Mikkel Larsen discusses why, despite the decision of Bank of America, the roles of Chair and Chief Executive must be performed by different people.
Bank of America have reversed a decision made in 2009 to split the role of Chair and Chief Executive. Brian Moynihan, who is currently the Chief Executive, will replace former Chair Chad Holliday immediately.
The change means Bank of America has joined a group including JPMorgan Chase, Goldman Sachs, Wells Fargo and Morgan Stanley all of whom now have a single person combining the role of both Chair and Chief Executive.
In the US, the question to split the two roles is hotly debated, contrary to the UK where spitting the roles are widely considered as best practice.
The reason behind the 2009 decision of dividing the roles illustrate very clearly the problem that one person being both Chair and Chief Executive presents.
In 2009, then Chair and Chief Executive, Kenneth Lewis had to pay out $10 million after being sued by New York Attorney General in relation to the takeover off Merrill Lynch.
Mr Lewis was accused of misleading his own shareholders and hiding the losses of Merrill Lynch prior to the shareholder vote on the merger to make sure it got voted through.
In the UK it is accepted best practice that the two roles should not be combined. The UK Corporate Governance Code, which apply to all companies listed on the London Stock Exchange clearly state that:
“The roles of Chairman and Chief Executive should not be exercised by the same individual.”
The reason for splitting them up is simple – to avoid concentrations of power in one individual and to differentiate leadership of the board (the Chair’s job) from the running of the organisation (the Chief Executive’s job).
A board’s role is to maintain an oversight of the management and the Chair is leading in that work.
If the Chair is also responsible for the management he will be leading on the oversight himself – a situation which can lead to some seriously bad practise.
This blog originally featured on the Alliance Directors Club website. Find out more about the Alliance Directors Club.
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