Abstract
Recent corporate scandals have led to renewed campaigns for governance reforms, including calls for the separation of CEO and chairman positions. This paper argues that this trend ignores the possibility that differences in firm characteristics determine the appropriateness of separating or combining the two positions. I propose and test hypotheses on the determinants of leadership structure using a sample of 1,883 firms. I find that organizational complexity, CEO reputation, and managerial ownership increase the probability of CEO duality. I also find that whether CEO duality benefits or hurts the firm is contingent on firm and CEO characteristics. These results suggest that firms do consider the costs and benefits of alternative leadership structures, and that requiring all firms to separate CEO and chairman duties may be counterproductive.
Similar content being viewed by others
Notes
Source: The Corporate Library, on the Internet at www.thecorporatelibrary.com.
It is reasonable to argue that complex organizations derive significant benefits from non-duality, since such organizations are inherently more difficult for shareholders to understand and monitor. While acknowledging this possibility, the organizational complexity hypothesis postulates that, for complex firms, the incremental benefits of non-duality (over constraints imposed by labor and product markets) are dominated by the cost of lost CEO flexibility and the greater potential for distortions in transmitting information between the CEO and board chairman. A related argument is that complexity, as the number, diversity and interconnectedness of tasks and units, generates economies of specialization, thereby favoring the division of labor. However, since a non-executive chairman, by definition, does not perform executive functions, it is not clear that complexity in this sense favors separation of CEO and chairman duties.
An alternative proxy is the ratio of intangible assets to total assets, with the ratio being presumed higher for complex organizations. However, most firms have missing values for intangible assets in Compustat. Hence, it is not feasible to use this proxy.
An alternative possibility is that the CEO becomes entrenched at higher ownership levels and takes on the additional powers of board chairman. Unfortunately, it is impossible to differentiate between these two effects in the context of this paper, that is, one cannot tell whether higher ownership positively affects the probability of CEO duality because of incentive alignment or CEO entrenchment.
This point is emphasized by General Motors, ExxonMobil, Verizon Communications, and several other firms in opposing shareholder proposals recommending separation of CEO and chairman responsibilities.
These publications include Wall Street Journal, Financial Times, BusinessWeek, Fortune, Forbes, Newsweek, Time, Washington Post, New York Times, and USA Today. See Factiva for a complete listing. Press appearances range from 0 to 2,877, with mean and median values of 26.5 and 7, respectively. Thus, to reduce potential problems with outliers, I follow Milbourn (2003) and use standardize article counts (based on the empirical cumulative density function of press appearances) in my regressions.
As previously acknowledged, this result is also consistent with an entrenchment argument.
References
Anderson, C. A., & Anthony, R. N. (1986). The new corporate directors: Insights for board members and executives. New York: Whiley.
Baliga, R. B., Moyer, R. C., & Rao, R. S. (1996). CEO duality and firm performance: What’s the fuss? Strategic Management Journal, 17, 41–53.
Bebchuk, L. A., & Cohen, A. (2005). The costs of entrenched boards. Journal of Financial Economics, 78, 409–433.
Bethel, J. E., Liebeskind, J. P., & Opler, T. (1998). Block share purchases and corporate performance. Journal of Finance, 53, 605–634.
Bhagat, S., & Black, B. (2002). The non-correlation between board independence and long term performance. Journal of Corporation Law, 27, 231–274.
Boone, A., Field, L. C., Karpoff, J., & Raheja, C. G. (2006). The determinants of board size and composition: An empirical analysis. Journal of Financial Economics, in press.
Brickley, J. A., Coles, J. L., & Jarrell, G. (1997). Leadership structure: Separating the CEO and chairman of the board. Journal of Corporate Finance, 3, 189–220.
Brickley, J., & James, C. (1987). The takeover market, corporate board composition, and ownership structure: The case of banking. Journal of Law & Economics, 30, 161–181.
Business Roundtable (2002) Principles of corporate governance. Retrieved from http://www.brtable.org/pdf/704.pdf.
Callahan, W. T., Millar, J. A., & Schulman, C. (2003). An analysis of the effect of management participation in director selection on the long-term performance of the firm. Journal of Corporate Finance, 9, 169–181.
Dahya, J. 2004. One man two hats—What’s all the commotion! Working paper, Baruch College.
Dalton, D. R., Daily, C. M., Ellstrand, A. E., & Johnson, J. L. (1998). Meta-analytic reviews of board composition, leadership structure, and financial performance. Strategic Management Journal, 19, 269–290.
Dalton, D. R., Daily, C. M., Johnson, J. L., & Ellstrand, A. E. (1999). Number of directors and financial performance: A meta-analysis. Academy of Management Journal, 42, 674–686.
Davidson, W. N., Jiraporn, P., Kim, Y. S., & Nemec, C. (2004). Earnings management following duality-creating successions: Ethnostatistics, impression management, and agency theory. Academy of Management Journal, 47, 267–275.
Faleye, O. (2007). Classified boards, firm value, and managerial entrenchment. Journal of Financial Economics, 83, 501–529.
Fama, E., & Jensen, M. C. (1983). Separation of ownership and control. Journal of Law & Economics, 26, 327–349.
Finkelstein, S., & D’Aveni, R. A. (1994). CEO duality as a double-edged sword: How boards of directors balance entrenchment avoidance and unity of command. Academy of Management Journal, 37, 1079–1108.
Francis, J., Huang, A. H., Rajgopal, S., & Zang, A. Y. (2005). CEO reputation and reporting quality. Working paper, Duke University and University of Washington.
Goodstein, J., Gautam, K., & Boeker, W. (1994). The effects of board size and diversity on strategic change. Strategic Management Journal, 15, 241–250.
Goyal, V. K., & Park, C. W. (2002). Board leadership structure and CEO turnover. Journal of Corporate Finance, 8, 49–66.
Hartzell, J. C., & Starks, L. T. (2003). Institutional investors and executive compensation. Journal of Finance, 58, 2351–2374.
Hermalin, B. E., & Weisbach, M. S. (1998). Endogenously chosen boards of directors and their monitoring of the CEO. American Economic Review, 88, 96–118.
Holderness, C. G., Kroszner, R. S., & Sheehan, D. P. (1999). Were the good old days that good? Changes in managerial stock ownership since the great depression. Journal of Finance, 54, 435–469.
Jensen, M. C. (1993). The modern industrial revolution, exit, and the failure of internal control systems. Journal of Finance, 48, 831–880.
Jensen, M C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3, 305–360.
Lehn, K., Patro, S., & Zhao, M. (2006). Determinants of the size and structure of corporate boards: 1935–2000. Working paper, University of Pittsburgh and Bentley College.
Milbourn, T. T. (2003). CEO reputation and stock-based compensation. Journal of Financial Economics, 68, 233–262.
Morck, R., Shleifer, A., & Vishny, R. (1988). Managerial ownership and market valuation: An empirical analysis. Journal of Financial Economics, 20, 293–315.
Peasnell, K. V., Pope, P. F., & Young, S. (2003). Managerial equity ownership and the demand for outside directors. European Financial Management, 9, 99–118.
Pi, L., & Timme, S. G. (1993). Corporate control and bank efficiency. Journal of Banking & Finance, 17, 515–530.
Rajgopal, S., Shevlin, T., & Zamora, V. (2006). CEOs’ outside employment opportunities and the lack of relative performance evaluation in compensation contracts. Journal of Finance, 51, 1813–1844.
Rechner, P. L., & Dalton, D. R. (1991). CEO duality and organizational performance: A longitudinal analysis. Strategic Management Journal, 12, 155–160.
Rosenstein, S., & Wyatt, J. (1990). Outside directors, board independence, and shareholder wealth. Journal of Financial Economics, 26, 175–192.
Shleifer, A., & Vishny, R. (1986). Large shareholders and corporate control. Journal of Political Economy, 94, 461–488.
Stoeberl, P. A., & Sherony, B. C. (1985). Board efficiency and effectiveness. In E. Mattar & M. Balls (Eds.), Handbook for corporate directors (pp. 12.1–12.10). New York: McGraw-Hill.
Vancil, R. F. (1987). Passing the baton: Managing the process of CEO succession. Boston: Harvard Business School Press.
Yermack, D. (1996). Higher market valuation of companies with a small board of directors. Journal of Financial Economics, 40, 185–213.
Acknowledgments
This paper has benefited significantly from comments and suggestions by three anonymous referees, Randall Morck, Christine Mallin, Bonnie Buchanan, Don Margotta, Emery Trahan, and seminar participants at Northeastern University and annual meetings of the Financial Management Association and the European Financial Management Association. Support from the Lloyd Mullin Research Fellowship is gratefully acknowledged.
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
About this article
Cite this article
Faleye, O. Does one hat fit all? The case of corporate leadership structure. J Manage Governance 11, 239–259 (2007). https://doi.org/10.1007/s10997-007-9028-3
Received:
Revised:
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s10997-007-9028-3