JP Morgan's Jamie Dimon is just the lastest to be ensnarled by the annual "separate the roles" campaign -- independent of lack of evidence these arrangements improve governance. Media pundits often refer to "the silly season" when critiquing the overblown electioneering rhetoric that accompanies the falling leaves every other autumn. There is also a "silly season" of springtime inflammatory governance polemics. The "governista" mantra that recycles seasonally is the chant for mandatory "separation of roles" for corporate CEO and chairman positions that spouts with the daffodils in time for the spring. Last spring produced a record of 56 proxy votes on leadership role separation -- with only four approved by shareholders and this spring looks comparable.
The drumbeats of commercial interests from profit proxy advisory services and lawyers along with a more innocent chorus of determined ideologically-driven advocates brings about a welcomed seasonal energy attracting the attention of drama seeking media. Sadly, while the burden of proof should be on those who seek to break the prevailing practice -- instead the separation of roles is accepted with a religious fervor absent evidence it helps.
The tragedy is that these board governance titles are not predictive of financial success nor are they preventive of governance misconduct. Perhaps, on occasion, the model may not do any damage, say at firms like Ford, HP; Microsoft; Oracle; Walmart; and Tenet Healthcare -- given family ownership and entrepreneurial transitions.
However, there exists no empirical justification for this role split arrangement to be the norm. Fully 18 of Fortune's top 25 "Most Admired Firms" have a combined chairman/CEO leadership roles as do such high performing iconic enterprises as: Amazon, Starbucks, IBM, Southwest, Berkshire Hathaway, Walt Disney Company, PepsiCo; Coca Cola; UPS; Fed Ex; General Electric, American Express, BMW; Procter & Gamble; Caterpillar, 3M, Target, Time Warner; DirecTV; Exxon Mobil, and Boeing.
Often it does NOT Work
Furthermore, many firms frequently waved around by shareholder activists as poster children for the effectiveness of the separation of roles tired it -- and dropped it. These firms include: IBM; Procter & Gamble; Boeing; Dell; General Motors; and The Walt Disney Company. If this governance structure was so valuable, why did the "try it, you'll like it" experiments failed so quickly -- with the very boards who'd introduced such role separation recombining the leadership roles? In fact, only 23 percent of U.S. firms actually have independent board chairs.
Looking more systematically at large scale studies over the past 15 years, the published truth is that the separation of roles is not a panacea -- or even always a relevant factor in increased shareholder returns or greater integrity in leadership actions. Recent research on 309 firms between 2002 and 2006 by Mathew Samadeni and Ryan Krause of University of Indiana found that the financial performance of once high performing firms was actually diminished by the introduction of separate roles. They concluded, "if it ain't broke, don't fix it."Similarly, voluminous research over the past fifteen years from scholars such as Yale Law School's Roberto Romano ; Sanjai Bhagat of the University of Colorado; and Bernard Black of Northwestern University demonstrate that such box-checking clichéd corporate governance metrics do not lead to superior financial returns.
Moving from financial results to preventing executive misconduct, some of our biggest corporate scandals in U.S. corporate history ranging from Enron to WorldCom and Computer Associates to Global Crossing -- already had such separate roles in place and were celebrated for their overt good governance models -- before collapsing in criminal fraud. For example, HealthSouth, dutifully checked all the boxes that proxy advisory firm ISS cherishes and earned at 93 percentile -- just months before a series of former CFOs admitted to the massive accounting fraud there before heading off to prison.
Many times, in addition to confusion over responsibilities and voice, the separation of roles escalates palace intrigue. The "independent chairman" of General Motors, Ed Whitacre, a former telecom executive, seized the CEO job from revered GM loyalist Fritz Henderson -- who successful led the firm out of bankruptcy -- because he wanted the job for himself -- placing himself at the center in all their media promotion. Last year's political assassination of Citigroup CEO Vikram Pandit was led by Citigroup chairman, Michael O'Neill, an aspiring former former banker who served as Barclays CEO for only two months and then CEO of Bank of Hawaii for four years -- leaving office a decade ago. His insertion of the more compliant Michael Corbat did not lead to any significant strategic change.
European Model Often Fails in Europe
Shareholder activists frequently cite the separation of roles as the prevailing model in Europe, therefore -- like fine European wines and trendy Parisian fashion -- presumed to be superior to any cowboy leadership of Yankee business enterprise. However, at every major European scandalized firm, and they are as common tragically as in the U.S., this celebrated separation of roles already existed.
In fact, the separation of roles did not prevent governance scandals of the last decade at: Siemens; Swiss Air; BP; Royal Dutch Shell; Royal Ahold; Canary Wharf; BAE Systems, Barclays, BP, Eurasian Natural Resources Corporation, GlaxoSmithKline, HBOS, Kazakhmys, HSBC, Royal Bank of Scotland and Standard Chartered, among many others.
Often the crisis response of firms such as BP, Barclays, and Royal Dutch Shell suffered elevated confusion as key constituents did not know who was in charge, who was accountable, and which of the inconsistent voices was the one with real authority. In fact, the prominent UK financial journalist Ian Fraser has written:
"The shameful and scandalous behaviour of many FTSE-100 firms in recent years... proves that Britain's elaborate attempts to codify corporate governance have failed. This is largely because the Codes have given rise to a shallow "box ticking" culture, in which directors are able to tick the relevant boxes but avoid their true responsibilities."
In fact, the corporate governance "Magna Carta" for the "separation of roles" in corporate life is presumed to be the much cited "Cadbury Commission" report authored by Sir Adrian Cadbury. Sir Adrian a successful British Olympic oarsman hardly steered his own company to greatness as chairman of Cadbury Schweppes for a quarter century of failure until its hapless surrender to Kraft and then Modelez and Hershey as custodian of its once great brands.
Nonetheless, in the aftermath of the governance confusion over MacMillan CEO Robert Maxwell's unusual death in 1990- allegedly dancing naked off his yacht in the Canary Islands, The Cadbury Commission was established by British regulators to suggest improvement s British corporate governance system in the interest of restoring investor confidence in the system. The most controversial element was supposedly the requirement for the separation of the chairmanship from the CEO role -- but interestingly, the separation was "recommended , not compulsory" where there is a combined office of the chairman and CEO "... board members might look to a senior non-executive director who might be deputy chairman as the person to whom they should address any concerns."
The genuine origin for this "separation of powers" long predates recent shareholder activism and is celebrated in the writings of 18th century French political theorist who showcased the division of executive, judicial, and legislative powers in ancient Greece and Rome. The logic was that slowed decision making and balanced power would reduce risk and allow protection for minority interests.
With such goals may be, recent experience suggests few would worship the government leadership examples of balanced power in the U.S. -- let alone in Greece or Italy -- are the model for contemporary entrepreneurial risk taking in business. Governments are in the risk reduction business, but private enterprises must encourage prudent, strategic risk taking.
Just because the British separate the roles at the top is no reason to copy that practice any more than to require our business leaders to wear bowler hats and our lawyers to wear wigs and gowns to court.
Jeffrey Sonnenfeld is Senior Associate Dean for Executive Programs and Professor in the Practice of Management, Yale School of Management and past chairman of Blue Ribbon Commission on CEO Succession of the National Association of Corporate Directors.