To Split or Not to Split?

A rash of corporate financial scandals in the past decade left many governance mechanisms under fire. One in particular that became a target of shareholders was the chief executive officer (CEO) also serving as the company’s chairman of the board – a structure some believe allows the CEO to effectively be his or her own boss.

Often over the objection of the board, shareholders forced numerous firms to split the roles. But, considering that historically 80-85 percent of firms have combined the CEO and chair roles, can duality really be that bad?

Assistant Professor Aiyesha Dey and her co-authors Ellen Engel (University of Chicago) and Xiaohui Liu (University of Texas, Dallas) sought to examine the implications of combining and splitting the CEO and chair roles and discovered that, as with so many things, there isn’t a one-size-fits-all answer.

In their study, the researchers examined what factors help determine why a firm decides to combine rather than separate the roles. They found, among other things, that firms with complex operations and/or the presence of powerful, established CEOs tended to opt for the dual role. Companies that weren’t as focused on research and development were more likely to split them.

Dey and colleagues then linked these factors to performance consequences of firms that were forced to split the roles to test what happens when firms that should have a combined leadership structure are forced to separate the two roles.

 “We found that the firms that were forced to separate the roles of the CEO and the chairman performed worse immediately following the announcement of the split and afterward,” says Dey. “In particular, the firms where the economic factors suggested they should have the roles combined did much worse.”

Dey hopes her research, which was the first to document a link between economic determinants of board leadership structures and the corresponding performance consequences, will prevent shareholders and investors from imposing blanket governance rules on firms.

“You need to think about firm-specific costs and benefits when deciding which leadership structure is better,” adds Dey.

“Sarbanes-Oxley has already mandated a list of checks and balances and you have independent lead directors who hold executive meetings even when the CEO is the chair. If you have a CEO who has a proven track record, let the CEO lead the firm with vision and expertise,” she says.