CEO Duality Essays, Book Reports, Term Papers

This essay CEO Duality Essays, Book Reports, Term Papers has a total of 1884 words and 12 pages.

CEO Duality October 22,1999 Term Paper Separating the Board Chairperson and Chief Executive Officer: Pro and Con By: Danielle Thomas & Rebecca Hundley I Introduction Numerous reports on corporate governance have emphasised the desirability of increasing the number of outside directors on boards. An equally important and related issue is a growing insistence that the role of chairman and chief executive should be separate, though on this issue there is less unanimity in the U.S. than in other countries. Choosing the right Chief Executive officer is the key task for the board of directors. Pressure on chief executives to perform in ever decreasing time frames makes it essential that the CEO and the Board work closely together. An effective chief Executive will drive company strategy, lead the top team and fulfill shareholder ambitions . A good CEO will transform Board dynamics by keeping an open line of communication, placing a high value on Board input, and promoting the belief that management and the Board is working toward common goals. The average Board size is between eight and nine members. It used to be that Boards were constructed of executives with one or two non-executives; but trends are swiftly driving executives out of the boardroom as even the CEO’s familiar role as chairman has been called into question. There has been a notable shift from executive director to non-executive director in the boardroom. The supposed advantages to these changes are to provide greater board independence from management, greater objectivity, and a representation of multiple perspectives. Bosch believes that the fundamental principle underlying this composition is accountability; if you have strong independent directors, a separation of the Chair/ Chief executive role will safeguard accountability . An opinion widely held is that separating the role of chairman from chief executive- would secure a board sufficient power to challenge CEO dominance. Although in many cases that rationale holds true, there are considerable benefits to CEO duality. Researchers have suggested that chairman/chief executive duality is a double-edged sword . While some stockholders are put off by the absence of board control and checks and balances, others are reassured by the presence of unity of command and the absence of potentially acrimonious conflict between strong-minded individuals. Finkelsein and D’Aveni found that a major factor in divining the success of this duality was the level of CEO informal power. ‘Either perceptual or objective data can be used to measure informal CEO power. Although some researchers have used perceptual measures of power, power is a sensitive subject for many managers. In using perceptual measures, a researcher assumes that social actors are knowledgeable about power within their organizations; informants are willing to divulge what they know about power distributions; and such a questioning process II Advantages of CEO Duality When it comes to insiders versus outsiders on the board, a predominant role for insiders finds support more often, probably because insiders are more familiar with the issues, the technology, and the practice of the firm . Only they who are deeply involved and can make it work add value. It is simply not viable for twice removed outsiders, no matter how expert, to provide anything other than a cursory perspective and maybe act as an eventual deterrent to abuses of executive power. According to organizational theory, this CEO duality can establish strong, unambiguous leadership . By consolidating two of the most prestigious offices in a company stakeholders are often reassured, because it clarifies decision-making authority . ‘An additional problem with nonduality is that it weakens and disrupts CEOs ability to manage the task environments their organization faces. For example, several laboratory studies suggested that the participation of constituencies who review negotiator action lead to less effective and more difficult negotiation processes. As a result, “The reasons the positions of chairman and CEO are usually combined is that this provides a single focal point for company leadership”(Anderson/Anthony)’ A powerful and effective CEO creates an image of stability and instills a sense of well being to its employees as well as its shareholders, projecting a clear sense of direction. III Negative aspects of CEO Duality When a company’s chief executive officer is also the chairperson of its board, directors often have contrary objectives . Boards of directors are charged with ensuring that Chief Executive Officers (CEO’s) carry out their duties in a way that serves the best interests of the shareholders. Therefore, the Board of Directors maintains equilibrium between CEO and shareholder interests. ‘Two theories have been put forth to explain why a firm would adopt a dual leadership structure. Fama and Jensen (1983) suggest that the leadership structure of the firm can help control the agency problems created by the separation of residual risk bearing and control typically found in most corporations. More specifically, they believe that the separation of the decision management (initiation and implementation of investment proposals) and decision control (ratification and monitoring of investment proposals) functions within a firm reduces agency costs and leads to enhanced firm performance. At the apex of the leadership structure, this means that the highest-level decision management agent (the CEO) should not control the highest-level decision control structure (the board of directors). As the chairman of the board has the greatest influence over the functioning of the board, Fama and Jensen's theory implies that the effective separation of decision management and decision control requires that the chairman of the board must not also be the CEO of the firm. Further, if Fama and Jensen are correct, firms that switch to a dual leadership structure should experience an improvement in performance following the leadership structure change.’ ‘Other authors, however, found that separating the chair and CEO positions led to improved firm performance. Rechner and Dalton (1991) used three accounting measures of profitability to invest

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