CEO duality - when the roles of CEO and Chairman are filled by one single person - has been one of the most debated issues in corporate finance in recent years. Since the 1990's, regulators and governance activists have been pressuring firms to separate the Chairman and CEO positions in order to avoid any conflict of interest. However, despite abundant research, there is no proof that CEO duality has a negative impact on companies. On the contrary, this study shows that, in the context of increased competition, firms with consolidated leadership actually perform better.
From the article
CEO Duality and Firm Performance: Evidence from an Exogenous Shock to the Competitive Environment
Tina Yang, Shan Zhao
Journal of Banking & Finance
There is mixed evidence on the links between dual leadership and firm performance, and it is extremely difficult to draw any conclusions about this because of the diversity of situations and of possible causes. To circumvent this challenge, the researchers looked at a sample of companies facing a crucial change in their competitive environment. Using the exogenous shock of the 1989 Canada-United States Free Trade Agreement, they observed the firms' ability to respond quickly to changing ecosystems, relating post-shock performance to existing leadership structures in 2000 U.S. companies.
In a context of greater competition and shifting market opportunities, duality firms outperform firms with separate leadership by 3 to 4 %
Combining the roles of CEO and Chairman makes companies stronger to face increased competition, even more when they rely on heavy R&D, in sectors where information is more crucial. This dual leadership enables them to save on information costs and communication time. Additionally, CEOs obviously retain unparalleled on-the-job, firm-specific knowledge, which is always upto- date. Consequently, consolidated leadership means faster decision-making, which is a key advantage for responding rapidly to challenges, and for surviving in times of fierce competition.
Firms have been under enormous pressure to abolish duality, and the number of companies combining CEO and Chairman roles has been declining in the past decades. In the UK, a majority of firms used to have consolidated leadership in the 1980s; fewer than 5 % still do now. In the U.S., 54 % of S&P 1500 firms still have their CEOs also chair the board, down from 70 % in 1996. Despite this deep-rooted trend, recent support by JP Morgan Chase's shareholders of keeping chief executive Jamie Dimon as the Chairman, as well as Netflix investors opposing a plan to split the CEO and Chairman roles prove that the shareholders' point of view, analyzing the pros and cons in terms of costs and benefits, do not always match the regulators' opinions, and can be in favor of duality.
- Separating CEO and Chairman roles comes with costs and benefits, which depend on the companies' characteristics and need to be assessed individually.
- The push for leadership duality can be counterproductive, as in highly competitive times, firms with this type of structure perform better.
- Furthermore, this performance gap is larger for firms with higher information costs and better corporate governances