According to organizational theory, this CEO duality can establish strong,
unambiguous leadership . By consolidating two of the most prestigious offices in
a company stakeholders are often reassured, because it clarifies decision-making
authority . ‘An additional problem with nonduality is that it weakens and
disrupts CEOs ability to manage the task environments their organization faces.
For example, several laboratory studies suggested that the participation of
constituencies who review negotiator action lead to less effective and more
difficult negotiation processes. As a result, “The reasons the positions of
chairman and CEO are usually combined is that this provides a single focal point
for company leadership”(Anderson/Anthony)’ A powerful and effective CEO creates
an image of stability and instills a sense of well being to its employees as
well as its shareholders, projecting a clear sense of direction. III Negative
aspects of CEO Duality When a company’s chief executive officer is also the
chairperson of its board, directors often have contrary objectives . Boards of
directors are charged with ensuring that Chief Executive Officers (CEO’s) carry
out their duties in a way that serves the best interests of the shareholders.
Therefore, the Board of Directors maintains equilibrium between CEO and
shareholder interests. ‘Two theories have been put forth to explain why a firm
would adopt a dual leadership structure.
Fama and Jensen (1983) suggest that the leadership structure of the firm can
help control the agency problems created by the separation of residual risk
bearing and control typically found in most corporations. More specifically,
they believe that the separation of the decision management (initiation and
implementation of investment proposals) and decision control (ratification and
monitoring of investment proposals) functions within a firm reduces agency costs
and leads to enhanced firm performance. At the apex of the leadership structure,
this means that the highest-level decision management agent (the CEO) should not
control the highest-level decision control structure (the board of directors).
As the chairman of the board has the greatest influence over the functioning of
the board, Fama and Jensen's theory implies that the effective separation of
decision management and decision control requires that the chairman of the board
must not also be the CEO of the firm. Further, if Fama and Jensen are correct,
firms that switch to a dual leadership structure should experience an
improvement in performance following the leadership structure change.’ ‘Other
authors, however, found that separating the chair and CEO positions led to
improved firm performance. Rechner and Dalton (1991) used three accounting
measures of profitability to investigate the performance of a sample of Fortune
500 firms that maintained the same leadership structure from 1978 through 1983.
These authors found that firms with a dual leadership structure consistently
outperformed firms with a unitary leadership structure. Pi and Timme (1993)
found some evidence that banks with a dual leadership structure were more
profitable and were more cost efficient than firms with a unitary leadership
structure.’
Agency theorists view the board of directors as a type of checks and balances
system, similar to that of our government. Agency theorists are typically
opposed to CEO duality, whereas organizational theorists offer more support. It
has been reported that a vigilant and conscientious board is made up of
independent outside directors, otherwise unaffiliated with the company other
than that they hold large sums of that company’s stock. ‘Outside directors are
more vigilant than directors with other firm affiliations because (1) they focus
on financial performance, which is a central component of monitoring. (2) They
are more likely than insiders to dismiss CEOs following poor performance, and
(3) protecting their personal reputations as directors gives them incentive to
monitor.
