One Job Too Many (?)

by Jenna Moore, a current Bachelor of Business (Honours) student.

The recent and unexpected $6B trading loss sustained by JPMorgan Chase & Co fuelled the debate centered on CEO duality. CEO duality refers to the situation where the CEO also holds the position of the Chairman of the board. With increasing public awareness and academic interest in corporate strategic leadership, two key questions resound in both corporate finance research and social debate at large: Should the CEO and Chairman roles be separated? Should a separation be mandatory?

The central concern of duality is the power the control structure grants the CEO. In a firm with a dual CEO the traditional role of the board of directors is presumably compromised due to the incestuous crossover of management and monitoring functions. The board is primarily charged with overseeing the management and closing the gap between managers’ and owners’ interests. They traditionally govern the organization by establishing broad policies and objectives whilst also designing compensation contracts and hiring and firing firm executives, one of which is the CEO.

A shift in the control structure of firms began in the 1930s as CEOs simultaneously assumed the role of board Chairman, transforming the board into an advisory system for management rather than an objective monitoring body. More recently, the high profile of corporate misconduct has led many firms to separate control in an effort to increase investor protection by assuring board independence. Yet, despite numerous attacks against dual control dating back to the 1980s, the power structure is still common among US firms today. So if CEO duality has endured in the ever increasingly public (and protected) market, why is the issue of CEO duality so hotly debated?

A quick survey of corporate governance literature demonstrates intense interest in the consequences to operational performance attributed to CEO duality. However, despite a plethora of theoretical constructs and empirical investigations, the one common element is inconclusiveness. Many studies are apt at finding associations between CEO duality and various commercial phenomena, however prudent authors highlight that the strength of the relationships vary according to the specific control variables selected. One study, for example, finds CEO duality is related to international acquisitions, which according to agency theory would suggest that the dual role provided increased opportunities to expropriate shareholder funds by divesting abroad and forcing growth for growth’s sake. Yet when investigated under the light of alternative control variables, it could be surmised that international acquisitions are also more likely for larger, high-sales-growth firms with lower leverage and lower cash levels, suggesting that CEO duality is associated with high sales growth, lower leverage and lower cash levels. Not the worst possible outcomes for shareholders.

The persistence in interest to regulate the separation of CEO and Chair functions reflects the pervasiveness of agency theory, which implies that unless appropriate governance structures are in place, managers will not act to maximize the returns to shareholders. Cynical much? When an unexpected negative event occurs, a firm comes under fire from activist shareholders, institutional investors, proxy advisory firms, and regulators, and if the firm has a dual CEO/Chair then this is going to take center stage. But what about the corporate successes − are these dissected in the same way? Shouldn’t academics focus on finding ways to prescribe the success of dual leaders such as Warren Buffet and Robert Benmosche rather than mitigate the failure of Kenneth Lay or Bernie Ebbers? Tolstoy famously suggests that all happy families are alike but every unhappy family is unhappy in its own way − is this analogous to the success and failure of corporations?

Is there more substance in stewardship theory, which proposes CEO duality creates clear lines of authority to which management (and the board) can respond more effectively? In direct opposition to some academics, many successful dual CEOs argue that having clear and unambiguous authority concentrated in one person is essential to effective management. And in times, namely periods of crisis, strong, directive, stable and unconfused leadership is seen as the critical requirement for organizational survival. The aforementioned Robert Benmosche demonstrates the benefits of concentrated leadership during the successful reorganization of AIG, which led to full repayment to the US government and taxpayers in 2012.

But anecdotal evidence aside, empirical results suggest that the market is indifferent to changes in a firm’s duality status and there is no significant changes to operating performance around changes in duality status. In short, CEO duality by itself does not influence firm performance; rather leadership structure is endogenously and optimally determined given firm characteristics and ownership structure. These results support organizational life cycle theory, which proposes that complexity is the key determinant in respect of governance requirements as the organization moves through the life cycle. The implication of this is that there is no one universal structure that will optimize the effectiveness of leadership in public firms and this is often the argument presented by pro-duality advocates. This line of thinking reflects the intuitive view that success cannot simply be prescribed.

One very important omission of much of the academic literature is the scope that individuals have to impact the business regardless of a given structure. To put it quite plainly, simply filling all the jerseys on the field doesn’t make a winning rugby team. The most important aspect in relation to the role of the Chair is their ability to facilitate effective decision-making across the board, which will be a direct reflection of individual attributes and abilities. Tonello (2011) pushes the data collection envelope and finds ‘inherent limitations of separate, nonexecutive chairs’; and that the important issue for board effectiveness is the leadership style of the Chair and the board process, irrespective of duality status. His work compels the examination of the role, responsibilities and process by which a Chair is selected in order to obtain the desired capabilities and behaviors, suggesting that “being able to identify someone who possesses these competencies should inform the decision of whether or not to separate the chair/CEO roles”.

So, those of you who have not completely given up on human kind all together are likely to agree with Lynall, Golden and Hillman (2003) in that “it is not a matter of choosing one theoretical perspective over another but, rather of identifying under which conditions each is more applicable.” Hamilton and Elsayed (2007) agree, highlighting that CEO duality will benefit some firms while separation will be more advantageous for others. If an indiscriminate mandate forces boards to select a Chair simply to separate the role, it could be concluded that the objective to stifle the small proportion of self-seeking dual CEOs would be at the cost of flexibility of all firms to optimize their leadership structure according to changing conditions. Who is that protecting?

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