Prepared by: Zainab Ashfaq (4525819)
Unit Code: BGP8022
CEO DUALITY-THE COMBINATION OF CHAIRMAN AND CEO ROLES
A literature review of different theories and empirical research about CEO Duality.
Recent financial scandals like Enron, Mobily and WorldCom arise a demand for a better monitoring and controlling structure within the organizations. Conflict of interest between the shareholders and the managers is an on going debate in the literature of corporate governance. In this situation, the board of directors is supposed to be a critical ...view middle of the document...
In order to control this conflict between two parties, numerous mechanisms were suggested (Jensen and Murphy 1990). Among these mechanisms, the corporate board is considered to be the central controlling tool that can check the management activities more closely (Brennan 2006). The role of board involves supervision and providing guidance to the management. Because of their powerful position, they are able to figure out the problem at early stage and ‘blow the whistle’ (Rashid et al. 2010, p. 77).
However, the role of corporate board and the structure of board has been examined critically by the corporate governance scholars. There is an ongoing debate that to which extent these boards should be allowed to monitor, whether the board with large number of outside directors is more effective for monitoring or not (Dalton and Dalton 2011), whether the role of CEO and board chair should be performed by the same individual or not (Dey, Ellen and Liu 2011).
Zona, Zattoni and Minichilli (2013) draws attention towards a unique aspect of firm innovation, which is a critical factor of firm success in this modern era. According to them, it is also tied to the board structure. Studies based on agency theory claims that self-interested executives do not favor the investments decision in research and development, which negatively affects the firm innovation. This leads to the need of more outside directors on board.
The purpose of this study is to review the literature examining several theories and aspects of corporate board structure. Corporate governance researchers have been exploring this area from almost 40 years (Krause and Semadeni 2014).
Although it is a very broad area, this study attempts to highlight some of the issues regarding the board structure and performance of the firm. In the beginning, the concept of board structure in relation to the proportion of inside and outside directors is reviewed. Related empirical findings of some researchers (Paul M. Guest 2008; Koerniadi and Rad 2012; Waqar et al. 2014) are also discussed in this section. Later, the area of CEO duality is examined in more detail, which is surrounded, mainly by the agency and stewardship theory. Antecedents of duality (Kang and Zardkoohi 2005); cost and benefits involved in the separation process of CEO and Chairman of board (Brickley, Coles and Jarrell 1997); and separation types (Krause and Semadeni 2013) are reviewed. Each area of discussion is supported by its practical findings.
INSIDE AND OUTSIDE DIRECTORS ON BOARD
Daniel and Naveen (2008: 352) reviewed the board structure in relation with the firm value and raised a question that “Does one size fit all?” They argued that the monitoring and advisory role of board has been studied widely and a general conclusion is that smaller boards are more creative and perform monitoring tasks effectively because of their strong co-ordination. On the contrary, larger groups suffer more co-ordination...