The Case for Appointing an Independent Chair

Boeing Co. CEO Dennis Muilenburg was recently fired from half his job.

The company’s board of directors stripped Muilenburg of his chairman’s title, appointing lead director David Calhoun to fill the role. The beleaguered Muilenburg has been under fire for Boeing’s ongoing struggle to return its grounded 737 MAX passenger jet to service after two fatal crashes and a growing list of safety issues.

Boeing said in a statement that it wanted Muilenburg to focus all of his attention on receiving regulatory approval for the planes to fly again, and this presumably would give him more time. However, the board previously had resisted pressure from shareholders to split the titles. One has to ask: Was this action taken more for its public relations value than to strengthen Boeing’s governance culture?

Splitting the CEO and board chair duties is a divisive issue in the world of corporate governance. Its proponents argue that a board can operate more independently when it’s led by an outside director, which is undoubtedly true. But it’s also undoubtedly true that many CEOs who serve in both capacities would feel diminished in power and prestige if they were stripped of their chairman’s title.

After JPMorgan Chase & Co. suffered a $6 billion trading loss in 2012 – known as the London Whale incident – U.S. and U.K. regulators assessed $920 million in fines for safety and soundness violations, and the board cut Chairman and CEO Jamie Dimon’s compensation in half, to $11.5 million.

In 2013, shareholder activists pushed for the appointment of an independent chairman at JPMorgan’s annual meeting. The company strongly opposed the measure and there were reports that Dimon might quit if he lost the vote. Shareholders voted overwhelmingly in Dimon’s favor, and he remains the bank’s chairman to this day.

Of the 10 largest U.S. bank holding companies (including Goldman Sachs and Morgan Stanley), four have separated duties of the CEO and chair. Citigroup appointed an independent chair after it encountered serious trouble during the financial crisis. Wells Fargo & Co. did likewise after its account fraud scandal led to a harsh regulatory crackdown. Bank of America Corp. also divided the CEO and chair roles when it struggled during the financial crisis, although CEO Brian Moynihan was given the chairman’s title in 2014 after the bank’s financial condition improved.

More recently, Bank of New York Mellon Corp. appointed an interim CEO and elevated the board’s lead director to the chair’s role after Chairman and CEO Charles Scharf resigned to take the CEO job at Wells. And State Street Corp.’s current chairman, Joseph Hooley, retired as CEO in December 2018 after having served in both capacities for several years; it’s reasonable to expect that the new CEO, Ronald O’Hanley, will eventually succeed Hooley as board chair as well.

The largest U.S. banks (nine of which control half the industry’s assets) only seem to appoint an independent chair when there’s trouble – as in the case with Boeing – or when facilitating a CEO transition.

I know a number of highly effective bank CEOs who also serve as board chairs (Dimon and Moynihan, to name two), so combining the functions in one person doesn’t necessarily detract from a company’s performance any more than splitting them would automatically make it perform better.

And yet, having the same person serve in both capacities strikes me as an inherent conflict of interest. The roles of management and the board are very different. Management runs the company while the board provides oversight and – hopefully – holds the management team accountable for its performance. Remember, the CEO works for the board. The board does not work for the CEO – but when the CEO is also the chair, it kind of does.

If many large corporations, including big systemically important banks, tend to appoint outside chairs only when they get into trouble, could an empowered board with a strong independent chair have kept them out of trouble in the first place?