The observation by 19th century historian Lord Acton that “power tends to corrupt and absolute power corrupts absolutely” seems appropriate when analysing one of the most significant trends in corporate governance — the steady demise of the “all-powerful” executive.
Over the past decade, the joint chief executive/chairman has become a dying breed. Globally, the number of new appointees holding the chief executive/chairman role has dropped to a record low as corporate governance best practice moves towards the idea that the two most senior roles at a listed company should be split, says Strategy&, a consulting arm of professional services group PwC.
The UK’s corporate governance code advises against combining the two posts. Only one company in the FTSE 100 — Hikma Pharmaceuticals — has one person, Said Darwazah, sharing the chief executive and chairman roles, says research group MSCI.
The US is one of the few industrialised countries where a joint chief executive/chairman is still common at the biggest groups, although their numbers generally are falling. Half the companies listed on the S&P 500 have one person holding the combined role.
“Having a separate chief executive and chairman is becoming a global standard for almost everyone,” says Per-Ola Karlsson, a partner at Strategy&. “Governance codes around the world presume that it is best practice. But in the US, progress has been slow.”
He attributes this to the different mindset of Americans. They are more inclined to believe that someone holding both roles can deliver greater efficiency and better performance, while not compromising the principles of good corporate governance, he says.
Jamie Dimon, chief executive, chairman and president of JPMorgan Chase, the US investment bank, is a prime example of a business leader who gives weight to the argument that one person in the joint role can deliver results.
The bank has consistently been one of the top performers among the world’s financial groups since he took on the post of chairman in 2006, adding to his existing role of chief executive.
However, the bank has not avoided scandals. It suffered large losses after a series of derivatives transactions entered by a trader, nicknamed the London Whale, went wrong. This prompted several investigations into the group’s internal controls.
Similar failures have prompted other companies and business leaders to emphasise the importance of having a separate chief executive and chairman.
Tom de Swaan, chairman of Zurich Insurance, argues that big financial groups should separate the roles because of their complexity. Although Mr de Swaan took up the joint role at Zurich temporarily last year after the departure — and subsequent suicide — of chief executive Martin Senn, he insists that it is healthier to split the positions.
“One of the most important roles in being a chairman is to have the right management in place,” he adds. “The second thing is to make sure the company strategy is being executed effectively. It is hard to carry out these roles properly if you are the chief executive as well.”
Some big investment groups, such as UK asset managers Schroders, Legal & General Investment Management and Aberdeen Asset Management, strongly support separate roles.
Jessica Ground, global head of stewardship at Schroders, puts it simply: “The chief executive is there to run the company, the chairman is there to run the board. These are two different activities.”
Clare Payn, head of corporate governance in North America at LGIM, adds: “Having one person do both suggests the chief executive can mark their own homework. The big listed companies are often very complicated institutions. The CEO does not have time to act as chairman as well.”
Findings are mixed over whether a company performs better with separate or joint roles. One factor that complicates this analysis is that companies with poor results often bring in a joint chief executive/chairman to turn round performance. Between 2011 and 2015, the lowest performing companies globally appointed 50 per cent more joint chief executive/chairmen than the highest performing companies, according to Strategy&.
Other research by MSCI shows that companies where the roles are combined tend to lag behind in the long term.
Over 10 years, average total shareholder returns were 225.8 per cent at the groups where the roles were combined and 361.9 per cent at the companies where they were separated. These figures were calculated as of December 31 2015.
The most recent data, published in August by Credit Suisse, also show that separating the roles may benefit performance. Of the 400 non-family-owned companies on the S&P 500, those with separate chief executives and chairmen delivered an average of 7.4 per cent annually over the 10 years to January 2016 compared with 5.3 per cent for companies with the same chief executive and chairman.
However, there are no hard data to indicate which groups fare best when it comes to preventing scandals and improving corporate governance, says Mr Karlsson of Strategy&. “I would say that a separate, independent chairman would give a company a better chance of avoiding a major scandal. But I have found no strong evidence to quantify this.”
Until there are firmer data backing the separation of the posts, the joint role is unlikely to become completely extinct. Some investors, particularly in the US, will happily back an “all-powerful” holder of both roles — as long as they are delivering strong results and returns.
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