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Brickley, Coles, and Jarrell

 

“Corporate Leadership Structure: On the Separation of the Positions of CEO and Chairman of the Board,”
James Brickley, Jeffrey Coles, and Gregg Jarrell, Working Paper and presentation October 1994.

Executive Summary
Many shareholder groups have argued for the separation of CEO and Chairman of the Board of Directors. This paper looks at the fact that 80% of firms have a single CEO who is also Chairman the Board of Directors and suggests that such a relation may be optimal. Notably the paper posits the view that the CEO has valuable inside information and he may be better able to use that in both roles. Further that firms use the multiple title to phase in and phase out new CEOs. Conclude that there are good points of having a single person in charge of both positions.

Many have looked at the apparent lack of response by Board of Directors as evidence that things must change. Benjamin Rosen Chairman of Compaq: “when the CEO is also Chairman…Checks and balances have been thrown to the wind.” This is a common view in popular press and with the United Shareholder’s Association. Many large firms (notably GM) have given into these groups and separated the power.

Prior research (Pi and Timme 1993 and Rechner and Dalton 1991) finds that firms with dual leadership (that is a different person for each role) tended to do better than firms with unitary leaders on several accounting based measures. Thus emphasizing potential benefits of separating the two titles.

This paper looks at costs and benefits of unitary vs. dual leadership. They argue that Non-CEOs are accompanied with the following costs of separation: Information Costs-How to choose the person in the first place. Must have specific knowledge of the firm and industry. Thus this is a difficult and costly problem. Agency Costs: who monitors the monitor?

This new person adds a layer of potential conflict and since there is specialized knowledge, it is difficult to monitor this new monitorĀ (Alchain and Demetz (1972)). Further if you have two in command you will have finger pointing (too many cooks spoil the broth).

Changing the succession process. Currently many firms “pass the baton” by phasing in the new CEO and phasing out he old CEO while he can still oversee the new CEO. Thus the new CEO first gets CEO position, then later both the CEO and Chairman positions. Surprisingly there is more separation in small firms. Further finds that CEOs who hold only CEO position tend to be younger and do not have as long tenure. The authors use this to support their theory of a phase-in succession process. However it could equally be used as evidence that the Chairman is doing his/her job and removes those CEOs that do not do a good job.

Overall this paper suggests that these costs may result in a unitary management position being optimal. Further since nearly 80% of firms do this and many others have their old CEO as Chairman, this view is well supported empirically. However, it does not really say anything definitively and the current form where unity dominates may be sub optimal due to agency costs.