New AIB executive chairman Dan O'Connor: a compromise choice that, from a corporate governance standpoint, is a bad choice

The appointment of AIB chairman Dan O'Connor as the bank's executive chair -combining the two top roles - may have broken the impasse between AIB and the Department of Finance over who was going to run the country's biggest financial institution, but it also raises questions about the government's commitment to sound corporate governance in banking.

Last week the board of AIB finally submitted to the will of finance minister Brian Lenihan by abandoning Colm Doherty, head of capital markets, as their preferred candidate for the chief executive post being vacated by Eugene Sheehy, who announced his resignation way back in April under pressure from institutional investors. Doherty had been strongly backed by his fellow board members but Lenihan, in a nod towards corporate best practice, refused to sanction the appointment as he wanted an outsider in the top job. Instead Doherty received a consolation prize of managing director.

The elevation of an internal candidate implicated in the bank's near-failure last year was a line the minister was not prepared to cross – especially not for an institution which had, according to Department of Finance sources, tried to dictate the terms of the bank guarantee scheme in September 2008.

Yet his promotion of O'Connor as a compromise candidate, after months of wrangling with the AIB board, is arguably just as bad from a governance point of view.

All companies listed on the Irish stock exchange – which for now still includes AIB – must comply with something called the Combined Code on Corporate Governance. This is basically a set of guidelines on how the board and committees should function, how the company should report its financial results and how it should comply with regulations. And it is quite clear on the matter of executive chairmen.

"The roles of chairman and chief executive should not be exercised by the same individual. The division of responsibilities between the chairman and chief executive should be clearly established," it says.

A separate but related issue arises when the chief executive becomes the chairman, as was the case in 2005 when Sean FitzPatrick became chairman of Anglo Irish Bank. The code advises against this on the grounds that a former executive cannot be independent enough to act as a chairman should.

In short, good corporate governance as set out in the code dictates that companies should not allow an overlap between chairmen and chief executives.

Unsurprisingly, the Corporate Governance Association of Ireland last week issued a stern statement opposing the deal between Lenihan and AIB to install O'Connor – even on an interim basis.

"It is hard to understand how the government, AIB's largest shareholder, would agree to such a breach of the code even on an interim basis as it sends out the wrong signals to the international investment community. It is also hard to understand when the government itself recently promised in the Renewed Programme for Government to bring in legislation to require segregation of the roles of CEO and chair in Irish banks," the CGAI statement said.

But this conflation of executive and non-executive roles is not new in Irish corporations. Even after the fiasco with FitzPatrick at Anglo, the new chairman, Donal O'Connor, wound up running the bank for nine months after nationalisation while the board scoured the globe for someone willing to take on the responsibility of sterilising Europe's most toxic bank.

Quinn Group, in an effort to comply with public company standards, also went through extensive board restructuring earlier this year after chairman Sean Quinn was told to resign as chair of Quinn Insurance following his censure by the Financial Regulator over illicit intracompany loans related to Quinn's own Anglo investments.

Perhaps most infamously, DCC executive chairman Jim Flavin was forced to resign – despite having the support of his board – last year when the Irish Association of Investment Managers (IAIM) and the Office of the Director of Corporate Enforcement (ODCE) moved against him after the Supreme Court found he had engaged in insider trading.

Corporate accountants Grant Thornton railed against this Irish tendency in their annual corporate governance review early this year: "Companies are doing enough to comply with the provision of the code whilst paying lip service to the spirit and values exemplified by good corporate governance". At the time, seven Iseq companies had the chief-to-chairman problem, while two still had executive chairmen.

As the taxpayer is being asked to fund a bailout of a banking sector brought low by lax standards, Brian Lenihan and AIB have now added to that number.