The Impact Of CEO Duality On Governance
The structure and dynamics of leadership play a pivotal role in shaping a company’s productivity. The concept of Chief Executive Officer (CEO) duality describes a situation where the CEO also serves as the Chairperson of the Board of Directors. Businesses are characterized by both ownership and management and the interplay between these two functions is critical for an organization’s sustainability.
Having the same person hold both the positions of CEO and Board Chair affects the company in multiple ways, which can be either beneficial or detrimental. Generally, separating the roles of the CEO and the Board Chair is considered best practice by many regulators, but should this be the case? This article explores the implications of CEO duality on corporate governance and delves into its potential benefits and drawbacks.
The roles of the CEO differ significantly from those of the Board Chair and under the CEO duality policy the person is required to carry out these roles simultaneously. The Board Chair often undertakes the role of leading and managing the Board of Directors in setting clear expectations for company culture, values and behaviours. Separately, the CEO sets and executes the organization’s strategy, allocates capital, and is ultimately accountable to the Board of Directors.
The history of CEO duality is closely tied to the development of modern corporate governance practices. The separation of the roles of CEO and Board Chair was not always a prevalent practice, and the evolution of CEO duality has been influenced by various factors over time.
In the past, the concept of separating the roles of CEO and Board Chair was not common. Often, the founder or a major shareholder would assume both positions, and the board of directors had a more advisory role. As corporations grew in size and complexity during the 20th century, the need for independent oversight and checks and balances became apparent.
The establishment of independent boards of directors gained traction to ensure that management decisions were subject to scrutiny and aligned with the interests of shareholders. The Cadbury Report played a critical role in advocating for separation of these roles in response to several corporate scandals. The report recommended that the roles be separated to enhance corporate governance and ensure an effective balance of power.
In the wake of accounting scandals like Enron and WorldCom, the United States passed the Sarbanes-Oxley Act, 2002 which introduced several reforms to strengthen corporate governance. While the Act did not specifically mandate the separation of CEO and Board Chair roles, it emphasized the need for independent board oversight.
Regionally, the King IV Report on Corporate Governance for South Africa 2016, reinforces the notion that good corporate governance is holistic. Principle 7 provides that the governing body (the Board) should comprise the appropriate balance of knowledge, skills, experience, diversity and independence for it to discharge its governance role and responsibilities objectively and effectively. Additionally, Principle 10 stipulates that the Board should ensure that the appointment of, and delegation to, management contribute to role clarity and the effective exercise of authority and responsibilities.
Many countries and stock exchanges introduced corporate governance codes and guidelines that encouraged companies to adopt best practices, including separating the roles of CEO and Board Chair for example, Mwongozo: The Code of Governance for State Corporations in Kenya, 2015. Institutional investors and shareholder activism started to wield more influence over corporate governance practices and often advocated for splitting the roles of CEO and Board Chair as part of efforts to promote better governance and protect shareholder interests.
Some of the main concerns are: CEO duality concentrates a significant amount of power in the hands of a single individual. This concentration of power can lead to potential abuses, lack of checks and balances, and decisions that may not always be in the best interest of the company and its stakeholders.
There is a lack of Independence. The separation of roles typically ensures a degree of independence in the boardroom. The CEO may have significant influence over the board, which could compromise its ability to provide effective oversight and challenge management decisions objectively.
There is reduced accountability and oversight. When roles are combined, it may be challenging for the board to hold the CEO accountable for their actions and decisions effectively. This can hinder the effectiveness of corporate governance mechanisms that aim to ensure the CEO acts in the company’s best interests.
CEO duality can create potential conflicts of interest, as the CEO may prioritize their interests over those of other shareholders and stakeholders. Such conflicts could result in decisions that benefit the CEO personally but are detrimental to the company’s long-term prospects. For example, the board directors often vote on any potential pay increases for senior management. The CEO being the Board Chair creates conflict of interest as they would essentially vote on their own benefits and allowances.
The decision-making process may become less transparent and inclusive. Important decisions may be made without appropriate oversight, leading to strategic mistakes or risky behaviors that could harm the company’s performance.
Companies with CEO duality may face greater scrutiny from investors and may find it harder to attract and retain investors who value strong corporate governance and prefer a clear separation of roles.
CEO duality can complicate the process of CEO succession planning. When the CEO also serves as Board Chair, there may be a lack of independent oversight in choosing a suitable successor, potentially leading to suboptimal decisions about leadership transitions.
In recent years, there has been a growing trend towards separating the roles to enhance corporate governance practices and increase accountability. However, some scholars argue that the appropriateness of CEO duality should be assessed on a case-by-case basis, considering the unique dynamics of each organization.
For instance, in family-owned businesses some argue that due to complex family dynamics, having a CEO who is also the Board Chair may lead to a better understanding of these dynamics, leading to better conflict resolution. Additionally, family-owned businesses are often driven by long-term goals, thus some argue that CEO duality would foster a focus on the company’s sustained growth and legacy rather than short-term gains.
Another sector affected by CEO duality is small and medium-sized enterprises (SME). These businesses operate in highly competitive markets and may argue that CEO duality assists in swift decision-making processes, especially when the CEO has a deep understanding of the business’s intricacies. Some argue that for SME’s the combination of CEO and Board Chair roles may enhance the alignment of strategic vision, as the CEO’s perspective on the business is directly integrated into the board’s decision-making process.
Regardless of the board structure and these perceived advantages, it is crucial for companies to prioritize transparency, accountability, and independent oversight in their governance practices to safeguard the interests of all stakeholders.
SME’s and Family-owned businesses may optimize corporate governance and mitigate the impact of CEO duality by: Appointing independent directors to the board who can help provide unbiased oversight and act as a counterbalance to the CEO’s influence; Creating specialized committees like audit, remuneration, and nomination committees can foster better governance practices and ensure a systematic approach to critical decisions; Enhancing transparency in decision-making by disclosing of potential conflicts of interest and Developing a robust succession plan that considers external candidates for the CEO position to promote a diverse leadership team and ensure a smooth transition.
The impact of CEO duality on corporate governance is a question of balancing risk and reward. While the practice may expedite decision-making and foster unity of vision, it also raises concerns about accountability, transparency, and the independence of the board. By implementing prudent governance mechanisms, businesses can strike a balance that harnesses the benefits while safeguarding against potential drawbacks, thus increasing the likelihood of long-term success and sustainability.