In his speech before The Clearing House on Nov. 30, 2016, Comptroller of the Currency Thomas Curry stated that his agency is considering whether to mandate the separation of the chairman and chief executive roles at national and federal savings banks.
This is a subject that the American Association of Bank Directors has studied and followed for many years. For the reasons set forth below, we urge the Office of the Comptroller of the Currency not to mandate such a separation.
At first blush, it could make sense to require the chairman of the board to be an outside board member. Such a separation would symbolize the board’s independent character. While many banks have organized their boards that way, many have not.
But what does the separation really mean in practice?
It’s hard to say unless you are a member of the board and management. Or perhaps a national bank examiner.
In AABD’s experience, outward manifestations of “independence” do not necessarily signify authentic independence. On the flip side, outward manifestations of nonindependence do not necessarily indicate a lack of independent thought or action.
The proxy advisory firms like to use the chairman/CEO separation as a litmus test of board independence because they are not in the position of individuals who have close familiarity with a company’s actual people and governance. All they can do is judge independence from outward appearances.
The proxy advisory firms have challenged public companies that have a unified chairman/CEO role innumerable times, but they have frequently been voted down. Most of the time, the shareholders don’t buy into their arguments that separating the chairman and CEO functions will make the company safer or more profitable.
The OCC doesn’t need to set up a mandatory separation because it has access to “inside information” — the real internal functioning of the bank and its governance. In contrast to the proxy advisory firms, which have no inside knowledge, the OCC has examining and oversight powers. It examines banks regularly on site and oversees banks off site. It has access to board and board committee minutes and reports. It may interview any insider, including directors, the agency wishes. It has subpoena and enforcement powers.
In addition, there is little, if any, empirical evidence that companies with separate chairmen and CEOs are more successful or safer than those without separation. In a recent article (“Chairman and CEO: The Controversy over Board Leadership,” June 24, 2016), David F. Larcker and Brian Tayan of Stanford University’s Rock Center for Corporate Governance concluded that “[m]ost research finds that the independence status of the chairman is not a material indicator of firm performance or governance quality.”
While Comptroller Curry’s speech can serve as a strong wake-up call to banks to consider their governance structure and whether a change might improve the bank’s performance, AABD is unaware of empirical research showing a clear nexus between a separate chairman and CEO position and either long-term profitability or safety and soundness. Without clear empirical proof that a change in the governance structure of most banks is necessary for safety and soundness, AABD believes that the OCC should be very cautious in pressing banks to make this change. Bank boards, shareholders and management are aware of the considerations for and against separation, and banks and their shareholders should have the freedom to make this choice on their own.
AABD has urged bank boards to have robust corporate governance processes, including annual evaluations of board performance to help assure that the board is an independent voice in the institution. It is during these annual reviews that consideration may be given to whether the chairman and CEO should be separate or not, and in cases where they are not separate whether the board should appoint a lead director or other nonmanagement board member to have influence or control over the board agenda and reporting process. Let the board decide.