Jeffrey Sonnenfeld on Separating the Chairman and CEO Roles at JPMorgan

Published in the New York Times on May 9, 2013.

The Jamie Dimon lynch mob is growing. It calls for the separation of the role of chairman and chief executive officer, attacking him for holding both at JPMorgan Chase.

I have studied corporate governance for 35 years, and I have come across no evidence to suggest that anything would be gained by separating those roles.

While the model can work on occasion, it is surely no panacea that ensures good economic results or good governance. Last spring saw a record of 56 shareholder votes on leadership-role separation—with only four approved. This year looks to be similar, with calls for change at firms ranging from JPMorgan and the Walt Disney Company to Boeing and DirecTV.

The leaders of these companies have delivered their shareholders excellent returns and are the envy of their industries for business innovation, candor in governance and reliance on independent lead directors.

Disney stock trades at a record high, with profit soaring 32% across the company. DirecTV handily trounced earnings estimates, with earnings up 7.4%. Boeing’s briefly grounded Dreamliner is again aloft, and so are earnings, by 20%. And, despite last year’s notorious "London Whale" trading disaster, JPMorgan’s balance sheet was never in danger and Mr. Dimon generated a historic $21 billion in net income—all this with unparalleled transparency and candid self-criticism.

Do these companies really have poor governance that ought to be torn apart by shareholders?

The separation of roles at the top of corporate pyramids is not necessarily pointless. In theory, the chairman can be the guardian of the board’s agenda and ensure the independent oversight of management. The chief executive can then focus on strategic planning and effective execution.

This arrangement can work at companies during leadership transitions and when there are dominant shareholder blocs, like family control. Examples of companies with this model apparently working include some prominent ones like Ford Motor, Citigroup, Wal-Mart, Microsoft, Oracle, Tenet Healthcare, the New York Times, and Hewlett-Packard.

In fact, this hydra-headed governance was quite useful recently. The chairman of HP, the technology industry star Ray Lane, magnanimously stepped down as chairman following HP’s overpriced acquisition of Autonomy, a big data enterprise, which resulted in an $8.8 billion HP writedown. Mr. Lane and his fellow directors asserted soon after the purchase that they had been deceived by Autonomy’s fraudulent accounting, which went undetected when investigated by two leading audit firms.

While Mr. Lane was never a unique champion of this deal and fired the chief executive behind it, the proxy advisory firm ISS this week incited a shareholder revolt demanding more board accountability.

By taking the bullet, stepping down as chairman but remaining on the board, Mr. Lane made it easier for the new CEO (and fellow director) Meg Whitman to continue executing a brilliant turnaround strategy.

Curiously, many companies frequently bandied about by shareholder activists as prime examples of the effectiveness of the separation of roles tried it—and dropped it. These firms include IBM, Procter & Gamble, Home Depot, Boeing, Dell, General Motors, Time Warner, and Walt Disney. If this governance structure was so universally priceless, why did the "try it, you’ll like it" experiments fail so quickly, with the very boards that had introduced such role separation recombining the leadership roles? Recent research on 309 companies that separated roles between 2002 and 2006 by Matthew Semadeni and Ryan Krause of Indiana University found that the financial performance of high-performing companies was often hurt by the separation. In fact, only 23% of S&P 500 firms have a truly independent director as chairman.

Some of the biggest corporate scandals in American history, from Enron to WorldCom to Computer Associates to Global Crossing, already had such separate roles in place and were celebrated for their overt good-governance models before they collapsed in criminal fraud. In fact, HealthSouth checked all the boxes that ISS cherishes and outearned 92% of the companies in its industry—just months before a series of former chief financial officers admitted to the huge accounting fraud there that put them and their flashy but self-righteous chief executive, Richard M. Scrushy, in prison.

Many times, in addition to confusion over responsibilities and voice, the separation of roles escalates palace intrigue. The former “independent chairman” of General Motors, Edward E. Whitacre Jr., previously a telecom executive, seized the chief executive job from the revered GM loyalist Fritz Henderson, who successfully led the firm out of bankruptcy, because Mr. Whitacre wanted the job for himself.

Shareholder activists frequently cite the separation of roles as the prevailing model in Europe, so thus, like fine European wines and Parisian fashion, it is presumed to be superior to any cowboy leadership of Yankee business enterprise. However, name your favorite European scandal and you’ll find they had this separation of roles in place.

The logic is that slowed decision making and balanced power will reduce risk and allow protection for minority interests. But business must encourage prudent, strategic risk taking. In the town square of villages in almost every nation, there is a statue celebrating not a board committee but a courageous individual leader.

It conjures up the old adage that ships are safest on shore, but that is not why they are built.

Jeffrey A. Sonnenfeld is senior associate dean for executive programs and a professor in the practice of management at the Yale School of Management.