Why the CEO-chair split matters

FORTUNE — J.P. Morgan’s Jamie Dimon and Goldman Sachs’s Lloyd Blankfein may have survived Wall Street’s implosions and other financial debacles, but shareholder activists have hardly given up on knocking them off their imperial perches, or, at least, one of their perches.

A group of union retirement funds aims to split the dual roles that Dimon and other CEOs hold at their companies — being the CEO and the company chairman. The activists are calling for corporations to appoint chairmen, who head the board of directors, from outside the company who can demonstrate financial independence and freedom from conflicts of interest.

While banking, and specifically Dimon, are receiving the most attention, shareholder activists say that execs wearing both the hats of CEO and chairman are far too numerous across the corporate landscape, especially in the “too big to fail” tier of major companies.

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In Blankfein’s case, a separate coalition of union pensions is trying to separate the twin CEO and chairman posts he has held at Goldman Sachs (GS) for six years. Last year, an activist push resulted in the company, which has weathered its own accusations of inappropriate business dealings, to choose a lead outside director. But this year, the company has tried to sideline any attack on Blankfein’s control.

Governance groups say that the corporate coziness — the CEO acts as his own boss because he reports to himself in his chairman role — allows unchecked risk taking that may produce spectacular short-term results but winds up harming a company. A coalition of pension funds is proposing that some two dozen companies reshape their executive power structure when they hold their shareholder meetings this spring.

No easy change

Just how difficult such splits are to engineer was made clear last week as Walt Disney Co. (DIS) shareholders rejected an effort to separate CEO Robert Iger from his chair role. This defeat was particularly grating to corporate governance advocates because Disney separated the two roles in 2005, then restored them both to Iger last year.

“Walt Disney is the perfect case of poor dialogue between the board and its long-term shareholders, which creates a detriment to all,” says Tim Goodman, a spokesman for Hermes Equity Ownership Services, which advises institutional clients.

Only one-third of shareholders voted for the measure, rejecting company arguments that Iger’s leadership resulted in the company’s recent strong financial performance. Iger, who earns some $40 million a year, is slated to retire in March 2015 but will retain the chairman job for an extra year beyond that.

Combining the CEO and chair roles flouts good governance principles, but Disney is not the only major corporation to reverse course on this issue. Sears Holdings (SHLD), which operates both Sears and Kmart stores and has been struggling to reenter the ranks of top U.S. retailers, announced last month that its chairman, Edward Lampert, would add the CEO portfolio to his duties.

Lampert, a hedge fund billionaire, explained at the time that, “the board feels it is important that there is continuity of leadership during this important period of transformation and improvement at Sears Holdings.”

However, given the company’s recent track record, shareholders may well question Sears’s rationale in expanding Lampert’s responsibilities. The company has had six straight years of losses at stores open more than one year.

As American as insider trading

Combining the two roles often seems a default for companies despite studies showing that the arrangement muddies clear lines of authority. The overlapping roles are part of a management structure that is almost uniquely American, and is not copied in other countries, say management experts.

“It is rooted in the longstanding tradition that the chairman and the CEO usually come from the same group of people, the circle of friends and acquaintances where people know each other, know what to expect, and there is an ease of communication,” says Jason Schloetzer, an assistant professor at Georgetown’s McDonough School of Business.

While the board’s traditional role is to serve as an advisor, says Schloetzer, who specializes in management issues, “in the last decade, that has shifted dramatically to monitor as awareness has grown that shareholder capital was not always being deployed in the best ways.”

Repeat efforts to split the dual roles “puts pressure on companies to explain why it is in the company’s best interest,” he says. “And that becomes more difficult year after year.”

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Even so, convincing shareholders to rock the corporate boat can be an uphill battle. Efforts to scuttle the dual relationship at J.P. Morgan have failed previously, including last year, where a proposal garnered only 40% of shareholder support. That vote, however, came before shareholders were aware of the full magnitude of the London whale trading losses.

“Unchecked risk taking and oversight failures have cost J.P. Morgan (JPM) more than $6 billion in losses,” noted New York City Comptroller John C. Liu, the custodian and trustee of the NYC pension funds, in proposing this year’s CEO-chair split effort.

Signs of change

Many prominent companies, across almost every industry, have the dual structure, according to data prepared for Fortune by Equilar, which follows executive compensation and other corporate issues. They include Archer Daniels Midland (ADM), Cisco (CSCO), Coca-Cola (KO), Dell (DELL), FedEx (FDX), Procter & Gamble (PG), Starbucks (SBUX), Visa (V), and others.

According to GMI Ratings, the percentage of S&P 500 companies which have the dual arrangement were found at 68% (342) of companies in 2005, but have since declined to 56.4% (281) of companies in 2012.

The number of companies that have an independent chairman of the board has risen from 8.5% (43 companies) in 2005 to 20.7% (103 companies) in 2012, according to GMI research.

A study in June 2012, also conducted by GMI Ratings, found shareholders at large-market-cap companies that had separated the two positions received a 28% higher five-year return. Such findings are cited by pension funds, which have been stung by the decline in investment returns, especially from companies in the financial sector.

The union federation is filing proposals specifically to require an independent board chairman at some well-known companies, including General Electric (GE), Johnson & Johnson (JNJ), Lockheed Martin (LMT), Target (TGT), and Wal-Mart (WMT).

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But taking on a company chief executive is a lot harder than it may look. When corporate governance reformers first gained steam about a decade ago, Andrew Grove, the former chairman of Intel Corp. (INTC), underscored the importance of split control when he asked, in an interview, “Is a company a sandbox for the CEO, or is the CEO an employee? If he’s an employee, he needs a boss and that boss is the board. The chairman runs the board.”

An independent chair, says GMI’s Gladman, “Is not a magic bullet. But it is becoming difficult for companies just to insist ‘we have the wonderful, irreplaceable CEO.”

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