The Code (FRC 2016a) outlines some key principles that UK companies need to comply with or explain why they are departing from them. There should be a split role for the CEO and chair, so no one person can dominate the whole company, where the CEO is responsible for the direction of the company and the chair is responsible for the direction of the board. Johnson, Magee, Nagaranjan and Newman (1985) found that the sudden death of the founder of a company had a positive impact on the share price. Johnson et al (1985) explained this by suggesting that it could be because of founders’ influence over the company and their ability to set their pay. However, the impact of the death may not have been the only factor to influence the positive share price movement, as Johnson et al (1985) found that often founders also had large ownership stakes in the firm, thus the share price movement could have been because of this too.
There are two arguments about duality of the CEO and chair, one that if the CEO and chair are the same, there is less balance to the board of directors (Jensen and Meckling, 1976),
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also there is potential to be misused the power, and splitting the roles helps prevent too much control vested in one individual Lipton and Lorsch (1992). The counter argument is that the duality in leadership enhances the ability of the leader to make faster decisions in a fluid business environment (Yang and Zhao, 2014). Jensen and Meckling (1976) suggested that with separation of CEO and chair, it limits the extent that there are managerial entrenchment and opportunism. Duru, Iyengar and Zampelli (2016) finds that in a study based on data from the US from 1997 to 2011 that CEO duality has a negative and significant impact on operating performance, when there is a smaller proportion of
independent directors on the board, moreover, when the proportion of independent board directors rose it mitigated the negative effects of CEO duality. However, other research has found different results with Boyd (1995) identifying no association between CEO duality and firm performance. Boyd (1995) however finds with further examination of the type of business/environment there was significance association, with firms operating in environments with scarce resources (e.g. steel industry) there is a positive association between firm performance and CEO duality, this is the same as when Boyd (1995) examines firms with complex business environments which also has a positive association. However, Boyd’s (1995) data is from 1980 and 1988, and there were many revisions to ‘The
Code’/Combined Code since then, thus the results from older research may need to be treated with caution. Baliga, Moyer and Rao (1996) find similar results to Boyd (1996) that duality is not detrimental to business performance. Baliga et al (1996) examine the impact the announcement of changes in duality has on share prices, where it is expected that a change from duality to non-duality should have a positive effect and where non-duality to duality would have a negative effect, however, neither impacted the share price
significantly. Baglia et al (1996) also test for the impact of the change in duality on operating performance in the short-term and again the results are insignificant, however, the long term operating performance did show the positive effect of a change in duality, although the results were weakly significant. Although at the time of study there was almost no major firm in the US in 1988 had an independent outside chair (Brickley, Cole and Jarrell, 1997) where over 80% of firms had duality of CEO (Yang and Zhao, 2014) this might mean that evidence from the different decades may yield different results, as there are more cases of independent outside chair in the US now. Larker and Tayan (2016) find that from the top 92 firms and bottom 95 firms in the S&P 1000 in 2015 that 61% of these firms have CEO duality,
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where the top 100 firms had 69% duality and smaller firms has 53% duality. The results were similar in a more recent study by Cornett, Marcus, Saunders and Tehranian (2007) who finds there is no significant relationship between ROE and CEO duality with data from the S&P 100 firms from 1993 to 2000.
Finkelstein and D’Aveni, (1994) find that CEO duality is less likely to occur in high performing firms with vigilant boards, where vigilant boards are classified by the proportion of outside directors, for chemical and computer industry from the Fortune 500 companies in 1984 and 1986. Consistent with these results, Elsayed (2007) finds that when corporate performance in a sample of Egyptian firms is poor, CEO duality is more likely, as a means to improve corporate performance.
Yang and Zhao (2014) support the view that dualities benefits/costs depend on the business environment, as the exogenous shock of the 1989 Canada-United States Free Trade
agreement is tested. Where Yang and Zhao find that duality firms outperform non-duality firms by 3-4% when their competitive environments changed, suggesting that duality saves the costs of information and helps make speedier decisions. Whereas, Sharma (2004) find that duality of CEO had a positive association to the likelihood of fraud and when firms have high institutional ownership this also has a positive association to the likelihood of fraud. The evidence in favour of splitting the roles of CEO and chair is somewhat mixed on how it influences performance. It was suggested that the benefit of having CEO duality is that decisions are made quicker (Yang and Zhoa, 2014), as when there is an economic shock firms’ with duality recovered quicker. Both Duru et al (2016) and Boyd (1995) find that duality has a positive effect on performance, however, Boyd (1995) find this is for more complex firms. Others find that there is no signification association between CEO duality and performance (Baliga et al, 1996; Cornett et al, 2007). However, Sharma (2004) find that when there is CEO duality there is a positive association with the number of frauds. When there is CEO duality corporate governance tended to be poorer (Finkelstein and D’Aventi, 1994; Elsayed, 2007).
Overall, the problem of CEO dominance when the role of CEO and chair are not split identified in The Code (FRC, 2016a) are not present in the academic literature on CEO duality and firm performance (Yang and Zhoa, 2014; Duru et al, 2016; Boyd 1995; Baliga et
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al, 1996; Cornett et al, 2007), however, CEO duality has a negative effect on over corporate governance and instances of fraud (Finkelstein and D’Aventi, 1994; Elsayed, 2007; Sharma; 2004).