The chief operating officer position seems to be a sensible approach to handling management succession and dealing a chief executive officer's span of control issues. Many smaller banks especially look to COOs to assist their CEOs and be the heir apparent. Some large banks, including Wells Fargo and JPMorgan Chase, also have a COO.
But many other institutions, of all sizes, are increasingly choosing to go without the COO position. Some new CEOs would prefer not to have the COO in a bank's leadership structure. Meanwhile, across numerous industries, the COO position has been in a long-term decline. According to a report last year by Crist Kolder Associates, the number of firms with a COO has declined from over 48% in 2000 to around 33% in 2015. (The study looked at 672 large companies, in multiple sectors, from the Fortune 500 and S&P 500 indexes.)
There are many reasons why including a COO in a bank's management lineup is not attractive.
First, a COO can actually inhibit succession planning by complicating the search process. COOs can deter from attracting qualified external candidates, who may be hesitant to consider joining institutions where the succession plan appears fixed. This is a problem in the current competitive and digital environment, where banks need new talent with a fresh change agenda.
Also, many CEOs fear becoming a lame duck. Consequently, they are uncomfortable with the potential threat posed by a strong "CEO-in-waiting" COO. Thus, they are likely to favor less aggressive and potentially less qualified COOs who will not rock the boat. Succession issues should be addressed directly and not through a difficult-to-define COO position.
But the problems surrounding the COO position go beyond succession complications. While some say that COOs can alleviate overstretched CEOs, who have too much to manage, they arguably can add another layer of management and additional complexity — slowing decision-making, hindering communication and even harming moral. Having a COO also complicates recruiting and retaining other talented senior management, like a world-class chief financial officer. Such talent would find it demotivating to report to an intermediary instead of directly to the CEO.
Also, a confusing shared command structure creates potential conflict with subordinates; a COO and CEO could pitted against each other if they are conveying conflicting messages to staff.
Authorizing a COO to take on CEO-like duties also diminishes accountability, since it obscures who has the right to make the ultimate decision and who takes responsibility for outcomes. As I heard one senior manager recently say, it is an abdication of leadership for a CEO to be split into two jobs. That role should fall to one person.
If the firm is too complex and the CEO's span of control is too large, then companies should address that problem directly by simplifying the firm and making its goals more focused. As the 21st century sees more firms streamlining their missions, there is less of a need for a COO position.
Finally, and perhaps most concerning is the evidence that firms with COOs have lower returns and trade at lower market-to-book pricing multiples. Alternatively, it may arise from unclear accountability. In any event, investors want CEOs closer to the business and customers, and not in some insulated corporate center. Removing a redundant COO layer helps satisfy this desire.
Changing corporate organizational structures reflect market developments and strategic adjustments following the financial crisis. The unfocused 20th-century diversified financial conglomerate strategy is giving way to more efficient and focused strategies at banks. This change is contributing to the COO position becoming an endangered species. Banks should think twice about creating or retaining the COO position to avoid ending up with a two-headed monster that is ill-suited to the post-crisis environment.
J.V. Rizzi is a banking industry consultant and investor. The views expressed are his own.