IN-DEPTH: Big banks face push for independent oversight
As the responsibilities assigned to CEOs and board chairs grow increasingly more complex, more investors are pushing for the separation of the roles, with the demand the subject of several high-profile campaigns at some of the largest banks this season.
According to Diligent Market Intelligence (DMI) data, in the first half of this year, 37 shareholder proposals seeking the adoption of policies requiring the separation of the CEO and chair roles have been subject to a vote at U.S.-based companies, securing 31.9% average support. Of these, almost a third of such demands have targeted companies in the financial services sector, averaging 30.4% support.
"There is an inherent conflict of interest for a CEO to act as her/his own oversight as chair. The contradictions and inconsistencies in investing and voting decisions [can] result in the alienation of clients and the unreasonable politicization of the ESG debate, exposing [financial institutions] to huge reputational risk," argued Bluebell Capital Partners in an April regulatory filing.
Independent oversight
As of June 26, 2024, 292 (58.4%) of S&P 500 companies and 1,911 (63.7%) of Russell 3000 constituents had separate CEOs and chairs, according to DMI's Governance module.
Some 22 (38.6%) and 277 (64%) of S&P 500 and Russell 3000 financial services companies have separated the roles.
In recent years, companies have had to expand their oversight across a myriad of topics and governance concerns. Alongside new ESG policies and processes and post-pandemic considerations, emerging risks such as cybersecurity and artificial intelligence also rank among the new areas demanding attention from the board.
As a result, CEOs and chairs have a seemingly ever-increasing workload, with investors seeking confidence that companies are well-equipped to navigate and manage such risks.
"The role of the CEO is to run the company. The role of the board is to provide independent oversight of the CEO. Therefore, in general terms, there is an inherent conflict of interest for a CEO to act as her/his own oversight as chair," a Bluebell Capital Partners' proxy filing reads.
"The responsibilities of the board include hiring, remunerating, monitoring and, when necessary, replacing the CEO. For the board to be independent in carrying out these responsibilities, it cannot be chaired by the CEO," a Norges Bank Investment Management position paper reads. "A chairperson who is independent from management can better provide objective guidance and is less likely to have inherent conflicts of interest."
For financial services companies, many obligations also extend to the companies to which they provide lending and underwriting, making oversight of these risks even more complex.
Banks push back
The demand to separate the roles was advanced in several high-profile campaigns this season with almost 64% of such proposals at financial services companies securing support from more than one-third of votes cast at 2024 meetings, including votes at Bank of America, Lincoln National and Prudential Financial.
One such independent chair proposal secured 43% support at JP Morgan Chase's May 21 annual meeting. The proposal was endorsed by proxy advisors Glass Lewis and Institutional Shareholder Services (ISS), the latter of which claimed that "an independent chair is better able to oversee the executives of a company and set a pro-shareholder agenda." It was a demand that the bank's investors had seen on previous ballots and had notably secured 47% backing at its 2021 annual meeting – a result noted by proponent Kenneth Steiner in renewing the push this year. "Any proposal that gets above 45% support has to get a majority vote from the most informed shares because there is an overwhelming abundance of automatic votes from the JPM shares that have no other source of proxy voting advice other than JPM management," he argued.
The company disagreed, however, noting in its proxy statement that "with [Jamie] Dimon serving as both chair and CEO, the firm has delivered return[s] that ha[ve] consistently and substantially outperformed that of our performance group."
In another noteworthy campaign initiated in April, Bluebell Capital proposed that BlackRock adopt a binding independent chair requirement. The activist alleged that the world's largest fund manager has "numerous contradictions and inconsistencies between [its] ESG strategy and its implementation," derived in part from a lack of independent oversight at the board level. BlackRock, however, argued that the service of Larry Fink as CEO and chair is "the most appropriate and effective leadership structure" at the present time citing his delivery of "industry-leading growth and long-term financial returns for our shareholders, including 9,000% total return since our IPO."
Bluebell's proposal secured just 13.1% support at its May annual meeting, with Glass Lewis recommending shareholders oppose the proposal on the basis that its binding nature "does not allow the board sufficient flexibility."
The counterbalance
In many instances, companies with combined CEO and chair roles have appointed lead independent directors (LID), with the goal of ensuring there is an independent counterbalance to the CEO/chair. In this role, LIDs serve as a liaison between the CEO and board and preside at board meetings absent of the chair.
Indeed, such a structure was referenced by JP Morgan. "As part of its annual review of leadership structure, the board considers the role of the lead independent director, whose responsibilities demonstrate the board’s commitment to empowering the lead independent director to serve as a strong, effective counterbalance to the CEO."
However, some shareholders do not consider the measure as a sufficient substitute.
"A lead director is no substitute for an independent board chairman. With the CEO serving as chair this means giving up a substantial check and balance safeguard that can only occur with an independent board chairman," argued John Chevedden, the proponent of a Bank of America independent chair proposal. "A lead director can delegate many details of his lead director duties to management and then simply rubber-stamp it."
