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Split in the boardroom?

Should more banks separate the jobs of chairman and CEO? Corporate governance wish lists meet multiple realities

Debate over separating the roles of chairman and CEO went on before the Jamie Dimon-JPMorganChase case, and will go on even after Dimon's victory. While governance experts have their views on what's best, bankers often tailor the decision to bank-by-bank situtations. Debate over separating the roles of chairman and CEO went on before the Jamie Dimon-JPMorganChase case, and will go on even after Dimon's victory. While governance experts have their views on what's best, bankers often tailor the decision to bank-by-bank situtations.

Twenty-five years ago Doug Fisher and a group of other investors founded what today is Virginia Commerce Bancorp, a $2.9 billion-assets holding company in Arlington. From the beginning, the bank maintained separate chairman and CEO positions.

Fisher, current chairman, explains that horse sense drove the decision.

“We understood that we didn’t know banking,” says Fisher, “but we wanted to keep an eye on our money. And we felt that we could do that if we could monitor where our money was being spent.” Hence, they installed a chairman who could centralize the board’s oversight of management.

“There’s always been something of a blur in the middle,” says Fisher of the chairman and CEO’s duties, “but clearly our CEO runs the bank and I don’t run it.” For Virginia Commerce, now in the midst of being acquired, this approach has always been the rule. And it worked.

At New Jersey’s ConnectOne Bancorp, quite a different arrangement has evolved. Frank Sorrentino III began as a non-executive chairman, working with a professional CEO who did not have a stake in the startup bank. In the beginning (2005), Sorrentino, whose roots were in construction and real estate, did not involve himself in management. He says it made sense to separate the jobs.

About a year later, with the Englewood Cliffs, N.J., bank established, Sorrentino became more involved in management decisions and became an executive chairman, and another year later, chairman and CEO. Over time Sorrentino became the $1 billion-assets bank’s largest stockholder, as well.

As those developments came together,  he says, “I couldn’t conceive of the two roles being split up.” However, in 2013, feeling the need to adopt a “best practice” of governance, the bank’s board determined to appoint a lead director, whose job includes presiding over executive sessions. The lead director also helps set board agendas.

Not long ago, Fifth Third Bancorp turned to consultant William Isaac, a former FDIC chairman, for advice on the idea of splitting the chairman and CEO jobs. At the time the bank had a joint chairman and CEO position, plus a lead director slot.

“I said that it was a good practice,” says Isaac,  referring to separate roles, “though not required.” His caveat was that any transition occur in the course of a retirement, to make the shift less traumatic. Fifth Third’s board decided to go ahead with the idea and asked him to suggest candidates. None worked out, and the bank’s search firm wound up recruiting Isaac for the job, which he accepted, as non-executive chairman. For the time being, James Hackett, lead director, continues in that position as well.

Isaac says that he and Hackett work closely with Kevin Kabat, president and CEO of the $113 billion-assets organization. “We’re both very much in the loop,” says Isaac. Yet Isaac says this is not the only way to achieve independent viewpoints on a bank’s board—just one way

“Ultimately, it’s more about how you all behave, than who has what title,” says Isaac. “At Fifth Third, there’s a lot of independence on the board.”

“What banks are striving for, as an industry,” Isaac adds, “is to have strong involvement by the board in both oversight and company direction.” Ultimately, he says, board members must remember that their fiduciary obligation is to shareholders.

Which approach is “right”? That’s a matter of much debate, no matter what the size of the bank involved. Sorrentino believes that this is a bank-by-bank, fact-based decision, and many agree with him.

Yet many corporate governance experts increasingly lean towards splitting the two roles. And there is recognition that while the principles behind the debate are identical, in theory, across the spectrum of bank sizes and types, clearly those factors, plus geography, can’t be ignored. Nor, say experts, can personalities and the stage in a bank’s life cycle be ignored.

The debate over Jamie Dimon’s positions with JPMorganChase put the issue on the front page earlier this year, but it was quietly going on for some time before that, both in banking circles as well as more general governance discussions. We explored the issues with a range of chairmen, CEOs, and attorneys and corporate governance experts.

Chase: Interesting, not indicative

The highly publicized Dimon debate “was something on another planet” for most bankers says G. William “Billy” Beale,  CEO at Union First Market Bank, $4 billion-assets, Richmond, Va. Beale notes that proxy advisory firms like the dominant Institutional Shareholder Services and Glass Lewis & Co. LLC, prefer to see the positions split. It happens his bank has done so since the 1960s. But he says that unless a bank gets involved in something big, like a controversial merger, such firms’ views typically aren’t a factor. In his bank’s case, Beale tends to set the board meeting agenda, but the chairman runs the meeting.

Many others interviewed agreed that the Chase case has had little bearing on their thinking.

“It became more of a symbolic issue, used as a weapon, in the case of Dimon, because of the ‘London whale’,” says David Baris, executive director of the American Association of Bank Directors and partner at Buckley Sandler LLP. “At a certain level, it’s a nonissue, because there is no empirical evidence that separating the chairman and CEO roles makes any difference regarding performance. It’s a perception.”

Indeed, to the degree he found clients discussing the Chase case at all, attorney Richard Schaberg said “it was more along the lines of football game observations made on Monday, rather than something that inspired introspection.” Schaberg is global co-chair of Hogan Lovells’ financial institutions practice.

Continuing the sports analogy, banking attorney and blogger Jeff Gerrish bluntly says: “It’s totally another league.”

Putting Chase aside, then, bankers, board members, and shareholders examining this fundamental corporate governance issue have to weigh considerations carefully.

The corporate governance concepts involved have a strong body of research behind them. For example, the recent Bridging Board Gaps: Report of the Study Group on Corporate Boards, with a blue-ribbon list of academic, foundation, and corporate participants, noted that each organization has its own factors, features, and foibles. However, the study group made this recommendation: “The default for board structure should be an independent chair.” Failing that, an organization ought to have a chairman-CEO complemented by a lead director who “should be an individual who has no aspirations to be CEO of the company and who focuses primarily on facilitating effective board meetings.”

In the real-world, the split/no-split decision hinges on more than only pure corporate governance theory.

Split the positions

“Over time, I’ve changed my view,” says corporate governance expert Charles Elson. “I used to be agnostic about this, but now I think it’s a very good idea.”

At one time boards, especially those of larger companies, harbored adversarial attitudes and combining the chairmanship and the top leadership seemed to make some sense, says Elson, a co-chair of the study previously mentioned, and director of the John L. Weinberg Center for Corporate Governance at the University of Delaware and holder of the Edgar S. Woolard, Jr., Chair in Corporate Governance there. But now that many boards have resumed more of a monitoring role, it makes more sense to have an independent nonexecutive chairman balancing the CEO, he believes.

“You can’t run a board and run a company,” says Elson. “Something gets short shrift. Or the board ceases to be an effective oversight vehicle.”

While Jamie Dimon won his battle to retain both roles, Elson points out that both Citibank and Bank of America managed to split the jobs, which he applauds.

Elson favors the split for all corporations, but stresses the importance of it for the financial services business, which continues to work its way out of the aftereffects of the financial crisis.

“If we go back to where we were,” warns the professor, “that’s where all the problems come up again.”

Community bank investor and advisor Joshua Siegel of StoneCastle Partners agrees that there are risks to banks where one person dominates decision making and oversight. He says that in many bank failures the institutions had chairman-CEOs in place.

“When you are chairman and CEO, you have a tremendous amount of control over an organization,” says Siegel. “When you have two heads, you tend to have a balance.” On the other hand, he says, separating the offices doesn’t guarantee good results.

A key consideration as the industry faces growing costs and compliance burdens is the potential to survive through consolidation. The role of leadership in an M&A context must be considered, Siegel suggests.

Many CEOs have an ownership stake in their bank, some of them a significant one. But they are also employees who have to think of life after acquisition, if they are the likely target of a potential deal.

Shareholders represented by an independent chair may get a more impartial decision—or, at least, one tilted towards their interests as owners, says Siegel. On the other hand, the management team has vested interests.

“Take a bank that should be sold,” says Siegel. “If the CEO, CFO, and other senior staffers don’t get a good offer from the acquirer, or don’t look to get a good severance package, how hard are they going to push for that deal to go through?”

Bob Coleman, a Chicago corporate attorney and a director at $13.3 billion-assets PrivateBank there, says the company has been well served by splitting the positions ever since making a major acquisition. “The complications of the financial services business are such that there is value to separating the jobs,” he says. “The board doesn’t have the broad perspective that’s necessary, and must take the lead from the CEO.” Strategic planning, for instance, is a joint effort.

A key point, he says, is that the CEO is a board member, but “the chairman really became the spokesman for the board members—we speak as one.”

Management succession, always a challenge, becomes somewhat more doable when the jobs are separated, points out Tom Chandler, an Idaho business attorney at Hawley Troxell Ennis and Hawley and retired founding director at $160.8 million-assets Syringa Bank, Boise, which maintains separate positions.

That’s not to say that succession can’t be discussed if the chairman is also the CEO, he says. “It’s just that it’s like talking to your parents about estate planning.”

And the simple issue of division of labor must be considered, says Chandler. “The chairman manages the board, and it’s a full-time job to manage the board,” says Chandler.

In part, the challenge defines the difference between a CEO and a chairman, says Chandler. The CEO is clearly the boss of the employees—he or she exercises “command and control” leadership, typically. “The board is much more of a collegial partnership,” he explains. “Board members expect to be listened to, and it takes hours to listen to each one.”

Likewise, the independent chairman can work to be a buffer between the board and the CEO, who is busy with the bank’s day-to-day affairs.

“It’s a best practice, and I’m seeing more independent chairmen than I used to,” says banking attorney Jeff Gerrish, but merely filling in the seat doesn’t do the job. “Sometimes, it’s just the oldest guy in the boardroom,” says Gerrish. In a perfect world of corporate governance, he says, the chairman is the bank’s leader, the keeper of the strategic keys.

 “That person is a pretty rare bird in community banks, so you wind up defaulting to the figurehead chairman,” says Gerrish.

Indeed, one of the key roles, ideally, of the independent chairman is setting the board’s agenda—a very powerful tool in determining where the board puts its attention and precious meeting time. But among banks contacted for this article, not all independent chairs took this on. Sometimes, they run their meetings, but the CEO has framed the board’s discussion.

Lead director position

The lead director is supposed to come into play where the chairman and CEO are one person. The idea is that they enable the board to maintain a voice—or, to be blunt, not to let a dominant chairman and CEO call all the shots. Two of the experts contacted were not impressed.

Charles Elson plainly doesn’t buy the concept as it works in the real world. “The title is meaningless,” he says. “It sounds great. But if you are not setting the board agenda, you are powerless. And you are not running the meeting.”

Gerrish says he’s found lead directors in smaller public banking companies to be ineffective. He adds that a key weakness is that there is virtually no training available in how to be a good lead director—if the individual doesn’t have a sense of how to do the job, they may flounder. For that matter, he says, there is very little training available in being an independent chairman. And every board has a “lot of politics” going on, either obviously or under the surface.

Case for combining the roles

Part of the challenge in weighing this concept is that the conceptual blueprint is static—banks and banking are not. Plenty of banks utilize the chairman, CEO, and president posts as part of a management succession, training, and breaking-in process.  This is especially so in community banks, many of which are currently in a stage of generational shift.

Such institutions are working a plan tailored to their needs, not a theoretical discussion.

Schaberg sees the Chase situation as a major emphasis on this point: “The people who say that it is by definition better to separate the roles lost. It’s specific to the institution and the people filling those roles.”

A good example of a bank that knows what has worked for it for years is Ohio Valley Bank Co., Gallipolis. Jeff Smith, now chairman, had been chairman and CEO. Previously he had been president and CEO, and before that, president and COO. The veteran banker is the third leader of the bank to travel through these title shifts, as part of a longstanding management succession approach at the $823.6 million-assets bank. Thus, the bank’s chairman has long been an insider, not an independent director. Recognizing this, the bank appointed an independent board member to be “lead independent director,” and that person wound up joining management and was replaced in that role. The latest appointee is a former Ohio banking regulator.

Smith says the bank’s approach to its board evolved, so that it seeks directors based on skill sets, not on the business they bring to the bank.

The role of independent directorship is important to the bank. However, “the banking business is so complicated that the chairman needs to be well-versed in the business of banking,” says Smith. “It would be difficult to chair the board without banking experience.”

Regulatory considerations

At present, when a bank is healthy and operating satisfactorily, regulatory agencies typically don’t get involved in an institution’s decision to split or not split the posts, experts say.

However, “when you get adverse examination results, the regulators will look to governance being a root cause of the issue,” says Richard Schaberg.

Regulators can weigh in on the decision, though you won’t find a word about the issue in any exam manuals, according to Dave Baris of the director association. And some examiners may be impressed when a bank separates the roles on its own, though not every examiner will credit the bank for the move. “There are plenty of successful banks that have the same person in both positions,” he says. “And vice-versa.”

“I think the regulators like separation, though they don’t demand it—yet,” says William Isaac. For public companies, he adds that stock analysts also seem to favor separation. “So far they aren’t insisting on it,” he says, “but there’s pressure building up.”

Pointing out that struggles such as the Dimon case make for dramatic headlines, Isaac suggests that deliberations about this decision need to become “a lot less personal and less emotional.”

This article appeared in shorter form in the August 2013 Banking Exchange.

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