Efforts to separate the roles of chairman and chief executive at public companies in the U.S. have been underway for years. The share of companies in the S&P 500 with a split structure has risen to 41 percent in 2011 (the most recent figures available) from 23 percent in 2003, according to a report put out by Deloitte last year.
Splitting the roles is much more common outside the United States.The Deloitte report said that in Canada, 55 percent of companies in the Toronto Stock Exchange have independent board chairs. In Germany, 50 percent of companies in the Deutscher Aktien Index (DAX 30) have independent board chairs. In the United Kingdom, 76 percent of companies in the Financial Times Stock Exchange (FTSE) 100 Index split the roles.
Advocates of the split structure claim that this model best positions companies for strong performance and better, more shareholder-friendly governance. A 2009 study by the Corporate Library, a research firm based in Portland, Maine that has since become part of GMIRatings, said businesses with unified CEO-chairmen tend to be less "shareholder friendly."
"A board that retains the dual role out of reluctance to challenge a powerful chief executive may not be a strong protector of shareholder interests in other respects," the research firm said.
"The two most authoritative positions in a boardroom are the CEO and the chairman. However, when these roles are combined, all the authority is vested in one individual; there are no checks and balances, and no balance of power," Paul Hodgson of GMI wrote in a different, more recent report.
The evidence on the governance count is strong, so long as you define "shareholder friendly" as adopting structures approved of by self-styled shareholder advocates. But it remains an open question whether such firms actually perform better in ways that matter most to shareholders, including the performance of the company's stock.
There is in fact no strong evidence demonstrating the companies that split the roles of chairman and CEO perform better than other companies. Most academic research shows evidence that splitting the roles improves long-term performance of the company to be weak or nonexistent.
Last year, however, a paper by GMI challenged this consensus. That paper showed that while the median shareholder returns for over a one-year period and a three-year period were superior for companies that combined the roles. The returns over a five-year period were better for companies that separated the chair and CEO. The authors of the study conclude that this indicates that separated roles are better for long-term, diversified shareholders. This, however, might be an artifact of the study's timing, since the five-year period included the financial crisis in which many financial companies with unified roles suffered tremendous losses.
One reason that splitting the chair and CEO might not perform as well as advocates expect is that board structures in general—the number of independent directors, staggered voting, and so on—do not appear to have any consistent effect on financial performance. Boards may matter for company performance but the formal structures seem to matter less than is commonly supposed.
What's more, separate chairs are not necessarily independent. Many of the companies that have separated the roles wind up chosing ex-chief executives or other retired officers to lead the board. The Deloitte study found that only 21 percent of companies on the S&P 500 have truly independent, non-executive chairs (up from just 9 percent in 2004).
Even truly independent chairs may not be the blessing they seem to be. Even if splitting the roles makes it easier for a board to monitor the chief executive, the board must now also monitor another powerful individual—the chairman.
"The board now must expend effort to ensure that such a chairman doesn't use the position to extract rents from the company and, moreover, that the chairman expends the effort necessary to carry out the post's duties effectively. The board also must ensure that a dysfunctional rivalry does not arise between the chairman and the CEO, both of whom presumably will be ambitious and highly capable individuals," UCLA law professor Stephen Bainbridge has written.
Unsurprisingly, not all companies experience the split of the CEO from board leadership the same way. Some companies, particularly those whose stock has been under-performing for long periods, seem to see a boost in stock performance when the roles are split. For others, it makes no difference at all. And at least one study has found that in very complex companies—such as JPMorgan—the effect is very small to non-existent.
Companies that have the most to benefit from splitting the roles are those that operate outside the spotlight or lack strong directors. It would be hard to imagine a company more in the spotlight lately than JPMorgan. And the board has a strong and independent lead director, Lee Raymond, the former chief executive and chairman of ExxonMobil.