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Should the CEO and Chairman Roles Be Combined?

Changing the fundamental governance of an institution is an extremely costly undertaking, and Boards should be cautious about the performance effects that are likely to follow.

The debate on corporate governance faded from the headlines almost as quickly as it appeared last quarter as the experts debated the appropriate governance role for Jamie Dimon at JPMorganChase & Co. As it turned out, Dimon’s fate was decided by shareholders, largely based on his importance to the institution, rather than on the merits of splitting or combining the two most powerful jobs.

But the fundamental question remained unexplored: Does separating (or conversely, combining) the roles of chairman and chief executive help or hurt an institution? Our analysis of banking corporate governance and performance provides some surprising and important answers that boards of directors should consider carefully before changing the top management structure.

Our objective was to determine if either governance model was correlated to demonstrably better performance among banking institutions. Our conclusion was that institutions that retained a unified chairman and chief executive generated higher risk adjusted returns on equity and assets than those that retained two individuals in the roles.

However, institutions that changed models suffered significant degradation to returns for an average of two subsequent years, regardless of which model they began with. Three years after the change, and assuming the bank did not change back, the performance returned to the mean.

We examined the financial performance and governance structures of the top one hundred U.S. banks over a 20-year period. We eliminated foreign-owned banks, those with short-lived charters, and those primarily in non-traditional banking businesses, leaving 82 institutions. For those 82, we examined the nominal and year-over-year change to returns on equity and assets, normalized to compare peer banks by year, and compared that performance by the type of governance structure in the current and preceding years. We adjusted returns for the institutions’ cost of capital in order to account for the higher or lower market risk that might characterize one of the governance models.

Despite the attention this issue garnered over the past year, we could not find examples of prior analytical research that sought to correlate governance structure with performance. Other studies examined the growing and waning popularity of each governance model over time, or described anecdotal case studies based on well known corporate dealings, but did not address whether economic performance was broadly correlated with the governance model.

Performance Impact

In our research, banks with a combined chairman and CEO role throughout the study period performed better than those with a divided role throughout the period, by an average of 118 normalized basis points of return on equity and 14 normalized basis points of return on assets. Additionally, the institutions with combined roles improved more (or in some instances deteriorated less) each year than those with separate roles. Despite the governance zealots who insist that splitting the roles is a superior model, the evidence says the combined role generates higher performance and ongoing improvement.

So should an institution with separate roles consider combining? Or if directors choose to split the roles despite this evidence, what is the downside? We examined institutions that changed structures during the study period – transitioning from a split role to a unified one, or unified to split. We hypothesized that those that changing from single to split would exhibit markedly improved performance within the first few years, reasoning that such change likely followed a negative corporate event, provoking the board of directors to change the structure. We also hypothesized that those moving from split to single might also see improvement, since our findings demonstrated the superiority of the unified role.

In fact those organizations which changed from single to dual roles saw significant degradation in relative performance, declining an average of 450 basis points of return on equity in each of the two years after the change versus those institutions that did not change. Return on assets also declined by 42 basis points relative to the institutions that preserved a unified chairman/CEO role. Over the longer term, performance tended to return to the median, but it appears that a change in structure precedes, if not causes, a precipitous decline in performance.

Interestingly, the move from dual to single has a similar, albeit less dramatic effect on performance. Those banks that started out with a separate chairman and chief executive and then combined the roles also saw performance declines in the subsequent years, by 62 basis points of relative return on equity. Again, over time, performance returned to the mean, but for the two years following a change, a decline in performance should be anticipated.

Regardless of which model the company has today, boards should be aware that changing the governance structure can be highly disruptive and recovery is slow and painful. For a bank with $10 billion in assets, the data suggests that such a change could cost shareholders an average of nearly one hundred million dollars over the two subsequent years.

This research leads us to conclude that making a change to the fundamental governance of the institution is an extremely costly undertaking, and boards of directors should be cautious about the performance effects that are likely to follow. Not all institutions will follow the average, of course – some will do better and others worse. But the evidence of potential performance impact is considerable (at least in banking). Before considering any change in executive management structure, boards should develop a deeper understanding of how to successfully navigate this complex governance realignment.

Dave Kaytes is the Co-CEO of Novantas Inc., a management consultancy based in New York City. He can be reached at

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