Similar to other board composition variables i.e., size and independence, CEO-duality and its impact on firm performance has attracted intensive attention of the mainstream academic literature in the previous years. The term Board-duality refers to the situation where the board’s chairman is performing as the CEO at the same time in firms.
In fact, board-duality seems to be a wide phenomenon in business life in the old days. For example, during the 1980s and beyond, the global economy appears to have caught up in what is described as “board-duality”. Brickley et al., (1997) report that in 1988 the percentage of firms in Forbes executives’ compensation survey that had one person filling both posits was 80.9%.
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Moreover, Dahya et al., (2009) assert that board-duality was the dominant leadership structure theme in firms around the world until the 1990s. 74.4% of American firms were having the same person holding both positions, where in the Continental Europe the percentage was nearly 60% of firms having board-duality. However, recent surveys showing that the CEO/Chairman convergence has been dropped significantly. For example Favaro et al., (2010) stated that in 2009 the percentage of firms holding the term board-duality fallen to 16.5% in north America, and to 7.1% in Europe as stated in (Byrd et al., 2012).
It is arguably that these significant changes were driven by the corporate governance recommendations posits by the Cadbury report in 1992in the UK, and/or the Sarbanes-Oxley Act of 2002, and other seminal empirical findings on its negative effect on performance (Duru et al., 2016). The Cadbury report recommend that the positions of the CEO and chairman must be held by two different individuals. An underlying theoretical justifications of this recommendations is that, board with different candidates holding both posits separately will help in improving the quality of monitoring and hence, enhance corporate financial performance (Dahya et al., 2009). Other scholars have has come to a conclusion that having board-duality is similar to the function of “CEO grading his own homework” (Brickley et al., 1997: 190).
Theoretically, there are two-main dominant perspectives on duality’s performance effect. The effect of board-duality on firm performance is expected to be negative under the agency theory. When the CEO has extensive power i.e., dominate the firm board by having chairman positon, this will reduce the board effectiveness and ability in controlling managerial self- opportunistic behaviours, which in terms may reduce firm performance (Jensen & Meckling, 1979; Fama & Jensen, 1983; Jenson, 1993). On the other hand, stewardship and resource dependence theory argue that duality promotes more focused and flexible leadership which facilitates organizational effectiveness in a potentially dynamic business environment, which in terms may increase firm performance (Donaldson & Davis, 1991; Pfeffer & Salancik, 1978).
The empirical literature examining the effect of board-duality on firm performance yields mixed results and inconsistent findings (Byrd et al., 2012; Dalton & Dalton, 2011; Dahya et al., 2009). One reason could refer to the mixed evidence in corporate financial literature is that board of directors’ structure may be endogenously related to corporate financial performance (Brickley et al., 1997). Wintoki et al., (2012) provide evidence that board-duality variable is a subject to the past firm performance, and hence it not affecting firm performance. Yang & Zhao, (2014, p.536)
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stated that “it is not theoretically obvious whether dual or separate leadership is more beneficial to firm performance. Therefore, the efficacy of CEO duality is an empirical question”. However, empirical evidence on the relationship between board-duality and firm performance seemed to be mixed also.
Byrd et al., (2012) utilize the thrift crisis of the late 1980s to examine the influence of CEO- duality on corporate financial performance using US financial-companies’ data. They found that, during thrift crisis firms that combine the role of the chairman and CEO were significantly more likely to survive and resist the crisis than firms that separate those roles into independent CEO and independent chairman. According to their study, one underlying assumption to these results was the restricted lending policies that those financial firms adopt during the thrift crisis in the US market at that time. Lam & Lee, (2008) argue that neither agency theory nor stewardship theory alone can explain the board-duality influence on corporate financial performance. Accordingly, they assert that relationship between board–duality and corporate financial performance is contingent on the presence of the family-control factor. Thus, their results revealed that board- duality improves corporate financial performance in non-family firms while it decreases financial performance for family-controlled firms. One explanatory factor is that in family-controlled firms the ownership structure is quite different than those of non-family firms. Concentrated ownership structure may have different implications on the board of directors’ composition and firm’s leadership structure.
In Egypt as a country of the MENA region, Elsayed, (2007) report that board-duality has no effects on corporate financial performance. Similarly, Dahya et al., (2009) fail to find any performance differences between firms splitting the combined Board/CEO roles with other firms adopting board-duality leadership structure. However, Elsayed, (2007) highlighted the importance of the industry classification as it seems to have significant implications on the relationship between board-duality and corporate financial performance. After controlling for industry classifications, the results were to support the agency and stewardship theoretical assumptions concluding that board-duality negatively affects corporate financial performance in Egypt. Carty & Weiss, (2012) show that no correlation between board-duality and banks’ failure was found. Meta-analysis on 31 articles by Dalton et al., (1998) find that CEO duality does not affect firm performance. In fact, the empirical evidence associated with this issue seems to be inconclusive and exclusively related to developed markets experience such as USA (Elsayed, 2007; Wahba, 2015).
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In fact, the empirical evidence associated with this issue seems to be inconclusive and exclusively related to developed markets experience such as USA (Elsayed, 2007; Wahba, 2015). Thus, literature associated with board-duality issue is in general limited and in emerging markets is dearth. This research adds to the literature by analysing the impact of CEO-duality on firm performance using a new framework –Dynamic System GMM− that mitigates the endogeneity problem in such relationship. Given that family ownership is prevailing in the MENA context, it is expected that CEO-duality has negative implications on firm performance under the entrenchment assumptions. Accordingly, the below hypothesis can be formulated as the following:
𝐇𝐲𝐩𝐨𝐭𝐡𝐞𝐬𝐢𝐬𝟓: There is a negative link between board duality and firm performance.