CEO duality and firm performance

İLKİM İLAYDA KİRAZ

Increasing shareholder activism following a subsequent drop in shareholder value and poor corporate performance at many global corporations had rekindled concern in corporate governance and duality.
Although there are not sufficient evidences, CEO duality (CEO and chairman of the board are represented by same individual) has been blamed for the failure of firms to adapt to a changing environment and the poor performance in many cases. Most of the work in this field is based on U.S. or European companies. However, in recent years an increasing number of studies have exhibited that Chinese companies has got different corporate governance structure than U.S. and European companies.

The main framework and mechanism of CEO duality is identified by two different views that are represented by two schools of thoughts called agency and stewardship theorists. Eugene Fama, a Nobel laureate economist explains the role of the board in agency theory in terms of controlling managerial behavior and ensuring the interests of shareholders. In contrast, the advocates of stewardship theory assume that managers are good stewards of the corporation rather than self-interest seekers. Thus, agency theorists stand for a separate positioning of chairman and CEO while the stewardship theorists justify the benefits of duality for the corporate performance. 

According to the proponents of duality, it leads to superior corporate performance as it allows straight leadership for purposes of strategy implementation and formulation. They argue that duality may result in four significant benefits of the leadership performances of both CEOs and chairman. First of all, it provides an efficient leadership by increasing the probability that expectations of the board and management intersects. Second, duality prevents a potential rivalry between the CEO and chairman which increases leadership during crises. Third, it prevents the confusion as a result of the existence of two public spokesmen, the CEO and the chairperson. Finally, as Ram Baliga and Charles Moyer suggest, duality encourages entrepreneurship and innovation through improving the competencies of the corporation in an industry. In contrast, the advocates of the agency theory assert several potential benefits of having an independent chairman. These benefits are listed by David Larcker and Brian Tayan as a clearer separation of responsibility between the management and board; elimination of conflict areas such as the recruitment of independent directors, long-term succession planning, executive compensation and CEO performance evaluation; a clear authority of one spokesman to communicate with the public, management and the shareholders on behalf of the board; a complete focus of CEO on the culture, operations and strategy of the corporation. 

Duality is not only an issue of governance or leadership for the acting chairman or CEO roles. It is also associated with the firm performance, the stock succession of firm and cultural differences in many studies. In 1998, Dawn Harris from Loyola University and Constance Helfat from Dartmouth University have evaluated the common performance measures of duality such as ROE (return on equity), ROA (Return on assets), ROI (return on investment), changes in stock prices, profit margins and stock market returns. The controversial evidences between two schools of thoughts suggest neither independent chairmanship nor CEO duality can be described as governance practices that certainly improve corporate outcomes or operating performance in the researches based on Western companies.

Nevertheless, the work of Chinese University of Hong Kong researchers Jenny Tian and Chung-Ming Lau which analyses the CEO duality examples in China in 2011, provides evidences that CEO duality had positive linear relationship with organizational performance in terms of both operation efficiency (ROA and ROE) and financial strength (shareholder’s right ratio). Similarly, another Chinese research of Tin Yan Lam and Shu Kam Lee from Hong Kong Shue Yan University, which is based on Chinese family firms, demonstrates that CEO duality is linearly related to accounting performance in family-controlled firms. In other words, CEO duality creates benefits for non-family firms in China, while non-duality is good for family-controlled firms. 

Therefore, the effects of cultural differences on agency costs and the efficiency of stewardship approach when the firms make decisions about the board structure and the roles of board members may become a considerable variable in the future researches in this field.