Independence is a foundational principal in corporate governance.
Many good governance proponents would argue that corporate boards should be comprised primarily of outside directors who meet the legal definition of independence. In laypersons’ terms, this means they are free of any conflicts of interest that would prevent them from discharging their fiduciary responsibilities to the company’s owners.
Likewise, many governance experts would say that splitting the chair and CEO roles between two individuals also is a best practice. In this instance, the chair would be an independent director who focused their attention on managing the board, while the CEO ran the company.
Having an independent chair can be especially helpful when the board has appointed a new CEO who has never held that position before; the chair can focus on board governance while the CEO transitions into their new role. Splitting the jobs can also provide a check on an overbearing CEO who might dominate the board if they were also the chair.
This approach would seem to enhance the board’s independence, but is it a best practice? And does splitting the chair and CEO roles necessarily improve the company’s profitability?
Results from Bank Director’s 2020 Governance Best Practices Survey suggest that most bank boards have a majority of independent directors. The survey included 159 independent directors, chairs and CEOs at banks under $50 billion in assets. It was sponsored by Bryan Cave Leighton Paisner.
Forty-four percent of the survey participants say they have just one inside director on their boards, while 27% have two, 12% have three and 18% have more than three. An inside director is normally a member of management. Survey banks with more than $10 billion in assets were more likely to have just one inside director, while banks under $500 million in assets were more likely to have multiple insiders on their boards.
A majority of survey participants — 58% — have an independent director as their board chair, while the CEO was also the board chair at 31% of the respondents. Interestingly, survey banks under $500 million in assets were more likely to have split the chair and CEO roles (73%), while banks over $10 billion were less likely to have dual roles (50%).
James McAlpin Jr., a Bryan Cave partner who leads the firm’s banking practice group, says that while a combined role can make a difference in a situation where the board has to replace the CEO because of a performance issue, he does not consider it to be a best practice.
“Maybe 10 years ago I would have said, ‘Yes, it is a best practice for the chair not to be the CEO,’ but I have changed my opinion,” McAlpin says. “I do think it absolutely matters who the individual is. And in an instance where you have a well performing and highly respected CEO, it may make the most sense for that person to be the chair because they often want to run the board. And it would be difficult to retain them if they are not the chair.”
McAlpin’s point speaks to a simple truth at most banks: It is the CEO who drives the company’s performance, not the board or an independent chairman. A strong governance culture can certainly have a positive impact on a bank’s financial performance by establishing an effective risk management culture, adopting compensation practices that reward high performance and making sure that a capable CEO is in place. And an independent chairman can provide a CEO with an important sounding board if the two have a good relationship. But the CEO runs the company, not the board or the independent chair.
“I’ve never seen a study of this, but I doubt you would see any statistical advantage in terms of performance for having an independent chair,” McAlpin says. “In fact, it might be the opposite where the banks perform better if the chair and CEO are the same person.”
Greg Carmichael was not given the chairman’s title when he became the CEO at Fifth Third Bancorp, a $203 billion regional bank in Cincinnati, in November 2015.
“When we made the transition to myself as the new incoming CEO, we elevated our lead director to become the chairman for a period of time,” Carmichael explains. “It was decided and voted on when I became CEO that at some point I would become the chairman. And that time frame was roughly two years. They didn’t want to put the burden of the chairman role on me initially, which was appropriate. They also wanted to make sure that I had a chairman in place to help me through that transition to CEO.”
Carmichael was later appointed chairman in January 2018, and he says it was helpful that initially he could just focus his attention on running the company. “When you become a new CEO, you’re drinking from a fire hose and you’re just inundated with a ton of information and there are things you have to demonstrate and manage that take a lot time,” he says. “You have to get your operating rhythm in place. You have to get your credibility with [Wall Street], with your own organization; you have got to chart your vision, what you’re about and where you’re taking the company, and that takes an inordinate amount of time your first couple of years. They didn’t want that to be encumbered by me worrying about the board dynamics and the board meetings and so forth.”
Marsha Williams, Fifth Third’s chair during Carmichael’s early years as CEO, had served on the bank’s board since 2008; prior to her elevation, she had been the board’s lead director for two years. “It was very helpful to me because I had a great relationship with Marsha and it was always just a reassuring conversation or good guidance if there was input on something she thought was important,” he says.
After Carmichael assumed the title of chairman, Williams returned to her previous role as the board’s lead director. Carmichael says they continue to work together well. “There’s probably not a week that goes by that we don’t talk,” he says. “She’s a great sounding board on ideas and thoughts that I have. She’s good at giving me independent feedback from the board [about] things they’d like to hear more about.”
Carmichael’s relationship with Williams highlights the importance of having a lead director when the CEO is also the board chair. Lead directors have less authority than board chairs, but they can help build an important bridge between the CEO and the independent directors.
Unfortunately, of the survey banks that have appointed an independent chair, only 55% have also appointed a lead director. “I think having a lead director is a best practice,” says McAlpin. “It’s important to have someone [the CEO] can talk to without having to talk to the entire board to bounce ideas off. I think it’s important for both the board and the CEO.”