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Should Community Banks Separate the Roles of CEO and Chairman?

Recent events at Wells Fargo led to an amendment of its bylaws requiring the separation of the CEO and Chairman roles, and these events are also driving the current discussion calling for the separation of the CEO and Chairman roles at other big banks.  The concern appears to be that a conflict of interest may arise if the person filling both the CEO and Chairman roles is disinclined to pursue a matter with the Board that could reflect adversely on the Chairman in that person’s CEO role. 

Community banks frequently combine the roles of Chairman and CEO or Chairman and President in one individual.  Will this recent concern raised at the big bank level be extended to persons holding both positions at community banks?  For reasons noted below, I think they should not:

  1. First, what happened at Wells Fargo is a universe away from what typically goes on at community banks. As we now know, certain management practices at Wells Fargo resulted in a multi-million dollar fine, the loss of thousands of jobs, a criminal investigation and the loss of faith and confidence by many customers.  These practices are not likely to occur at a community bank where the trust and confidence of the bank’s customers is critical to the bank’s success, where many of its customers are well known to the bank and where the thought that the bank might open false accounts is unimaginable.
  1. Second, the role of CEO at community banks is sometimes the result of a Board strategy to appoint a successor to the then current President and to designate the then current President as CEO in order to retain the valued knowledge and expertise of the then current President. This appointment to the role of CEO of the then current President may also involve the appointment of that person as Chairman as part of the transition process for certain internal purposes.  This transition process makes good business sense for a community bank when developing a succession plan.  The continuing availability of the expertise and knowledge of the then current President should have considerable value to the community bank, and based on my experience generally should produce good results for the community bank and its shareholders. 

In summary, this is a practice which I believe contributes to good and practical succession plans at community banks and permits Boards to retain valuable expertise, all of which contribute to continuing shareholder confidence in the bank.  I believe the designation of one individual for both the CEO and the Chairman roles should be an acceptable corporate governance practice for community banks.  Wells Fargo does not present a compelling story for the required separation of the CEO and Chairman roles at community banks unless those banks for their own good business reasons decide to separate the roles. 

I have two additional suggestions for the bank’s consideration when consolidating these roles.  First, Boards that combine the roles of CEO and Chairman in one person should be vigilant regarding their continuing fiduciary responsibilities for their oversight of the bank.  Second, the separate roles of CEO and President should be clearly defined in the bank’s bylaws.  Community bank bylaws commonly provide for the official positions of President and Chairman and to describe the responsibilities and authority of each, but it is uncommon for community bank bylaws to separately describe the roles of CEO and President.  Thus, for those community banks which maintain separate roles for the President and the CEO I suggest Boards for those banks make sure their bylaws recognize the separate roles, responsibilities and authorities of each such officer, and if necessary amend those bylaws to make clear the distinctions between those two roles.

DISCLAIMER: The information provided is for general informational purposes only. This post is not updated to account for changes in the law and should not be considered tax or legal advice. This article is not intended to create an attorney-client relationship. You should consult with legal and/or financial advisors for legal and tax advice tailored to your specific circumstances.

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