Combining the roles of the CEO and the chair of the board of directors is typically referred to as CEO duality. Whether CEO duality is good or bad for shareholder value is not entirely clear. According to agency theory, combining the two roles in one person gives too much power to the CEO while weakening the board of directors and this can result in the destruction of shareholder value. On the other hand, resource dependence and stewardship theories suggest that CEO duality results in a more unified and improved leadership, which is particularly helpful for firms that benefit from quick decision making in highly competitive and fast changing environments. Similarly, opinions vary about the practice of CEO duality depending on country. For example, nearly half of the S&P 500 firms in the United States combine the two roles, but CEO duality in the United Kingdom is largely discouraged by successive codes of best practice and large institutional investors. As a result, only about 15% of UK-listed firms have CEO duality. Germany is even more radical and prohibits CEO duality altogether.
This year, Emmanuel Faber stepped down from his dual role as chairman and CEO of Danone, the multinational food company that was founded in Barcelona and is now based in Paris. After joining the company in 1997, Faber became Danone’s CEO in 2014 and then also became the chair of the company’s board of directors in 2017. The thinking behind this was that combining the two roles in the person of Emmanuel Faber would lead to quicker decision-making in an industry that was experiencing major changes. In fact, CEO duality was not a new practice for Danone; only three years prior, in 2014, the roles had been split when Franck Riboud, the founder’s son, passed the role of CEO onto Faber but remained as chairman on the board.
Faber was certainly a leader who set his mark on Danone, particularly with his focus on creating long-term value for the company and a return to stakeholder capitalism. In June 2020, Faber proposed a change to Danone’s articles of association, making it an “entreprise à mission” or a company with a purpose. His proposal received the approval of 99% of Danone’s shareholders. With this change, Danone officially moved away from simply maximizing shareholder value by committing itself to look after its customers, suppliers, and employees. CEO duality was without a doubt a factor in helping Faber push ahead with this major strategic change.
Ultimately, Faber had to step down from his role of CEO-chair because of his lacklustre performance and a downward sliding share price, and by some reports Faber was ousted from his job by activist shareholders. However, it is important to note that Faber’s emphasis on stakeholders was never put into question – and this might be why Danone’s initial response to the shareholder unrest was to offer to separate the roles of the CEO and chair so that Faber could remain as chairman. Yet, in the end, Faber was dismissed from both roles (though he seems not to have resigned from his position on the board of directors.) While it is still early days, Danone’s share price has been on a sustained upward trajectory since the shareholder upheaval started.
Most shareholder proposals calling for the separation of the two roles fail to receive the support of a majority of the shareholders.
Faber’s was certainly not the first high-profile CEO duality case to come under scrutiny. But not all dual CEO and chairman roles are successfully separated. Take the example of Johnson & Johnson (J&J). The pharmaceutical company was targeted by one of its shareholders, Trillium Asset Management, in 2020 with the call to separate the CEO and chairman roles held by Alex Gorsky. Trillium Asset Management argued that dividing the two roles would ensure a balance of power between the CEO and the rest of the board and that this was particularly essential during such a critical time when J&J was facing a multitude of lawsuits. Unlike Faber, however, Gorsky managed to hold on to his CEO duality and still assumes both roles.
It’s interesting to note that Gorsky is not the exception, but the rule. Most shareholder proposals calling for the separation of the two roles fail to receive the support of a majority of the shareholders. And existing research backs this, with most studies being inconclusive on the link between CEO duality and firm performance, regardless of whether that performance is bad or good.
With my colleagues Peter Limbach of the University of Cologne and Meik Scholz-Daneshgari of Karlsruhe Institute of Technology, I investigated the reasons S&P 500 firms in the United States gave for either combining or separating the roles of CEO and chairman of the board. Fifty-six percent of the firms surveyed combined the two roles for the purpose of unified leadership, implying that CEO duality results in a more consistent direction and allows for quicker decision-making. The second most frequently stated reason (46% of the firms) for combining the two roles is that CEO duality leverages the CEO’s knowledge of the firm. Finally, 23% responded that CEO duality creates a bridge between the management and the board of directors, thereby improving the flow of information between the two.
What about the reasons behind separating the two roles? One-third of the firms in our study stated that separating the CEO and chairman roles makes sense as they are inherently different, while another 30% replied that the separation facilitates the monitoring of the management. Twenty-two percent responded that this separation makes it easier for the CEO to focus on managing the firm.
The stock market as a whole tends to adopt a nuanced approach when evaluating the link between board leadership structure and firm performance.
A textual analysis also revealed that firms with CEO duality tended to state two reasons – rather than just one as this was the case for firms without CEO duality – to justify their choice and used significantly more words as well as using more positive words. These patterns suggest that firms with CEO duality were aware that combining the two roles goes against what is perceived to be best practice and were therefore on the defensive.
So, how did the stock market react when these S&P 500 firms disclosed the reasons, for the first time, behind either combining or separating the CEO and chairman of the board roles? In this respect, the characteristics unique to that firm and CEO seemed to matter. For large and complex firms, the market’s reaction to the “unified leadership” reasoning was negative, which suggests that investors worried that combining the two roles would lead to a waste of shareholder funds. The market seemed to be concerned that the costs from unified leadership outweighed the benefits. However, when small firms, high-growth firms, and high-tech firms claimed “unified leadership” as the reason for CEO duality, the market reacted positively, signaling that the benefits outweighed the costs.
While the separation of the roles of the CEO and chair is considered best practice by regulators and large investors, our research findings reveal that it is not so clear cut. In fact, the stock market as a whole tends to adopt a more nuanced approach when evaluating the link between board leadership structure and firm performance: what might be considered bad practice in some contexts might very well create shareholder value in others. Thus, when it comes to CEO duality, companies and their stakeholders should consider the firm’s specific context and leadership before making the strategic decision to either combine or separate the two roles.
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