Does one hat fit all? The case of corporate leadership structure
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Does one hat fit all? The case of corporate leadership structure Olubunmi Faleye
Published online: 7 July 2007 Springer Science+Business Media B.V. 2007
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. Keywords
Corporate governance Leadership structure CEO duality
1 Introduction One of the most hotly debated issues in corporate governance is whether the chief executive officer (CEO) should also serve as the chairman of the board of directors. In recent times, shareholder activists and regulators in several countries have proposed rules encouraging separation of the two roles. This paper examines the economic determinants of the choice of corporate leadership structure and argues that the push toward a common structure may be counterproductive because it ignores the role of firm characteristics in determining the appropriateness of separating or combining the two positions.
O. Faleye (&) College of Business Administration, Northeastern University, Boston, MA 02115-5000, USA e-mail: [email protected]
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The CEO is a corporation’s chief strategist, responsible for initiating and implementing company-wide plans and policies. On the other hand, the chairman is responsible for ensuring that the board works as it should in counseling and monitoring the CEO. Since the chairman performs important control functions, it is often suggested that a separate person apart from the CEO should occupy this position. Fama and Jensen (1983) suggest that CEO duality (i.e., when the CEO also serves as chairman) violates the principle of separation of decision-management and decision-control and hinders the board’s ability to perform its monitoring functions. Likewise, Jensen (1993, p. 866) argues that separating the two positions is essential for board effectiveness, since a chairman/CEO cannot perform control functions ‘‘apart from his or her personal interest.’’ In contrast, Anderson and Anthony (1986) and Stoeberl and Sherony (1985) point out that vesting the two positions in one individual provides clear-cut leadership and focus in the conduct of the corporation’s operations. Besides, Brickley et al. (1997) argue that the monitoring benefits of CEO non-duality (i.e., separating CEO and chairman positions) m
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