An analysis of proxy statement leadership structure justification disclosures


The Dodd-Frank Act’s qualitative disclosure requirements have prompted a call in the accounting literature for greater qualitative disclosure scrutiny. In this paper, we investigate the informativeness of qualitative leadership justification disclosures required by Section 972 of the Dodd-Frank Act. The disclosures are divided between justifying combining the CEO and Chairman of the Board (CEO Duality) and splitting these two positions (split structure). We use content analysis in our investigation. We discover that the two types of justifications are very different. The split structure disclosures tend to be ‘boiler plate’ and lack informativeness. In contrast, our tests suggest that CEO Duality justifications are informative. Our tests suggest that disclosures’ intensities in CEO Duality firms are positively associated with an increasing volume of information that supports CEO Duality as the more appropriate leadership structure choice. Additionally, our test results show that leadership disclosures change users risk perception, but only for CEO Duality firms. This suggests that investors believe in and are using the disclosures when making their investment decisions.

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Fig. 1


  1. 1.

    These disclosures are required as a result of the Dodd Frank Act section 972.

  2. 2.

    By human capital value, Krause et al. (2015) appeals to the definition found in Castanias and Helfat (2001: 662) where human capital value is defined as the value of his/her “innate and learned abilities, expertise, and knowledge” to the firm.

  3. 3.

    All of the companies’ governance documents, with which we are familiar, give the board the privilege to elect its own chair. So the appointment of the CEO as chair of the board needs to be the result of a board vote. Therefore, the literature that indicates that the CEO influences the board structure so that the CEO is also the chair of the board (CEO Duality) indicates that the CEO is able to influence this vote.

  4. 4.

    We would like to emphasize that we use the words “true” and “truth” throughout the paper in connection with disclosure to mean that the disclosure is consistent with the economic benefits underlying the boards’ choice of leadership.

  5. 5.

    However, another implication of the Brickley et al. (1997) is that the board of directors can also truthfully support a split structure in some cases.

  6. 6.

    We have looked at a sample of disclosures in the initial disclosures in 2010 since these disclosures potentially provide the greatest quantity of new information about the firms’ leadership structures.

  7. 7.

    Interestingly, unlike other SEC mandated disclosures such as firm risk disclosure, we did not find any unfavorable statements in mandated leadership disclosure text. It is possible managers have the flexibility to avoid the use of unfavorable terms when justifying leadership structure and so our setting does not include the cases where intensive disclosures are provided to advance bad news (e.g., to ward off a lawsuit).

  8. 8.

    For example, notice that the Watson Pharmaceuticals’ disclosure begins by saying “The Board of Directors has determined that having an independent director serve as Chairman of the Board is in the best interest of shareholders at this time as though to imply it may combine the positions of CEO and Chairman of the Board if the appropriate candidate appears.

  9. 9.

    We need to use caution in interpreting our findings because past disclosure theory research suggests that firms voluntarily disclose good news about their leadership structures but are less forthcoming with bad news. So to the extent the mandated disclosures reveal new information, it is likely to be related to firms with less justifiable board leadership structures.

  10. 10.

    As we indicated in the introduction and consistent with past research (Rogers et al. 2011; Kothari et al. 2009), hypothesis 2 implies a joint investigation of the information content of the leadership structure justification disclosures and of the credibility of the information.

  11. 11.

    DICTION conducts its search to characterize a text based on 31 predefined dictionaries via 10,000 search words.

  12. 12.

    Basically, DICTION program compares word usage in a given passage to words contained in the 31 predefined dictionaries. Word search results are then formulated to generate scores for the five master variables.

  13. 13.

    The DICTION program matches words in the leadership disclosure text to our custom keywords, and then counts the number of keywords in the leadership structure paragraph.

  14. 14.

    Dey et al. (2011) provide results showing a trend from 2002 to 2009 by boards of director to split the CEO and Chair titles. Dey identifies 232 of the largest U. S. firms that have switched to the split leadership structure during the period and identified 41 that specifically indicate in news articles and press releases that they are being pressured to implement the split leadership structure. This contrasts with only 49 firms which they identify switching to the centralized leadership structure (combining CEO and the chairman of the board) during this period.

  15. 15.

  16. 16.

    In the sensitivity test, we control for the impact of board risk oversight disclosure on bid-ask spread. We rerun the regression by including the intensity of risk oversight disclosure, measured as the log of the total number of words identified in the disclosure of board role in risk oversight. Unreported statistics indicate that our main results still hold after controlling for other reporting/disclosure requirements enacted concurrently.

  17. 17.

    See a special issue call for papers on textual analysis research in accounting:


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Corresponding author

Correspondence to David Smith.

Additional information

We appreciate the comments received at the 37th EAA Annual Congress (Tallinn), the 2015 Conference of the Public Interest Section, the 2016 Midwest AAA, and from Johnathan O’Brien, and Phil Shane.


Appendix A: Examples of leadership structure justification disclosures

Since the leadership structure justification disclosures may not be familiar, we provide several examples for a split and CEO Duality structure. Watson Pharmaceuticals and Berkshire Bancorp support a split structure:

The Board of Directors has determined that having an independent director serve as Chairman of the Board is in the best interest of shareholders at this time. We separate the roles of Chief Executive Officer and Chairman of the Board in recognition of the differences between the two roles. The CEO is responsible for setting the strategic direction for the Company and the day to day leadership and performance of the Company, while the Chairman of the Board provides guidance to the CEO and sets the agenda for Board meetings and presides over meetings of the full Board. We also believe that this structure ensures a greater role for the independent directors in the oversight of the Company and active participation of the independent directors in setting agendas and establishing priorities and procedures for the work of the Board. We also believe that this leadership structure is preferred by a significant number of our shareholders (excerpt from 2010 proxy statement for Watson Pharmaceuticals).

The Company has chosen to separate the principal executive officer and board chairman positions as a matter of good corporate governance and to efficiently utilize the skills and time of the individuals who currently serve in these positions. Our CEO is responsible for the day to day leadership and performance of the Company, whereas our Chairman of the Board provides the strategic direction for the Company and presides over meetings of the full Board (excerpt from 2010 proxy statement for Berkshire Bancorp).

Allegany Technologies, Amazon, and Forrester Research support the CEO duality leadership structure as follows:

Under the Company’s Certificate of Incorporation, Amended and Restated Bylaws and Corporate Governance Guidelines, the Board of Directors has the flexibility to determine whether it is in the best interests of the Company and its stockholders to separate or combine the roles of Chairman and Chief Executive Officer of the Company at any given time. Whenever a Chairman and/or Chief Executive Officer is appointed, the Board of Directors assesses whether the roles should be separated or combined based upon its evaluation of, among other things, the existing composition of the Board of Directors and the circumstances at the time. While it retains the discretion to separate the roles in the future as it deems appropriate and acknowledges that there is no single best organizational model that is most effective in all circumstances, our Board of Directors currently believes that the Company and its stockholders are best served by having Mr. Hassey hold both of these positions concurrently.

The Board of Directors believes that having Mr. Hassey serve both as Chairman and Chief Executive Officer promotes unified leadership and direction for the Company, which more efficiently allows for a single, clear focus on the implementation of the Company’s strategy and business plans to maximize stockholder value. This leadership structure has resulted in the growth and financial success of the Company since Mr. Hassey began to serve in both capacities in May 2004. In addition, the Board of Directors believes that Mr. Hassey, serving in his respective capacities as Chairman and Chief Executive Officer, has served as an effective bridge between the Board of Directors and the Company’s management (excerpt from 2010 proxy statement for Allegheny Technologies).

The Board is responsible for the control and direction of the Company. The Board represents the Company’s shareholders and its primary purpose is to build long-term shareholder value. The Chair of the Board is selected by the Board and currently is the CEO of the Company, Jeff Bezos. The Board believes that this leadership structure is appropriate for the Company given Mr. Bezos’ role in founding the Company and his significant ownership stake. The Board believes that this leadership structure improves the Board’s ability to focus on key policy and operational issues and helps the Company operate in the long-term interests of its shareholders. In addition, the independent directors on the Board have appointed a lead director from the Board’s independent directors, currently Mr. Ryder. The lead director presides over the executive sessions of the independent directors, chairs Board meetings in the Chair’s absence, and provides direction on agendas, schedules and materials for Board meetings that will be most helpful to the independent directors (excerpt from 2010 proxy statement for Amazon).

At the present time, Mr. Colony serves as both Chairman of the Board and Chief Executive Officer. Mr. Colony is a significant stockholder in Forrester, beneficially owning approximately 35.3% of our outstanding common stock. As such, we believe it is appropriate that he set the agenda for the Board of Directors in addition to serving as the Chief Executive Officer. We also do not believe that the size of the Company warrants the division of these responsibilities. We do not have a single lead director because our Board is small enough that the independent directors work effectively together as a group and the presiding director at meetings of the independent directors rotates among the chairmen of the committees (excerpt from 2010 proxy statement for Forrester Research).

Appendix B: A list of key words

Ability Desirable Monitor
Accountability Direct involvement Needs
Active Discuss Opportunities
Alignment Effective/Effectiveness Optimal
Appropriate Efficient/Efficiency Oversee
Balance Experience/Experienced Oversight
Best Expertise Performance
Bridge Extensive Preside/Presiding
Call Facilitate Review
Capability/Capabilities Familiar Rotate
Challenges Foster Size
Check Founder Skill
Circumstances Growth Small
Clear History Strategy/Strategies
Cohesive Hold Strong
Commitment Independent Success
Communicate Industry Suitable
Complexity Innovative Talent
Consistent Insight Tenure
Consult Interact Understanding
Coordinate Knowledge Unified
Culture Liaison Well-functioning
Day-to-day Meet Well-served

Appendix C: Addressing endogeneity

Board leadership choice, like other corporate governance mechanism, could be endogenously determined. If we do not control for such potential endogenous effects, the parameter estimates on DUALITY, could be biased and unreliable. Following prior literature (Dey et al. 2011; Linck et al. 2008), we construct the selection model based on characteristics linked with firm’s leadership structure decision. As described in Sect. 3.2, these characteristics capture certain CEO characteristics, firm operating, information, and governance environment. All of these characteristics variables are lagged by 1 year.

$$ \begin{aligned} DUALITY & = \alpha_{0} + \alpha_{1} FDUALITY + \alpha_{2} SIZE + \alpha_{3} SEGMENT + \alpha_{4} BTM + \alpha_{5} VOLATILITY + \alpha_{6} R\& D \\ & \quad + \;\alpha_{7} PAST{\text{\_}}ROA + \alpha_{8} OUTDIR + \alpha_{9} LEAD + \alpha_{10} B{\text{\_}}SIZE + \alpha_{11} MEETING \\ & \quad + \;\alpha_{12} INS{\text{\_}}HOLD + \alpha_{13} LOG{\text{\_}}AGE + \alpha_{14} LOG{\text{\_}}COMP + \alpha_{15} FOUNDER + \alpha_{16} TENURE \\ & \quad + \;\alpha_{17} OWNERSHIP + INDUSTRY + \varepsilon \\ \end{aligned} $$

We employ the standard Heckman (1979) procedure and estimate a probit model where the dependent variable indicates whether the firm chooses a CEO duality leadership. Following Firth et al. (2014), we use the duality status of the previous CEO (FDUALITY) as the instrumental variable. First is the intuition that a firm is more likely to follow its traditional governance practice and a change for split/duality structure occurs infrequently. Second, it is unlikely that the changes in firm risk are directly affected by the duality status of the previous CEO. In the case there is no previous CEO, we use the duality status of the CEO in fiscal year 2010 as a substitute for FDUALITY. As shown in Table 8, we find that the coefficient on FDUALITY is highly significant, suggesting that FDUALITY is effective in predicting DUALITY.

Table 8 Estimation of inverse Mill ratios

Results of Eq. 5 presented in Table 8 are used to estimate the inverse Mills ratios (MILL). As shown in Table 8, we find that probability of a CEO Duality leadership increases with firm size, CEO age, CEO compensation, CEO tenure, CEO ownership, the percentage of independent directors, board size, the presence of a lead independent director, stock return volatility, and past performance while decreases with the number of board meetings. Our results are consistent with the arguments that CEOs are awarded the chair title as part of the succession process and the presence of independent directors is used to mitigate the negative effect of CEO Duality.

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Cheng, X., Smith, D. & Tanyi, P. An analysis of proxy statement leadership structure justification disclosures. Rev Quant Finan Acc 51, 1071–1106 (2018).

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  • Leadership structure disclosures
  • Content analysis
  • Informativeness
  • Dodd-Frank Act

JEL Classification

  • G3