Banks Try Splitting Chair, CEO Posts

Hammered by the credit crunch, some of Wall Street's biggest banks and brokerages -- like Wachovia and CEO Ken Thompson (above) -- increasingly are trying the dual leadership model.
By Laurie Kulikowski ,

Editor's note: This is the fifth story in an occasional series exploring the rise in shareholder activism and its impact on U.S. corporations amid the economic downturn. The first explored reasons behind the trend. The second detailed efforts by investors to rein in soaring executive compensation. The third looked at the battle being waged to get shareholder proposals on company ballots. The fourth examined shareholders' frustrations in the telecom industry.

Two days after it reported its first-quarter loss was 80% higher than it initially said,

Wachovia

(WB) - Get Report

announced chairman and CEO Ken Thompson was giving up his seat at the head of the company's board.

Thompson, while staying on as CEO, would now share power with longtime independent board member Lanty Smith. Thompson said the arrangement would allow him to focus on steering the company through the difficult economic environment, but many also saw it as a move to appease angry shareholders.

While not entirely uncommon in the banking industry, splitting the chairman and CEO roles is part of a trend among big financial institutions, as the sector reels from the credit crisis and housing downturn.

More than half of the 582 publicly traded banks in the U.S, mostly smaller institutions, have such an arrangement, according to a Sandler O'Neill analysis, and the practice is commonplace in Europe. It wasn't until earlier this year, however, after the effects of the credit crisis that gripped markets last year had began to show up in earnings reports, that boards of Wall Street's biggest banks felt the need to create power-sharing arrangements in the board room.

Citigroup

(C) - Get Report

named Vikram Pandit to succeed the ousted Charles Prince as CEO, but gave Prince's chairman title to Sir Win Bischoff. At

Bear Stearns

(BSC)

, prior to the firm's near collapse and fire sale to

JPMorgan Chase

(JPM) - Get Report

, longtime Chairman and CEO James Cayne gave up the executive role to President Alan Schwartz, but stayed at the head of the board.

Mark Fitzgibbon, the director of research at Sandler O'Neill & Partners, says as shareholders become more vocal in their frustrations and urge accountability onto boards and CEOs for their strategic decisions, the trend is likely to "accelerate."

"I think you are going to see a lot more companies

that separate the roles, particularly as we center a difficult economic and credit environment," he says. "The boards are going to want to have more influence and control and they're going to want the appearance of separation of duties."

But while splitting the roles may placate shareholders, there also are legitimate good governance reasons to make the move, says Jeff Warren, head of the financial services practice at executive search firm Russell Reynolds Associates. The chairman-CEO position is "a very challenging post to be in if you're trying to juggle managing your key leaders in a firm like this -- all of whom have responsibility in terms of the revenue and lines of business," he says.

"The fact of the matter is the complexities of these

banks are just enormous and it's not just business complexities around running global diverse businesses, there are tremendous risk complexities, which have gotten even more challenging and more complex with the different types of instruments and products," he says.

CEOs typically set company strategy, give guidance to their senior team leaders and are ultimately accountable for driving net income and shareholder value, while the nonexecutive board chairs oversee the board of directors and the various committees to work in the best interests of the shareholders, Warren says.

Increasingly Common

Surprisingly, roughly 60% of the 582 publicly traded banks and thrifts currently have a split chairman-CEO role, according to the Sandler O'Neill analysis.

While most of the banks with split roles are smaller institutions, there are some large firms that have separated the roles, including

Bank of New York Mellon

(BK) - Get Report

,

Fifth Third Bancorp

(FITB) - Get Report

,

Sovereign Bancorp

(SOV)

and

Wells Fargo

(WFC) - Get Report

.

And the number seems to be rising. As of last year, 37% of

S&P 500

companies had separate chairman and CEO roles, up from 34% in 2006 and 30% in 2005, according to RiskMetrics Group. But only 11% of the companies with split roles last year had an independent chair, RiskMetrics said.

Some companies' have taken a middle-ground approach by creating a lead director position that acts sort of as a "shadow" to the chairman of the board, says Pat McGurn, special counsel at RiskMetrics Group. Over the past few years, voting support for independent chairmen had dropped in "direct proportion" to the appointment of lead directors, McGurn says.

But there is a growing consensus that the chairman should be independent of the firm.

This proxy season shareholder proposals calling for an independent chairman came up at 32 companies, including several financial companies such as

Bank of America

(BAC) - Get Report

, Citi, Wells Fargo and

Washington Mutual

(WM) - Get Report

, according to RiskMetrics Group. The corporate governance and proxy advisor firm said that 16 have come to vote so far, with an average support of 32%.

So far, the WaMu proposal was the only one to garner a majority vote, according to preliminary votes, RiskMetrics says.

The Seattle-based company has been saddled with investor anger over the company's alleged missteps in the housing and credit crises. Shares have fallen more than 70%, as the nation's largest thrift has been forced to recapitalize twice since December. WaMu's troubles culminated last month, when a consortium of investors, led by private equity firm TPG, agreed to sink $7 billion into the struggling bank.

Separate chairman and CEO positions are common overseas. Approximately 70% of the largest companies in Europe have split roles, according to a 2006 Russell Reynolds report. Some countries such as Germany have laws regulating the issue; other countries such as France have passed laws that define -- but do not regulate -- the two roles more specifically. In the U.K., a majority of companies have split roles, the report says.

And the Office of Federal Housing Oversight several years ago mandated that government-sponsored mortgage giants

Fannie Mae

(FNM)

and

Freddie Mac

(FRE)

, in the wake of accounting scandals, agree to split their chairman and CEO roles. Fannie, as of February, has completed the directives under the consent order; Freddie still has to separate its chairman and CEO roles.

One Size Doesn't Fit All

But some industry observers say splitting the chairman-CEO role makes more sense in some situations than others.

"There are people who do the combined role in an outstanding way," says Jack "Rusty" O'Kelley, principal with consulting firm Katzenbach Partners. "It may be better to split the roles when a company is going through a significant turnaround and the CEO needs to devote 100% of his or her time to riding the ship and the chairman can focus on the relations with other directors and providing the support as needed by the CEO. If it increases organizational capacity -- that is the best time to do it."

Andrew Marquardt, an analyst at Fox-Pitt Kelton Cochran Caronia Waller, pointed to several mid-size banks troubled by the housing and credit downturn that should split their top two positions, such as

National City

(NCC)

and

Huntington Bancshares

(HBAN) - Get Report

.

"The question is, does a split in the roles indeed strengthen the corporate governance in that it makes the CEO more accountable? And does it indeed make the board more closely aligned and involved with the day-to-day operations and also accountable? If indeed that's true, then more should be split," Marquardt says. "If it's really just another shifting around of titles and it doesn't really change the sentiment or the involvement of the board, then it's moot point."

Still there hasn't been a whole lot of empirical evidence that the splitting of the chairman and CEO roles improves company performance, says Tom Hepner, an investment advisor with Ruggie Wealth Management, which has some investments in bank stocks.

Hepner is wary that Wachovia's efforts to split the two roles may be "a little bit of window-dressing to appease shareholders," he says.

"The reason that Wachovia did it was because they felt that they had to be responsive to the crisis, and this was one very overt, visible way to appear to be doing something," Hepner adds. "Citi's was because they have a smart hand-picked CEO in Pandit, who I think will do well, but I think his experience was a concern. Does he have relevant multifaceted, integrated, institutional experience that Citi would demand? So they got themselves a very experienced individual

in Bischoff to help really make sure that Pandit gets off the ground earlier and that he is successful through mentoring."

One issue that could come up if more companies look to split their top roles is recruiting. Finding either retired or actively looking executives to fill a nonexecutive chairmanship role could prove to be difficult. In addition, power struggles and clash of leadership is an important factor to consider and it may be easier to recruit talent by having the roles combined, some say.

"For many regional banks, there's been very little independence historically on boards," which are typically controlled by the CEO, says Todd Hagerman, an analyst at Credit Suisse. "For most regional banks, the CEO is typically one of the principal founders of the organization. There's been an ongoing move over the last couple of years to garner more independence at the board level."

But even with the best intentions, "finding a suitable chairman who has that background expertise and understanding will remain a challenge," Hagerman adds.

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