Does CEO Duality Really Affect Corporate Performance

Abstract

Does CEO duality - the practice of one person serving both as a firm's CEOand board chair - contribute to or inhibit firm performance? Agency theory suggests that CEO duality is bad for performance because it compromises the monitoring and control of the CEO.Using data of listed Romanian firms from the Bucharest Stock Exchange we analyze the relationship between CEO duality and performance (ROA or ROE). Empirical findings indicate that CEO duality is positively / negatively related with performance. In the last years many firms converted from dual CEO leadership structure to nondual structure, while a much smaller number of firms converted in the opposite direction. This recent trend is partly due to several high-profile cases where powerful dual CEOs were found to abuse their tremendous power, affecting expenses of the company and shareholders. However, empirical evidence is scant and inconclusive on whether non-dual, as versus dual, CEO leadership structure is associated with better firm performance. Theoretical studies provide no consensus as to whether firms with split titles (CEO and Chairman of the Board) outperform firms with combined titles. Fama and Jensen (1983) and Jensen (1976) suggest that CEO duality may hinder board's ability to monitor management and thereby increase the agency cost. As a result, splitting the titles of CEO and Chairman of the Board will improve firm performance. A first objective of the research is constituted by the determination of shareholding's structure and implicative of the companies managed by a CEO - Chairman or not, for companies listed in Bucharest Stock Exchange, overall and on activity sectors. The second objective of this study is to examine the relationship between CEO duality and the company's performance. Therefore linkages between performance of the listed companies and several key features will be tested, that are of interest in this study related to CEO duality, Chairman of the Board of Directors, ownership's structure, management - shareholder in the company, institutional investors - shareholders, company size and debt-to-equity ratio or the relationship between CEO duality - Chairman of Board of Directors and shareholder's structure.