Firms’ Rationales for CEO Duality: Evidence from a Mandatory Disclosure Regulation

Firms’ Rationales for CEO Duality: Evidence from a Mandatory Disclosure Regulation

Marc Goergen, Peter Limbach, Meik Scholz-Daneshgari

April 10 2019

CEO duality – the practice of combining the roles of the CEO and chairman of the board – has been the topic of one of the longest debates in corporate governance. While a majority of firms in the S&P 500 index combine the two roles, there is frequent pressure on firms from investors and governance experts to separate the roles. Yet, many shareholder proposals pushing for this separation do not receive majority support, indicating disagreement among shareholders about the value of CEO duality. Such disagreement is consistent with the inconclusive literature on the relation between CEO duality and firm performance (for a review, see e.g. Krause, Semadeni, and Cannella, 2014). Hence, there is a need to better understand why firms combine or separate the roles of the CEO and chairman.

Our paper exploits a 2009 amendment to Regulation S-K requiring public firms to disclose the reasons for combining (separating) the roles of CEO and chairman. We provide unique evidence on S&P 500 companies’ first-time disclosure of the reasons behind their board leadership structure. Thereby, we improve our understanding of why firms have opted for or against CEO duality. To assess the value implications and informativeness of the stated reasons, we also examine the stock market reaction to firms’ disclosures.

The proxy statements filed with the Securities and Exchange Commission (SEC) enable us to we identify 24 (22) distinct reasons for combining (separating) the two roles. We find that the main reasons firms state for their leadership structure are consistent with both agency theory and the theories of resource dependence and stewardship. Specifically, regarding the justifications for combining the two roles, 56% of the firms cite “Unified leadership”, arguing that having a CEO-chairman ensures clear and consistent leadership, directional clarity, and effective decision-making. Another 46% state that combining the two roles allows them to lever the CEO’s in-depth knowledge of the firm and its operations. Turning to non-duality firms, 33% of such firms report that they separate the two roles given the inherent differences between the tasks and roles of the CEO and chairman. Further, 30% of firms state that having a separate chairman facilitates managerial oversight.

Our textual analysis suggests that firms with CEO duality report significantly more distinct reasons and use more words, including more positive and negative ones. These patterns indicate that firms are aware of the controversy surrounding CEO duality and, hence, cater to investors’ needs for more information regarding their specific reasons for having duality.

Finally, the study of the stock market reaction to firms’ first-time disclosure of their reasons for their adopted leadership structure suggests that these reasons differ with respect to their informativeness for investors and that CEO duality has implications for shareholder value. While the stock market reaction to the disclosure of most reasons is statistically insignificant, it becomes significant to the most frequently stated reason for CEO duality, i.e., “Unified leadership”, once the characteristics of the firm are taken into account. That is, the market reaction is significantly negative for large and complex firms, which have more resources to waste and are more difficult to monitor. Conversely, it is significantly positive for small and less complex firms and for firms in more competitive and dynamic environments. For these firms, having unified leadership via a combined CEO-chairman – who can make decisions more effectively – is likely more valuable, whereas monitoring is less valuable. We find little evidence of a significant market reaction to the disclosure of the reasons for the less contentious choice of separating the two roles. This result is in line with less need from investors to obtain information about why firms separate the two roles.

To sum up, our study is the first to present evidence on the reasons that firms state for their board leadership structure. The results of our study suggest that the stock market considers a “one-size-fits-all” approach to CEO duality inappropriate.


Real name: 
Peter Limbach
University of Cologne and Centre for Financial Research (CFR)
Real name: 
Meik Scholz-Daneshgari
Karlsruhe Institute of Technology