Garnet Capital Advisors Blog

The financial press has breathlessly detailed the saga of whether yet another giant bank would be allowed to vest the roles of CEO and chairman of the board in one person. Shareholders for the nation's second-largest bank, Bank of America, recently confirmed that, yes, they do want CEO Brian Moynihan to also serve as chairman of the board of directors. This means the management structure of the Charlotte, N.C.-based bank now mirrors that of all but one of the country's biggest banks: Only Citigroup still splits the CEO and chairman roles.

Buffett and Frank have their say
The battle has been quite colorful, by corporate governance standards. Investing legend Warren Buffett came down on the side of Bank of America management. Even former Congressman Barney Frank chimed in. The retired House member from Massachusetts, best known in banking circles for his namesake Dodd-Frank financial regulations, said he supported combining the roles on the basis of a talk with a neighbor who happens to be a Bank of America executive.

If the drama over Moynihan's dual roles has a familiar ring, it's because Jamie Dimon, chairman and CEO of JP Morgan Chase, won a similar battle back in 2013. Activist investors had sought to split the roles after the "London Whale" scandal, in which the bank lost $6.2 billion.

Why does any of this matter? Turns out it isn't simply an issue of prestige for the executive in question. Choosing whether to combine or split the roles has deep implications.

Higher shareholder returns with jobs split
Let's start with the basics: In publicly-traded companies, the board of directors has the job of overseeing management, i.e. the CEO. How can a board keep its backbone and do what's right for investors when the roles are combined? Skeptics like corporate governance expert Paul Hodgson cite studies that show, perhaps surprisingly, it costs more to have one person do both jobs. Hodgson argued that not only does combining the roles cost a company more money in compensation, but also that it harms long-term performance. In the short term, shareholder returns under a company with one person in both roles outpace those of companies where the jobs are split. But by the five-year mark, companies that keep the roles separate see shareholder returns more than a quarter higher.

Moynihan and Dimon's argument
Reasons for having one person occupy both positions include that having one person do both jobs makes lines of responsibility crystal clear. There's one man or woman at the top and the buck stops with him or her. Supporters of the arrangement also say companies can be more nimble when bold moves are required than if there's friction between the chairman and CEO.

Major shifts in corporate governance for a particular bank can have an impact on the stock price if investors, the CEO and chairman of the board have differences on strategy. The experienced leadership team at loan sale advisory firm Garnet Capital Advisors helps clients read the practical meaning of such shake-ups.