Chairman/CEO: to Split or Not to Split?

JPMorgan re-ignites the corporate governance controversy

Some saw the issue as a silly sideshow, others as a turning point in US corporate governance.

Should Jamie Dimon give up his Chairmanship of JPMorgan?  For concededly good reasons, America’s best-known banker lost some of his luster this past year on both Wall Street and Capitol Hill thanks to the “London Whale” and a succession of other management missteps on his watch.  Still, the bank has been making money hand-over-fist and its stock is near its all-time high, so JPM’s shareholders showed their gratitude to Jamie Dimon this week by voting decisively to keep him on as both Chairman and CEO.


Among corporate governance cognoscenti, the Dimon affair has re-ignited the bigger issue of whether one person should play both roles – especially in banking institutions which are backed by taxpayers and are purportedly too big to fail.  Theoretically, the role of the Chairman is to monitor the CEO on behalf of the shareholders.  How can they both be the same person?  On the other hand, if they aren’t, where is the leadership line to be drawn between them?

In the UK and other developed economies, the Chairman and CEO of public companies are typically different people.  The Chairman runs the Board while the CEO runs the company.  The Chairman is typically older than the CEO, has had a longer and more distinguished business or professional career and enjoys a higher social status.  In London, for example, it’s the Chairman who’s invited to the Lord Mayor’s Banquet, not the CEO.

European Chairmen often maintain offices at company headquarters and spend at least a few days a week actively involved in formulating corporate strategy and policies.  In addition to controlling their Boards, they are also the voices of their companies and represent them in front of government regulators, industry trade groups and company shareholders. The best of them make sure there is an open debate among all the directors and that the Board does not simply bow to the CEO’s every wish.

The major problem with splitting the roles of Chairman and CEO is that lines of responsibility can blur.  Ideally, the Chairman serves as the CEO’s mentor, adviser and confidant.  For his part, the Chairman has to set aside his ego and refrain from interfering in the management functions of the CEO so as to preserve his independence as an overseer.  In any organization, who makes the decisions in a crisis and who gets fired when things go wrong has to be clear.  Ultimate leadership cannot vary according to circumstances.

In the US, the roles of Chairman and CEO are commonly combined, reflecting our cultural bias toward single, strong leaders who are unquestionably in charge of their enterprises. As a result, the Chairman/CEO’s top priority is executing his management agenda and not looking over his own shoulder.  A dominant Chairman/CEO often creates an uncomfortable working environment, but, on the other hand, he is effective at getting things done.

So each model has its pros and cons.  In any given case, it seems that the right answer depends upon how well the company is faring at the time the issue arises and which position is to be replaced.

So each model has its pros and cons.  In any given case, it seems that the right answer depends upon how well the company is faring at the time the issue arises and which position is to be replaced.  One academic study1 shows that demoting CEOs and replacing them with new Chairmen – as proposed with Jamie Dimon — actually hurts stock performance at companies that are doing well.  The opposite is reportedly true for companies doing poorly, whose stocks actually rebound when the Chairman and CEO roles are split.

Splitting the Chairman from the CEO can happen in three ways.  In Jamie Dimon’s case, the CEO was going to remain the same, but a new Chairman would have been appointed to oversee him.  Demoting a CEO like that clearly signals the Board’s low confidence in him which would undermine his credibility and effectiveness.  That was what Jamie Dimon must have felt when he threatened to quit JPM altogether if he were stripped of its Chairmanship.

In companies where the Chairman remains in place and a new CEO is appointed — which is what happened with Bill Gates at Microsoft —  it usually reflects the first step in a succession plan which carries with it a positive connotation for both the incoming CEO and the soon-to-retire Chairman.  In those situations, the Chairman usually hand-picks the CEO, and so they are likely (at least at the outset) to enjoy a healthy and productive relationship.

Lastly, there are the cases where the Chairman/CEO is removed altogether and replaced by two other executives.  This splitting of roles is often in response to situations where the Chairman/CEO is discharged for cause, such as what happened with Mark Hurd at Hewlett-Packard.  When that happens, the newcomers should know exactly where they stand relative to one another and should be able to avoid any disputes over turf.

When confronted with the role-splitting issue earlier this year, Lloyd Blankfein at Goldman Sachs persuaded shareholders pressing him to relinquish his Chairmanship to accept an empowered “lead independent director” as an alternative.  A “lead” director sets the board’s agenda, chairs its meetings and can bring together just the outside directors to openly discuss the Chairman/CEO’s performance and compensation.  The “lead” director, however, cannot usurp the Chairman/CEO’s authority without arousing the same internal leadership confusion as a separate Chairman.

So, in light of the facts that JPM was doing very well despite its one gigantic trading loss and that Jamie Dimon would be an impossible CEO to oversee, does anyone now think the shareholders of JPM got it wrong?

1 The study, whose title is yet to be determined, is to be published this summer by professors Matthew Semadeni and Ryan Krause at the Indiana University Kelley School of Business.

  • Will Thompson

    A really well argued piece. Looking forward though, should we seek to have some type of common standard as to the Chairman/CEO split or would a one-shoe-fits-all approach be structurally detrimental?

    • Stephen Bornstein

      Will, I think the message from my research is that each situation should stand on its own. The best arrangement for any one company may not be the best for another. In Jamie Dimon’s case, even with his problems, he was still delivering great performance for shareholders, and I loved the article suggesting that the only person who could possibly control him might be Hillary Clinton.

  • Jarrott Heath

    According to the CFA Institute, the primary purpose of corporate governance is two-fold: 1) mitigate the inherent conflicts of interest between management and shareholders; and 2) ensure the assets of the organization are used in the best interests of the shareholders. In order to achieve this objective, the board should be independent from the management team. Splitting the Chairman and CEO roles is NOT a judgement of Dimon’s past performance or ability to lead in the future, but rather a safeguard for shareholders under Dimon’s tenure or his successors.

    As for the TBTF perspective, the Federal Government has proven itself ineffective while overly burdensome in overseeing the banking industry. Increasing their oversight would not be beneficial. In fact, a common view of policy makers is that they have a separate agenda for the banks: social engineering and redistribution of wealth. The notion that Government interests are aligned with shareholders’ interests in the financial services sector is unrealistic and potentially destructive.