A,j<lpivy 1,1 M.inigrmcnl tXtCiniVl. 1989. Vol. III. Nv. 2. pp.

Ui-Ui
The Impact of CEO as Board Chairperson on
Corporate Performance: Evidence vs. Rhetoric
Paula L Rechner
University of Illinois at Urbana-Champaign
Dan R, Dalton
Indiana University
S
trongly worded reproaches against management aaivity
with respect to anti-takeover provisions, management-
initiated leveraged buyouts, and "crises" in director and
officer liability, among a host of other concerns, are com-
monplace. A cursory examination of leading business peri-
odicals indicates a very strong sentiment that management
often fails to meet its fiduciary duty to aa in the interests of
stockholders. Increasingly, shareholders, other activists, and
governmental agencies suggest perhaps "demand" would
be a better choice of words changes in corporate gov-
ernance struaures.
Point
A recurring criticism, for example, concerns the dual
role of CEO as board chairperson. There are those who
argue that this dual role represents a prima facie case of
conflia of interests. Given that one of the board's prime
charters is to monitor the performance of management,
there is some question as to whether a CEO/chairperson can
exercise the necessary independence of judgment for such
self-evaluation. It has been suggested, for example, that:
"A potential threat to the independence of the
board is the dual role of CEO as chairperson
The top managerial officer in the corporation,
therefore, is also the chairperson of the group
that is cftartered, among other things, to monitor
and evaluate the top managerial officer. Isn't it
reasonable to expect that, as board chairperson,
the CEO would attempt to influence other board
members^... An analogous potential for abuse
would exist if the President of the United States
served simultaneously as Chief justice of the
Supreme Court. "^
Evidently, others share this view:
"... the ties which board members will feel to the
CEO and their basic desire to be supportive are
compelling... [Tjhe intimidating power of the
chair, especially when occupied by a chief execu-
tive to v\/hom many on the board owe their direc-
torships and perhaps their livelihood, is a factor
which deserves serious consideration."'
As might be expected, however, there are those who
feel quite strongly otherwise: Not to have the CEO simul-
taneously serve as chairperson is thoroughly shortsighted.
Counterpoint
Much of the support for the CEO/chairperson dual
role is practically, perhaps reasonably, based. A clear issue is
one of control. It has been suggested, for example, that
"CEOs must direa the affairs of the corporation, serve as a
bridge between the board and corporate management...
and, above all, not be subordinate to anyone."^ (emphasis
ours) If the final responsibility for the conduct of the corpo-
ration rests with the CEO, then so must the authority. The
point has been persuasively made:
'The reason that positions of chairman and CEO
are usually combined is that this provides a single
focal point for company leadership. There is
never any question about who is boss or who is
responsible. This is an important issue... (other-
wise) ... this is guaranteed to produce chaos both
within the organization and in relationships with
the board."'*
141
May, 1989
Toward a "Fair" Hearing
This difference of view regarding CEO duality is
hardly a moot point, essentially restricted to an esoteric
group of organizations, Heidrick and Struggles, in their most
recent Chief Executive Officer profile of the Fortune 1000,
indicate that 54,1% of top officers hold the dual designation
"Chairman and CEO." In the larger industrials ($1 billion to
$1.9 billion sales volume), 75% serve in this dual capacity.
In the interest of fair reporting, however, it should be
noted that while the debate over CEO/chairperson roles has
been rich in rhetoric, there has been virtually no empirical
evidence brought to bear on this question.
The real, unaddressed issue is, "What difference does
it make?" Certainly, the suggestion is that the interests of
shareholders will suffer under the dual CEO/chairperson
model of governance. Are returns to shareholders less in
those organizations where CEOs acx as board chairperson
than in those organizations where these positions are held
separately?
The Study
The sample for this study consisted of companies
from the Fortune 500 group. The objective of this research
was to provide multiple-year comparisons of shareholder
returns for those companies with CEO duality versus those
with independent positions. (The variables of interest are
straightforward. CEO duality exists if and only if the CEO also
serves as chairperson. If different individuals serve in these
capacities, the roles are independent. This information was
derived from Standard and Poor's Register of Corporations,
Directors, and Executives.) To do this responsibly, it was
necessary to identify firms that experienced a stable gover-
nance structure; that is, CEO and chairperson were either
independent or were the same over the six-year period. The
result was a usable sample of 141 companies.
Stockholder return commonly relied on in the
economics, finance, and investment literature normally
comprises risk-adjusted, abnormal returns on common
stocks. This approach takes into account the effects of both
general market faaors and differential risk levels on security
returns. Thus, the measure reflects only those returns due to
firm-specific factors. The information used to calculate these
risk-adjusted abnormal returns was obtained from the Uni-
versity of Chicago's Center for Research in Security Prices
(CRSP) monthly price relative file.
Results
The objective of this study was to compare the share-
holder returns (from 1978 to 1983) of those companies with
CEO duality with the returns of firms with independent
roles. The results are interesting, even provocative: There is
no difference. Not only is there no significant difference
reflected over the entire six-year period, but there are no
such differences evident in any given year,^ in good years as
well as bad (higher/lower abnormal returns). Exhibit 1 pro-
vides a graphic illustration of these results. Indeed, for the
later years of the period, the abnormal returns to stock-
holders are actually marginally higher for companies with
CEOs filling the chairperson role. These higher levels, how-
ever, are not sufficient to be "statistically significant."
Discussion
That corporate governance is a legitimate area for
concern and even criticism is not at issue here. It is not
unreasonable to believe that there may be room for
improvement and reform. Indeed, there is ample evidence
that changes have been made and continue to be made in
this area. The proportion of outsiders now serving on boards
of directors is much higher than it was a decade ago. Board
auditing, nominating, and compensation committees are
now normally comprised solely of outside members.
We are uncomfortable, however, with the prospect
of board configurations being subject to legislation:
"... [CJovernmentaf intervention in the affairs of
the hoard is inappropriate and inconsistent with
the market system to which we have become
accustomed. Improved governance and account-
ability must lie in the strength of a firm's board of
directors, not in the halls of representative
government. "^
142
The Impact of CEO as Board Chairperson on Corporate Performance: Evidence vs. Rhetoric
While we have been as guilty as others at times, it
does not seem reasonable to base such robust criticism of
corporate governance on so little evidence. Frankly, it
appears that much of the effort and debate over whether the
CEO should simultaneously serve as chairperson may be
misplaced. The results indicate that for the Fortune 500 over a
six-year period, such a role does not impact shareholder
returns.
It should be noted, however, that these results do not
obviate all concerns about the dual role of the CEO/chair-
person, particularly if one's major concern is the potential for
abuses. Judges often disqualify themselves from trying a case
not because there will be a conflict of interests, but because
thereisaneed to avoid even the pofen(/a/for such behavior.
In addition, there is little justification for positing that
an "unethical" CEO/chairperson is necessarily an unprofit-
able one. The abuses in a dual-role organization may not
manifest in its financial performance, but in other areas.
Certainly, our results do not prove that the alleged conflict of
interest in the dual vs. independent role actually exists, or is
effective or otherwise. Nevertheless, the question of the
impact of this choice of governance structure on share-
holder wealth is potentially instructive.
There remain other, related questions regarding cor-
porate governance that might benefit from a data-based
inquiry. Does the percentage of outside members on the
board have an impact on shareholder returns? What is the
effect of SEC 6(b) relationships. These areas, too, have been
subject to much controversy. Attention to these and related
board issues may add a bit of substance to what has histori-
cally been an area of heated, but largely unexamined,
debate.
Endnotes
1. For an extended discussion of the potential limitations of existing
corporate board structures, see I. F. Kesner and D. R, Dallon, "Boards of
Direaors and the Checks and {lm)Balances of Corporate Governance,"
Business Horizons, 29(5), 1986: 17-23.
2. The Staff Report on Corporate Accountability provides an in-depth
review of critical corporate governance issues. See H, M. Williams, "Corpo-
rate Accountability and Corporate Power" (address), cited in Staff Report on
Corporate Accountability. Washington, DC: U.S. Government Printing
Office. 1960, p. 473.
3. A comprehensive overview of contemporary thought on the roles
and responsibilities of corporate directors is provided in P. A. Stoeberl and
B.C. Sherony, "Board Efficiency and Effectiveness," in E. Mattar (Ed.), Hand-
boolk for Corporate Directors. New York: McGraw-Hill, 1985, pp. 12.1-12.10.
4. C. A. Anderson and R. N. Anthony, The New Corporate Directors.
New York: )ohn Wiley & Sons, 1966. This book outlines current roles and
responsibilities of corporate directors. The authors also offer suggestions for
improving overall board effectiveness.
5. Results derived from repeated measures MANOVA (overall F = ,56,
ns). Univariate F-tests for all years also nonsignificant. Exact results available
from the authors by request.
6. Endnote 1, p. 23.
Paula L Rechner is assistant professor of strategic
management at the University of Illinois, Urbana-
Champaign. She received her Ph.D. from Indiana University
in 7986 and was avi/ardedan Alpha Kappa Psi fellowship for
her dissertation. Her research interests include corporate
governance, aids to strategic decision making, and executive
succession.
Dan R. Dalton is associate professor of management
and director of doctoral programs, Graduate School of Busi-
ness, Indiana University. Formerly with General Telephone
and Electronics (GT&E) for 13 years, he received his Ph.D.
from the University of California. His articles have appeared
in many business and psychology publications, including the
Academy of Management Journal, Academy of Manage-
ment Review, Journal of Applied Psychology, Strategic Man-
agement Journal, Journal of Business Strategy, Behavioral
Science, and Human Relations. He is the coauthor of Case
Problems in Management, Applied Readings in Personnel
and Human Resource Management, and the forthcoming
Absenteeism, Transfer, Turnover: An Interdependent Per-
spective. Professor Dalton is also a co-principal investigator
working on a five-year grant provided by General Motors
Foundation in the general area of personnel policy.
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