CEO Duality - Corporate Governance and Business Ethics

CEO Duality and Corporate Governance

A firm having its CEO also serve as the chairman of its board of directors (commonly referred to as CEO duality) has been identified as a fundamental conflict of interest by Boyd (1996) and Strier (2005). Despite the seemingly obvious conflict of interest of having the CEO lead the group that is monitoring his or her performance, there is no mandate from the SEC or the exchanges concerning whether this is allowed, and no law prohibits firms from having one person perform both duties. In fact, CEO duality has been quite common in the United States. Even though CEO duality is still quite common in the US, there is evidence that more firms are splitting the roles (Grinstein and Valles Arellano 2008). One possible reason for the reduction could be that firms are more sensitive to the potential conflict of interest this structure presents.

Even though CEO duality seems to be an obvious conflict of interest, the evidence on whether it actually hurts shareholders is mixed. Petra and Dorata (2008) find that splitting the roles increases the likelihood that CEO compensation will be kept in check. This supports the view that CEO duality increases the likelihood that managers (specifically, the CEO) will enrich themselves at the expense of shareholders. On the other hand, Faleye (2007) finds that firms appear to make the decision to have one person in both roles in a rational way. As a result, CEO duality works well for some firms but not for others. Specifically, more complex firms tend to benefit from CEO duality. Although this is not an exhaustive list of empirical studies on the impact of CEO duality, it is a sampling of the mixed evidence. As a result of the mixed evidence, it does not appear to be in shareholders’ best interests for regulators to mandate separating the two roles. However, less complex firms may want to voluntarily split these two roles to eliminate the perception that they are engaged in obvious conflicts of interest with little benefit to shareholders.

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