whose firm is recommending that shareholders vote for the chairman-CEO split at Bank of America and Goldman Sachs, acknowledged that academic research on the issue is mixed. But she said a more independent board led by a separate chair is "more likely to ask the tough questions" and challenge management when needed.

"We really want as much independence as possible on the board because it ensures that shareholders' interests are being served," Keatinge said.

Krause, the Texas Christian University professor, said there are several trade-offs involved, pointing to potentially faster decision-making by a chairman-CEO but also the potentially increased ability to challenge CEOs if the two roles are split.

Ultimately the issue comes down to what board chairs and CEOs are "doing with their power," the type of social dynamics that are harder to capture in academic research, Krause said.

"It really matters who chairs the board, and by 'who' I don't just mean, 'Are they the CEO or not?'" Krause said. "I mean the person, the values, the governing priorities that they bring to that role, and that's very difficult to measure."