The Obama administration will propose that banks "divide the function of chairman and chief executive between two executives," the New York Times reports. FutureOfCapitalism.com commented on this idea months ago, when it was Senators Schumer and Cantwell who were proposing it for all public companies, and had this to say:
empirical research calls into question the idea that a company with a separate chairman and ceo, or "dual leadership," will do any better than one with a unified executive. A working paper issued in 2000 by three professors reported, "If anything, the evidence suggests that dual leadership is associated with systematically lower cash flows and value." Another study, a doctoral dissertation, found, "firms that have split positions exhibit, on average, no lower or higher performance than other firms...The results imply that the benefits of split positions may be firm specific, that split positions are only appropriate for some firms, and that a net benefit will not be captured by all firms that simply enact a policy of split positions independent of their fundamental characteristics."
Why not allow the company's owners and directors to weigh this evidence and set up their own structures, rather than imposing a government mandate? If it turns out a "dual leadership" structure is better than a unified executive, companies that use it will see improved returns, and the next thing you know, mangers will set up funds that invest only in companies with dual leadership structures. If those funds outperform the overall market, the structure will become more widely adopted. But the idea that Treasury Secretary Geithner or President Obama or Chairman Bernanke knows the best governance structure for banks is just weird. Next they'll be telling colleges how to structure their boards of directors. At least Mr. Obama and Bernanke have relevant experience there, having worked as college professors. There's no evidence that dividing the bank chairman and chief executive jobs are any more related to bank performance than is the color of the paper that a bank uses to print its ATM receipts on. In Britain the dual leadership structure is commonplace. At Royal Bank of Scotland, the team of CEO Fred Goodwin and chairman Tom McKillop did not prevent the bank from requiring a Citi/BankofAmerica style government rescue/takeover. British mortgage lender Northern Rock had chairman Matt Ridley and CEO Adam Applegarth; it, too, failed and was nationalized.
One final point: If this change in the rules were such a great idea, why didn't the Obama administration include it in its "New Foundation" financial regulatory overhaul when that was announced back in June? Banking and financial policy is starting to look a bit like the Afghanistan strategy review, a kind of ongoing debate between various camps within the administration, creating uncertainty instead of the sought-after stability.
