Two divergent theories emerge from the literature on CEO duality. The agency theory advocates that a dual CEO negatively affects corporate performance, because it compromises the monitoring and control of the CEO, whilst the stewardship theory suggests the contrary effect due to the unity of command it presents. For a sample of 26 non-financial listed Portuguese firms from 2002 to 2016, this study draws on agency and stewardship theories to evaluate the relationship between CEO duality and firm performance, proxied by Tobin's Q. Using ordinary least square (OLS) and two stage least squares (2SLS) techniques to control potential problems simultaneity between CEO duality and firm performance, the author finds a negative relationship between CEO duality and Tobin's Q. This suggests that investors perceive no value in having a concentration of power with a dual leadership structure. Therefore, this study recommends that the positions of chairman and CEO should be separated for listed Portuguese firms.
TopIntroduction
Whether dual leadership structure is better for corporations is one of the most controversial topics in corporate governance literature. The board leadership structure, as it relates to whether the chief executive officer (CEO) and chairman position is combined or held by separate individuals, is an important and visible instrument of CEO power over the board. The effectiveness of the board fulfilling its monitoring and disciplining functions depends on CEO power relative to the board (Finkelstein, Hambrick, & Cannella, 2009). Therefore, the decision to adopt CEO duality or non-duality is a vital internal governance decision regarding the power structure of the firm and determines the ability of the board to fulfill its monitoring role (He, 2008).
Regulators and governance activists are pressuring firms to abolish CEO duality. Although CEO duality is considered an impediment to good corporate governance, it remains common practice in Portugal. In fact, CEO duality is observed in the majority (56,6%) of Portuguese listed companies in analysis. Consequently, CEO duality continues to exist and an examination of the consequences is relevant and valuable. In addition, the code of corporate governance for listed firms in Portugal is silent on whether the CEO should (or should not) be appointed as the board chair. It is therefore important for Portuguese firms to be aware of the likely performance outcomes from adopting the dual leadership structure.
Drawing on agency and stewardship theories, this study aims to evaluate the impact of CEO duality on firm performance for a sample of listed Portuguese firms from 2002 to 2016. Additionally, it is also examined whether firms that changed their leadership structure from duality to non-duality have differences in firm performance. Agency theory suggests that combining the two positions would constrain board independence and weaken board control, implying a negative effect on firm performance. Duality roles allow CEOs to dominate the board of directors, and they provide them with an opportunity to satisfy their own individual objectives in lieu of the best interests of its shareholders (Abels & Martelli, 2013). This also suggests that, firms that switch to a non-dual leadership structure should experience an improvement in performance following the leadership structure change. In contrast, stewardship theory argues that duality promotes strong, unambiguous leadership which facilitates organizational effectiveness in a potentially dynamic business environment (Finkelstein & D’Aveni, 1994). In addition, CEO duality leads to a considerable firm-specific knowledge and experience retained by the CEO. The cost of transferring this knowledge to a separate chairman of the board is high (Brickley, Coles, & Jarrell, 1997). Therefore, combining the two roles avoids these costs and should therefore improve corporate performance. Consequently, according stewardship theory, firms that switch to a non-dual leadership structure should experience no improvement in performance following the leadership structure change.
The choice of Portugal as research context is motivated by a number of reasons. The majority of literature on CEO duality and firm performance to date has been conducted in the Anglo-American context, characterized by dispersed ownership. Thus, board leadership issues seem to be particularly relevant in the Portuguese corporate environment, characterized by concentrated ownership. In addition, Portugal is a unique setting because corporate governance recommendations are not mandatory. Moreover, the code of corporate governance for listed firms in Portugal is silent on whether the CEO should (or should not) be appointed as the board chair. This lack of recommendation means that leadership structure practices may be more variable than in regulatory environments recommending specific leadership structure. Therefore, findings based on Portuguese data help build a more expansive international understanding of the effect of CEO duality on firm performance.