brickley et al leadership structure

5/26/2018 Brickley Et Al Leadership Structure

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Journal ofCORPORATEFINANCEE L S E V I E R Journal of Corporate Finance 3 (1997) 1 89- 22 0

L ead ersh ip s tructure Sepa rat ing the C E O andC h a i rm a n o f th e B o a r d

J a m e s A . B r i c k l e y a, , J e f f r e y L . C o l e s h G r e g g J a r r e l l ca William E. Simon Graduate School of Business University of Rochester Rochester NY 14627 USA

School of Business Arizona State University Arizona USAc William E. Simon Graduate School of Business University of Rochester Rochester USA

A b s t r a c tS h a r e h o l d e r a c t i v i s t s a n d r e g u l a t o r s a r e p r e s s u r i n g U . S . f i r m s t o s e p a r a t e t h e t i t l e s o f

C E O a n d C h a i r m a n o f th e B o a r d . T h e y a r g u e t h a t s e p a r a t in g t h e t it l e s w i l l r e d u c e a g e n c yc o s t s i n c o r p o r a t i o n s a n d i m p r o v e p e r f o r m a n c e . T h e e x i s t i n g e m p i r i c a l e v i d e n c e a p p e a r s t os u p p o r t t h i s v i e w . W e a r g u e t h a t t h i s s e p a r a t i o n h a s p o t e n t i a l c o s t s , a s w e l l a s p o t e n t i a lb e n e f i ts . I n c o n t r a s t t o m o s t o f t h e p r e v i o u s e m p i r i c a l w o r k , o u r e v i d e n c e s u g g e s t s t h a t t h ec o s t s o f s e p a r a t i o n a r e l a r g e r t h a n t h e b e n e f i t s f o r m o s t l a r g e f i r m s .JEL classification: G34; G3Keywords: Corporate Governance; CEOs; Board of Directors

1 . I n t r o d u c t i o n a n d o v e r v i e wM a n y c o m m e n t a t o r s c o m p l a i n t h a t b o a rd s o f d i r ec t o rs o f U . S . c o m p a n i e s f a il t o

p r o v i d e a d e q u a t e d i s c ip l i n e o f t o p m a n a g e r s . O f p a r t i cu l a r c o n c e r n i s t h e c o m m o n

* Corresponding author. Tel.: + 1-716-2753433.1 W e thank D ave Chapman, Jeri Coles, D ave Denis, M ason G erety, G ordon Hanka, M ike Hertzel ,Ke n Lehn, John Martin, Harold Mulherin, Bob Parrino, Dennis Sheehan, C liff Smith, Ric k Smith,Laura Starks, Karl vonder Heyden, Karen Van Nuys, Mike Weisbach, Mare Zenner, Jerry Zirnmer-man, an anonymous referee, and seminar participants at Arizona, Arizona State, North Carolina,

Northern Arizona, Penn State, Rochester, Texas, Virginia Tech and the January 1994 AFA Meeting forhelpful comments. We also thank Mike Lemmon for research assistance, Bert Cannefla, Scott Lee, andBob Parrino for sharing their work on the topic, and Kevin J. Murphy for sharing some of his data.092 9-11 99/9 7/ 17. 00 Copyright 1997 Elsevier Science B.V. All f ights reserved.PII S 0 9 2 9 - 1 1 9 9 ( 9 6 ) 0 0 0 1 3 - 2


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190 J.A. Brickley et al . / J ourn al o f Corporate Fina nce 3 1997) 18 9-2 20p r a c t i c e o f c o m b i n i n g t h e t it le s o f c h i e f e x e c u t i v e o f f i c e r ( C E O ) a n d c h a i r m a n o ft h e b o a r d ( C h a ir m a n ) 2. B e n j a m i n R o s e n , C h a i r m a n o f C o m p a q C o m p u t e r , v o i c edt h is c o n c e r n s u c c i n c t ly ;

W h e n t h e C E O i s a l s o c h a i r m a n , m a n a g e m e n t h a s d e f a c t o c o n t r o l . Y e t t h eb o a r d i s s u p p o s e d to b e i n c h a r g e o f m a n a g e m e n t . C h e c k s a n d b a l a n c e s h a v eb e e n t h r o w n t o t h e w i n d 3

T h e U n i t e d S h a r e h o l d e r s A s s o c i a t i o n a n d s e v e r a l l a r g e p u b l ic p e n s i o n f u n d s i nr e c e n t y e a r s h a v e s p o n s o r e d s h a r e h o l d e r p r o p o s a l s a t S e a r s R o e b u c k a n d o t h e rl a rge f i rms ca l l ing fo r sepa ra t i on o f t he CE O and ch a i rman t it le s 4 . K ey l eg i s l a to rsa n d r e g u l a t o r s h a v e b e g u n t o p u s h f o r s e p a r a t i o n a s a m a t t e r o f g e n e r a l b o a r dp o l i c y . S E C C o m m i s s i o n e r M a r y S h a p i r o h a s s p o k e n f a v o r a b l y o f a r e c e n tr e c o m m e n d a t i o n b y t h e U n i te d K i n g d o m ' s T a k e o v e r B o a r d t h at t h e p o si ti o n s o fC E O a n d c h a i r m a n b e s e p ar a te d , in o r d e r t o l e s s e n t h e p o w e r o f t h e c h i e fe x e c u t i v e o v e r o u t si d e d i r e c t o r s 5. C o n g r e s s m a n E d w a r d M a r k e y ' s s u b c o m m i t t eehe ld hea r ings on a corpora t e governance b i l l i n t he spr ing o f 1993 t o cons ide r ,a m o n g o t h e r s t ru c t u r al b o a r d r e f o r m s , r e q u i r in g t h e b o a r d c h a i r m a n t o b e i n d e p e n -d e n t , o r e s t a b li s h in g l im i t s o n t h e c i r c u m s t a n c e s in w h i c h a c o r p o r a t i o n ' s C E O c a nse rve as cha i rman 6 .

P r o p o n e n t s o f s e p a r a t i n g t h e t i t l e s t e n d t o b a s e t h e i r a r g u m e n t s o n a m i x o fa n e c d o t a l e v i d e n c e a n d a n in t u i ti v e a p p e a l t o ' c o m m o n s e n s e , ' a s w h e n t h e y c l a i mt h a t c o m b i n i n g t it le s r e s u lt s i n t h e C E O g r a d i n g h i s o w n h o m e w o r k 7. F u r t h e r -m o r e , i t i s c l a i m e d t h a t t h e r e i s n o c o g e n t a r g u m e n t f o r w h y s p l it ti n g th e t it le sw o u l d h u r t c o r p o r a t e p e r f o r m a n c e ( B u s i n e s s W e e k , N o v e m b e r 1 8 , 1 9 9 1 , p . 1 24 ).

W h i l e t h e e m p i r i c a l e v i d e n c e o n l e a d e r s h i p s t r u c t u r e i s l i m i t e d , m u c h o f t h erecen t ev idence appear s t o suppor t t he v i ew tha t s epa ra t i ng t he t i t l e s wouldi m p r o v e c o r p o r a t e p e r f o r m a n c e . R e c h n e r a n d D a l t o n ( 1 9 9 1 ) e x a m i n e 1 4 1 f i r m s

2 F o r e x a m p l e , s e e B a l a n c i n g t h e P o w e r a t t h e T o p , B r i ti s h S t y l e , b y R i c h a r d S t e v e n so n , N e wY o r k T im e s , S u n d ay , N o v e m b e r 1 5, 1 9 92 ; S e a r s P u s h e d to S p li t C E O ' s J o b , U S A T o d a y , M o n e yS e c t i o n , A p r i l 2 2 , 1 9 9 3 ; J e n s e n ( 1 9 9 3 ) a n d L o r s c h a n d M a c I v e r ( 1 9 8 9 ) .

3 S t o c k h o l d e r s w a n t B o a r d s o f I n d e p e n d e n t s , U S A T o d a y , M o n e y S e c t i o n , M a y 1 4, 1 9 9 3 . M r .R o s e n i s C h a i r m a n o f C o m p a q C o m p u t e r a n d i s c r e d it e d i n th e st o r y w i t h t u r n i n g t h a t c o m p a n ya r o u n d i n 1 99 1 a f t e r f i r in g C E O R o d C a n i o n . M r . R o s e n , w h o m a d e t h e s e r e m a r k s i n t e st i m o n yb e f o r e C o n g r e s s , a l s o o p i n e d t h a t th e C E O s h o u l d b e t h e o n l y i n s i d e r o n t h e b o a r d .

4 P e n s i o n F u n d s D e f y S e a r 's M a n a g e m e n t , M a r l e n e G iv a n t S ta r, P e n s io n s a n d I n v e st m e n t s , M a y17, 1993.

5 S E C O f f i c ia l F a v o r s S h a k i n g U p B o a r d r o o m s , R o b e r t S a n f o r d , S t . L o u i s P o s t - D i s p a t c h , A p r i l24, 1993.

6 C o n g r e s s to S t u d y S h a r e h o l d e r s ' R i g h t s , M a r l e n e G i v a n t S t ar , P e n s i o n s a n d I n v e s t m e n t s , A p r i l5, 1993.

7 T h i s s c h o o l - w o r k r e f e r e n c e i s a t t ri b u t a b l e t o B l e n y t h J e n k i n s , t h e d i r e c t o r o f c o r p o r a t e a f f a i r s f o rt h e I n s t i tu t e o f D i r ec t o r s, a L o n d o n t r ad e g r o u p . H e w a s q u o t e d i n t h e N e w Y o r k T i m e s a r t ic l e c it e da b o v e a s f o ll o w s . O n e o f t h e m a j o r f u n c t i o n s o f t h e b o a r d i s t o s u p e r v i s e m a n a g e m e n t . I f t h ec h a i r m a n o f t h e b o a r d i s a ls o i n m a n a g e m e n t , t h e n h e i s i n e f fe c t m a r k i n g h i s o w n e x a m p a p e r s .


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ZA. Brickley et aL / Journal of Corporate Finance 3 1997) 189-220 9

t h a t h a v e s t a b le l e a d e r s h ip s t r u c t u re s o v e r t h e p e r i o d 1 9 7 8 - 1 9 8 3 ( t h e t it le s a r ee i t h e r c o m b i n e d o r s e p a r a t e o v e r t h e e n t i re p e r io d ) . I n t h a t s a m p l e , 2 1 . 3 % o f t h ef i rms separa t e t he t i t l e s , whi l e 78 .7% have one i nd iv idua l ho ld ing bo th t i t l e s .U s i n g s e v e r a l a c c o u n t i n g - b a s e d p e r f o r m a n c e m e a s u r e s , t h e y f i n d t h a t f ir m s w i ths e p a r a t e t i t l e s c o n s i s t e n t l y o u t p e r f o r m f i r m s w i t h c o m b i n e d t i t l e s . T h e y c o n c l u d et h a t t h e i r r e s u lt s m a y p r o v i d e e m p i r ic a l s u p p o r t f o r s o m e s t ro n g l y w o r d e da d m o n i t i o n s a b o u t a g o v e r n a n c e s t r u c t u r e t h a t i n c l u d e s t h e s a m e i n d i v i d u a ls e r v in g s i m u l t a n e o u s l y a s C E O a n d b o a r d c h a i r p e r s o n ( p . 5 9 ) . T h e s tu d y ,h o w e v e r , d o e s n o t c o n t r o l f o r a n y o t h e r v a r ia b l e s t h a t a r e li k e l y t o b e j o i n t l yc o r r e l a t e d w i t h f i r m p e r f o r m a n c e a n d l e a d e r s h i p s t r u c t u r e . P i a n d T i m m e ( 1 9 9 3 )e x a m i n e a s a m p l e o f b a nk s o v e r th e 1 9 8 7 - 1 9 9 0 p e r io d . A p p r o x i m a t e l y 2 5 % o f t hef i rms have separa t e t i t l e s , whi l e 75% have combined t i t l e s . The i r r e su l t s sugges tt ha t , a f t e r con t ro l l i ng fo r f i rm s i ze and some o the r va r i ab l es , cos t s a r e l ower andre tu rns on as se t s a r e h igher fo r f i rms wi th sepa ra t e t i t l e s . They conc lude t ha tcombin ing t he two t i t l e s i s a po t en t i a l l y subopt ima l l eader sh ip s t ruc tu re . Theg e n e r a l i t y o f t h e s e r e s u l t s , h o w e v e r , i s l i m i t e d g i v e n t h a t t h e s t u d y f o c u s e s o nf i rms i n one r egu l a t ed i ndus t ry . Ba l i ga e t a l . ( 1996) ana lyze a sample o f 181i n d u s tr ia l c o m p a n i e s o v e r th e p e r i o d 1 9 8 6 t o 1 99 1. T w e l v e o f t h e f ir m s h a dsepara t e t i t l e s over t he en t i r e t ime pe r iod , whi l e 111 had combined t i t l e s . Theo t h e r 5 8 f i r m s c h a n g e d l e a d e r s h i p s t r u c t u r e s o v e r t h e s a m p l e p e r i o d . T h e a u t h o r sc o m p a r e i n d u s t r y - a d j u s t e d , s t a n d a r d i z e d M a r k e t V a l u e A d d e d , a s c o m p u t e d b yS t e r n S t e w a r t & C o m p a n y , a c r o s s t h e th r e e g r o u p s o f f ir m s f o r t h e s a m p l e p e r i o d .T h e y f i n d s o m e e v i d e n c e t h a t l e a d e r sh i p s t r u c tu r e m a t te r s - - f i rm s t h a t sw i t c h e dt o a d u a l l e a d e r s h i p s t r u c t u r e h a d b e t t e r l o n g - t e r m p e r f o r m a n c e t h a n f i r m s w h i c hm a i n t a i n e d c o m b i n e d l e a d e r sh i p . O v e r a l l , h o w e v e r , t h e a u t h o r s c o n c l u d e t h a t t h e r ei s l i t t l e ev idence t o suppor t t he hypothes i s t ha t s epa ra t i ng t he t i t l e s l eads t oi m p r o v e d f ir m p e r f o r m a n c e .

T h e c o m p o s i t i o n s o f th e s a m p l e s i n m o s t o f t h e s e s t u d ie s a r e c o n s i s t e n t w i thf r equen t ly c i t ed s t a t i s t i c s on t he l eader sh ip s t ruc tu res o f U .S . f i rms . For i ns t ance ,t h e N e w Y o r k T i m e s r e p o r t s, I n t h e U n i t e d S ta t e s, a c c o r d i n g t o v a r i o u se s t im a t e s , 7 5 % t o 8 0 % o f t h e f i rm s c o m b i n e t h e t w o j o b s ( N o v e m b e r 1 5 , 1 9 9 2 ,p . 4 ) . I n add i t i on , He idr i ck and S t rugg l es Inc . (1985) r epor t t ha t t he pe rcen t age o ff i rms wi th sp l i t t i t l e s among the Fortune 1 and 300 l ead ing non- indus t r i a lc o m p a n i e s w a s u p o v e r 1 3 % f r o m 1 9 8 0 t o 1 9 8 5 . R e e h n e r a n d D a l t o n i m p l y t h a tt h i s apparen t t r end i s r e l a t ed t o t he i r f i nd ing t ha t f i rms wi th sepa ra t e t i t l e so u t p e r f o r m f u n d s w i th c o m b i n e d t i tl e s.

O u r d i s c u s s i o n t o t h i s p o i n t s u g g e s t s t h a t a c o m m o n v i e w o n l e a d e r s h i ps t ruc tu re ( among r egu l a to r s , f i nanc i a l r epor t e r s and ce r t a in academics ) i s a sf o l l o w s . ( 1 ) I t i s o b v i o u s l y b e t t e r t o s e p a r a t e t h e p o s i t i o n s t h a n t o c o m b i n e t h ep o s i ti o n s . (2 ) A b o u t 2 0 - 2 5 % o f U . S . fi r m s h a v e s e p a r a t e ti tl e s a n d t h e f r e q u e n c yof sp l i t t it l e s migh t be i nc reas ing . (3 ) F i rm s w i th sp l i t t it le s ou tpe r fo rm f i rms w i thc o m b i n e d t i t l e s . ( 4 ) F i r m s w i t h c o m b i n e d t i t l e s w o u l d i n c r e a s e t h e i r v a l u e s b yseparat ing the t i t l es .


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192 J.A. Brickley et al. / Journal of Corporate Finance 3 1997) 189-22 0T h e p u r p o s e o f o u r p a p e r i s to c h a l l e n g e t hi s c o n v e n t io n a l w i s d o m . W e b e g i n

b y p r o v i d i n g a m o r e c o m p l e t e d i s c u s s i o n o f b o t h th e c o s t s a n d b e n e f i t s o f s e p a r a t et i t l e s . O u r a n a l y s i s s u g g e s t s t h a t r e f o r m e r s h a v e o v e r l o o k e d i m p o r t a n t c o s t s , a n dth a t i t i s n o t t h eo re t i ca l ly o b v io u s w h ich l ead er sh ip s t ru c tu re i s b es t . N ex t , w ep r e s e n t e m p i r i c a l e v i d e n c e o n t h is t o p i c . F i rs t , w e f i n d t h a t, w h i l e a b o u t 1 4 o ft h e f i r m s s e p a r a t e t h e t it le s , m o s t o f t h e s e f i r m s a r e s i m p l y t r a n si t io n i n g t o n e wC E O s . F o r m o s t o f t h e s e f ir m s , g o o d - p e r f o r m i n g C E O s a r e e v e n tu a l l y g ra n t e db o th t i t l e s . T h u s , t h e f r eq u en t ly -c i t ed s t a t i s t i c s o n th e f r eq u en cy o f sep a ra t e t i t l e so v e r s t a t e t h e i n c i d e n c e o f f i r m s w i t h f u n d a m e n t a l l y d i f f e r e n t l e a d e r s h i p s t ru c t u re s .R a t h e r , t h e y l a r g e l y r e f l e c t c r o s s - s e c t io n a l d i f f e r e n c e s i n t h e t i m i n g o f C E Os u c c e s s i o n s . S e c o n d , t h e d a t a s u g g e s t t h a t t h e p o t e n t i a l c o s t s o f s e p a r a t i n g t h et i t l e s ( w h i c h w e d i s c u s s b e l o w ) a r e i m p o r t a n t i n d e t e r m i n i n g t h e l e a d e r s h i ps t r u c t u r e s i n U . S . f i n n s . T h i r d , t h e e v i d e n c e s u g g e s t s t h a t s o m e f i r m s u s e t h e t i t l eo f c h a i r m a n a s a n i n c e n t i v e d e v i c e f o r n e w C E O s . T h u s , r e q u i r i n g a s e p a r a t i o n o ft h e t it l es w o u l d f o r c e s o m e f i r m s t o a l t e r t h e i r b a s ic i n c e n t i v e s y s t e m s f o r n e wC E O s . F o u r t h , o u r e v e n t - s t u d y e v i d e n c e , a s w e l l a s e v i d e n c e f r o m a c c o u n t i n gre tu rn s , i s i n co n s i s t en t w i th th e co n c lu s io n th a t f i rms w i th sep a ra t e t i t l e s o u tp e r -f o r m f i r m s w i t h c o m b i n e d t it le s .

O v e r a l l , o u r d a t a r e i n f o r c e a n d f u r t h e r d e f i n e t h e i m p r e s s i o n t h a t i n t h e U . S .a c h i e v i n g c o m b i n e d t i t le s i s th e e q u i l i b r i u m a n d t h a t s e p a r a t e t i tl e s s i g n i f y n o r m a ls u c c e s s i o n p e r i o d s o r e x t r a o r d i n a r y , t r a n s i t o r y e v e n t s . W e t e n t a t i v e l y a d v a n c e t h ea r g u m e n t t h a t t h i s w i d e s p r e a d p r a c t i c e i s i n d e e d e f f i c i e n t a n d g e n e r a l l y c o n s i s t e n tw i t h s h a r e h o l d e r s ' i n t e r e s t s f o r t h e t y p i c a l l a r g e U . S . c o m p a n y a n d t h a t l e g i s l a t i v er e f o r m s fo r c i n g s e p a r a t e t i tl e s a r e m i s g u i d e d . C l e a r l y , h o w e v e r , m o r e d e t a i le de s t i m a t e s o f t h e c o s t s a n d b e n e f i t s o f a l te r n a t i v e l e a d e r s h i p s t r u c t u re s a r e r e q u i r e db e f o r e m o r e d e f i n i t i v e c o n c l u s i o n s c a n b e r e a c h e d .

2 T h e b e n e f it s a n d c o st s o f s e p a r a t i n g th e C E O a n d c h a i r m a n t i t l e sI n o u r a n a l y s i s , w e r e l y o n t e r m i n o l o g y d a t i n g t o H a m i l t o n ( 1 7 8 8 ) . W e d e f i n e

u n i t a r y le a d e r s h i p s t r u c t ur e a s t h e c a s e w h e n t h e C E O a n d C h a i r m a n o f t he B o a r dt i t l e s a re v es t ed in o n e in d iv id u a l . We d e f in e d u a l l ead e r sh ip s t ru c tu re a s t h e casew h e r e t h e t w o p o s i t i o n s a r e h e l d b y d i f f e r e n t i n d i v i d u a l s . N o t e t h a t t h e r e i s s o m ec o n f u s i o n i n t h e l i t e r a t u r e o v e r t h e s e t e r m s . S o m e a u t h o r s u s e t h e a d j e c t i v e s t om o d i f y t h e i n d i v id u a l , i n w h i c h c a s e , f o r e x a m p l e , ' C E O d u a l i t y ' w o u l d r e f e r t ot h e c i r c u m s t a n c e w h e r e t h e C E O h o l d s b o t h t i t l e s . W e u s e t h e a d j e c t i v e s t oc h a r a c t e r i z e a f e a t u r e o f t he o r g a n i z a t i o n , s o t h a t u s i n g u n i t a r y l e a d e r s h i p ( s t r u c -t u re ) t o re f e r t o a s in g le C E O / C h a i r m a n a n d d u a l le a d e r s h ip t o r e f e r t o tw olead er s i s mo s t d esc r ip t iv e .2 .1 . B e n e f i t s o f d u a l l e a d e r s h i p s t r u c t u r e

T h e m o d e r n l a r g e c o r p o r a t i o n i s c h a r a c t e r i z e d b y t h e a b s e n c e o f t h e c l a s s i c a le n t r e p r e n e u r i a l d e c i s i o n m a k e r . I n s t e a d , i n o r d e r t o r e a p t h e b e n e f i t s o f ri s k


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J.A. Brickley et al. / Journal of Corporate Finance 3 1997) 189-220 193s h a r i n g , t h e c o m p a n y ' s r e s i d u a l c l a i m s a r e d i f f u s e d a m o n g m a n y a g e n t s , w h og e n e r a l l y v e s t th e i r d e c i s i o n c o n t r o l r i g h ts i n t h e b o a r d o f d i r e c to r s a n d t h e C E O ' so f f i c e . T h i s d e l e g a t i o n l e a d s t o a g e n c y p r o b l e m s b e t w e e n d e c i s i o n a g e n t s a n dr e s i d u a l c l a i m a n t s a n d c r e a t e s a g e n c y c o s t s , w h i c h J e n s e n a n d M e c k l i n g ( 1 9 7 6 )d e f i n e t o b e t h e s u m o f t h e c o s ts o f d e s i g n i n g , i m p l e m e n t i n g , a n d m a i n t ai n i n ga p p r o p r i a t e in c e n t i v e a n d c o n t r o l s y s t e m s a n d t h e r e s id u a l l o s s r e s u l ti n g f r o m n o ts o l v i n g t h e s e p r o b l e m s c o m p l e t e l y .

F a m a a n d J e n s e n ( 1 9 8 3 ) a r g u e t h a t a g e n c y c o s t s i n l a r g e o r g a n i z a t i o n s a r er e d u c e d b y i n s t i t u t i o n a l a r r a n g e m e n t s t h a t s e p a r a t e d e c i s i o n m a n a g e m e n t f r o md e c i s i o n c o n t r o l . D e c i s i o n m a n a g e m e n t r e f e r s t o t h e r i g h t s t o i n i t i a t e a n d i m p l e -m e n t r e c o m m e n d a t i o n s f o r r e s o u r c e a l l o c a t io n , w h i l e d e c i s io n c o n t r o l re f e r s to t h er i g h ts t o r a t if y a n d t o m o n i t o r t h e i m p l e m e n t a t i o n o f r e s o u r c e c o m m i t m e n t s .

T h e a p e x o f t h e d e c i s i o n c o n t r o l s y s t e m o f l a r g e c o r p o r a t i o n s i s t h e b o a r d o fd i r e c t o r s , w h i c h g e n e r a l l y h a s t h e p o w e r t o h i r e , f i r e , a n d r e w a r d t o p o p e r a t i n gm a n a g e r s , a n d t o r a t i f y a n d m o n i t o r i m p o r t a n t d e c i s i o n s . A s F a m a a n d J e n s e np o i n t o u t , t h e b o a r d i s n o t a n e f f e c t iv e d e v i c e f o r d e c i si o n c o n t r o l u n l e s s i t l im i t st h e d e c is i o n d i s c r e ti o n o f in d i v i d u a l t o p m a n a g e r s . T h i s a r g u m e n t s e e m s t o i m p l yt h a t c o m b i n i n g t h e C E O a n d c h a i r m a n t it le s c o n t r a d i c ts t h e ir s e p a r a t io n t h e o r y ( ap o i n t w h i c h t h e y p a r t ia l ly c o n c e d e ) .

E x t e n d i n g t h is l o g i c , J e n s e n ( 1 9 9 3 ) i n h i s P r e s i d e n ti a l A d d r e s s t o t h e A m e r i c a nF i n a n c e A s s o c i a t i o n r e c o m m e n d s t h a t c o m p a n i e s s e p a r a t e t h e t w o t i t l e s . I n t h i sspeech (p . 36) , J ensen a r t i cu l a t e s t he po t en t i a l benef i t s o f s epa ra t i on :

T h e f u n c t i o n o f t h e c h a i r m a n is t o r u n b o a r d m e e t i n g s a n d o v e r s e e th ep r o c e s s o f h ir in g , f i ri n g , e v a lu a t i n g , a n d c o m p e n s a t i n g t h e C E O . C l e a r l y th eC E O c a n n o t p e r f o r m t h i s f u n c t i o n a p a r t f r o m h i s o r h e r p e r s o n a l i n t e r e s t .W i t h o u t t h e d i r e c t io n o f a n i n d e p e n d e n t l e a d e r, i t is m u c h m o r e d i f f i c u l t f o rt h e b o a r d t o p e r f o r m i t s c r i t i c a l f u n c t i o n . T h e r e f o r e , f o r t h e b o a r d t o b ee f f e c t i v e , i t i s i m p o r t a n t t o s e p a r a t e t h e C E O a n d C h a i r m a n p o s i t i o n s . T h ei n d e p e n d e n t c h a i r m a n s h o u l d , a t a m i n i m u m , b e g i v e n t h e r i g h t s t o i n i t i a t eb o a r d a p p o i n t m e n t s , b o a r d c o m m i t t e e a s s ig n m e n t s , a n d ( j o i n t w i t h t h e C E O )t h e s e t ti n g o f t h e b o a r d ' s a g e n d a .

2.2. Costs of dual leadership structure2.2.1. Agency costs

C u r i o u s l y , t h e d i s c u s s i o n o f s e p a r a t i n g t h e t i t l e s h a s c o m p l e t e l y i g n o r e d t h ec r i t i c a l i s s u e o f t h e i n c e n t i v e s o f t h e n o n - C E O c h a i r m a n . A p p o i n t i n g a n o u t s i d ed i r e c t o r c h a i r m a n o f t h e b o a r d ( t h e h e a d d e c i s i o n c o n t r o l a g e n t i n a l a r g eo r g a n i z a t i o n ) m i g h t r e d u c e t h e a g e n c y c o s t s o f c o n t r o l l i n g t h e C E O ' s b e h a v i o r ,b u t i t i n t r o d u c e s t h e a g e n c y c o s t s o f c o n t r o l l i n g t h e b e h a v i o r o f t h e n o n - C E Oc h a i r m a n . G r a n t i n g a n o u t s i d e c h a i r m a n i n c r e a s e d d e c i s i o n r ig h t s o v e r s u c h t h in g sa s f i r i n g t h e C E O a n d a g e n d a s e t t i n g , c a n g i v e t h e i n d i v i d u a l e n o r m o u s p o w e r t o


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194 J.A. Brickley et al . / J ourn al o f Corporate Fina nce 3 1997) 189 220e x t r a c t r e n t s f r o m t h e f i r m . T h u s , s h a r e h o l d e r s m u s t b e c o n c e r n e d a b o u t t h ec h a i r m a n s p e r q u i s it e t a k in g , e f f o r t le v e l a n d i n v e s t m e n t p r e f e r e n c e s . I n t h e s p i r ito f A l c h i a n a n d D e m s e t z ( 1 9 7 2 ) , w h o m o n i t o r s t h e m o n i t o r ? I f t h e c h a i r m a n i s al a rge r e s idua l c l a imant , t hen t he p rob l em i s so lved as i t i s i n t he c l a s s i ca l mode l o ft h e e n t r e p r e n e u r i a l o w n e r . B u t , i n t h e l a r g e c o m p l e x c o m p a n y , i t i s g e n e r a l l y t h ec a s e t h a t n o o n e o n t h e b o a r d h a s g r e a t e r r e p u t a t io n a l a n d f i n a n c i a l c a p i ta l a t r i ski n t h e f u t u r e p e r f o r m a n c e o f t h e o r g a n i z a t i o n t h a n d o e s t h e C E O .2 2 2 Information costs

P r e s u m a b l y , C E O s h a v e u n p a r a l l e l e d s p e c i a l i z e d k n o w l e d g e r e g a r d i n g t h es t r a t eg i c cha l l enges and oppor tun i t i e s f ac ing t he f i rm. I f one accep t s t he apparen t l yr e a s o n a b l e a s s u m p t i o n t h a t t h e C E O p o s s e s s es , a s a n a t u r a l b y p r o d u c t o f h i sf i r m - s p e c i f i c e x p e r i e n c e , c o n s i d e r a b l e s p e c i a l i z e d k n o w l e d g e v a l u a b l e t o t h ec h a i r m a n s jo b , t h e n s e p a r a t in g t h e C E O a n d t h e c h a i r m a n t it le s n e c e s s i ta t e s th ec o s t l y a n d g e n e r a l l y i n c o m p l e t e t r a n s f e r o f c r i t i c a l i n f o r m a t i o n b e t w e e n t h e C E Oa n d t h e c h a i r m a n . O n e w a y t o r e d u c e t h is p r o b l e m i s t o h a v e t h e o l d C E O s t a y o na s c h a i r m a n i n d e f i n i te l y ( d e p e n d i n g o n a g e a n d h e a l th ) . N e v e r t h e l e s s , k e e p i n g t h eo l d C E O o n t h e b o a r d f o r a n e x t e n d e d t im e p e r i o d m i g h t h i n d e r th e n e w C E O i nm a k i n g c h a n g e s i n th e o r g a n i z a t io n ( s e e S o n n e n f e l d ( 1 9 8 8 )) .2 2 3 Costs of changing the succession process

A n o t h e r i m p o r t a n t c o n c e r n r e l a t e s t o t h e s u c c e s s i o n p r o c e s s o f C E O s . V a n c i l( 1 9 8 7 ) p r o v i d e s d e t a il e d s t u d ie s o f t h e s u c c e s s i o n p r o c e s s e s u s e d b y a b o u t a d o z e nf i rm s . T h e s e c a s e s t u d ie s s u g g e s t t h a t a c o m m o n s u c c e s s i o n p r o c e s s is w h a t V a n c i lc a l ls p a s s i n g t h e b a t o n . T h i s p r o c e s s h a s t h e f o r m e r C E O , w h o r e c e n t l yre l i nqu i shed t he CEO t i t l e t o t he he i r apparen t (passed t he ba ton) , r e t a in t hec h a i r m a n t it le d u r i n g a p r o b a t i o n a r y p e r i o d i n o r d e r t o a l lo w t h e b o a r d t o m o n i t o rt h e n e w C E O i n a c t i o n . T h e p r o b a t i o n a r y p e r i o d a l s o p r o v i d e s a n o p p o r t u n i t y f o rt he o l d C E O t o p as s o n r e l e v a n t i n f o rm a t i o n t o th e n e w C E O . T h e n e w C E Og e n e r a l l y h a s a n a d d i t i o n a l o p e r a t i n g t i t l e s u c h a s P r e s i d e n t o r C h i e f O p e r a t i n gO f f i c e r . I f th e n e w C E O p a s s e s t h is t e st , th e n t y p i c a l l y th e n e w C E O e a r n s t h eadd i t i ona l t i t l e o f cha i rman , and t he o ld cha i rman r es igns f rom the board s . A t t h i s

8 A c l a s si c e x a m p l e o f p a s s i n g t h e b a t o n i s t h e r e c e n t l y - c o m p l e t e d s u c c e s s i o n a t M e r r il l L y n c h . I nJ u n e 1 9 9 3, D a n i e l T u l l y b e c a m e c h a i r m a n - h e h a d b e e n th e C E O s i n c e F e b r u a r y 1 9 9 2, w h e n h es u c c e e d e d W i l l i a m S c h r e y e r . T u l ly h a d b e e n n a m e d P r e s i d e n t a n d C O O i n 1 98 5. W i l l i a m S c h r e y e r,w h o w a s n o n - C E O / c h a i r m a n f r o m 1 9 9 2 - 9 3 , d u r i ng T u l l y ' s ' p r o b a ti o n ' , re s ig n e d f o rm t h e b oa r dc o n c u r r e n t l y w i t h T u l l y ' s p r o m o t i o n t o c h a i r m a n . A n o t h e r r e c e n t e x a m p l e w h e r e t h e n e w C E O w a s ac o n t r o v e r si a l ch o i c e , i s H a r v e y G o l u b ' s s u c c e s s i o n o f J a m e s R o b i n s o n I I I a t A m e r i c a n E x p r e s s C o .R o b i n s o n w a s r e m o v e d a s C E O / c h a i r m a n b y a d i s g r u n t l e d b o a r d , a n d a n o u t s id e d ir e c to r M r . F u r l a u d ,w a s i n s t a ll e d a s ch a i r m a n . M o r e o v e r , t h e b o a r d s e t u p a n e x e c u t i v e c o m m i t t e e t o m o n i t o r M r . G o l u b ' sp e r f o r m a n c e d u r i n g h i s p r o b a t io n p e r io d . H a v i n g p a s s e d t h i s f i v e - m o n t h t e s t, t h e b o a r d p r o m o t e d M r .G o l u b t o c h a i r m a n , d i s m a n t l e d t h e e x e c u t i v e c o m m i t t e e , a n d a l l o w e d M r . G o l u b t o a p p o i n t h i s c h o ic ea s p r e s id e n t . S e e S t e v e n L ip i n , G o l u b S o l i d if i e s H o l d a t A m e r i c a n E x p r e s s , B e g i n s t o C h a n g e F i r m ,W a l l S t r e e t J o u r n a l , J u n e 3 0 , 1 9 9 3 , p a g e A 1 .


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J.A. Brickley et al. / Journal of Corporate Finance 3 1997) 18 9-2 20 195p o i n t , t h e C E O o f t e n h o l d s t h r e e r i f l e s , s u c h a s C h a i r m a n , C E O a n d P r e s i d e n t .A f t e r a f e w y e a r s , t h e C E O h a n d s o f f th e o p e r a t i n g t it le t o a n h e i r a p p a r e n t a n d t h ep r o c e s s c o n t i n u e s . V a n c i l c o n c l u d e s t h a t t h e t r a n s i t i o n p e r i o d , d u r i n g w h i c h t i m et h e C E O a n d c h a i r m a n t i t l e s a r e s e p a r a t e , i s d e l i b e r a t e l y s t r u c t u r e d t o a l l o w t h eb o a r d t o r e a d i l y o u s t t h e n e w C E O , s h o u l d h e o r s h e ' d r o p t h e b a t o n ' 9 . T h ep r o c e s s a l s o e a s e s t h e t r a n s i t i o n f r o m a c t i v e d u t y t o r e t i r e m e n t f o r a n a g i n g C E Oa n d t h u s m a k e s i t l e s s l i k e l y t h a t t h e C E O w i l l a t t e m p t t o h o l d o n t o h i s p o s i t i o nt o o l o n g . I f th is s u c c e s s i o n p r o c e s s is w i d e l y u s e d ( a s V a n c i l ' s c a s e s t ud i e ss u g g e s t ) , r e g u l a t i o n s t o s e p a r a t e t h e t i t l e s w o u l d f o r c e m a n y f i r m s t o c h a n g e t h e i rb a s i c s u c c e s s i o n p r o c e s s 10. T h e c o s t s o f f o r c i n g t h is c h a n g e h a v e n o t b e e nc o n s i d e r e d i n re g u l a t o r y d e b a te s . F o r i n s ta n c e , t h e p r o s p e c t o f b e i n g p r o m o t e d t ot h e c h a i r m a n s h i p p o t e n t i a l l y p r o v i d e s i m p o r t a n t i n c e n t i v e s t o n e w C E O s . T h e s ei n c e n t i v e s a r e l o s t i f t h e f i r m m a i n t a i n s a n i n d e p e n d e n t c h a i r m a n .2 . 2. 4 . O t h e r c o s t s

W h i l e t h e y a r e h a r d l y i m p a r t i a l , i t i s s t i l l i n t e r e s t i n g t o n o t e t h e o b j e c t i o n s o ft o p m a n a g e m e n t o f U .S . c o m p a n i e s t o c o m b i n i n g t it le s . T h e y c l a i m t h a t s pl it ti n gt i t l e s w o u l d d i l u t e t h e i r p o w e r t o p r o v i d e e f f e c t i v e l e a d e r s h i p , c r e a t e t h e p o t e n t i a lf o r r i v a l r y b e t w e e n t h e s e p a r a t e t i t l e h o l d e r s , a n d t h a t h a v i n g t w o p u b l i cs p o k e s p e r s o n s c o u l d w e l l l e a d t o c o n f u s i o n a n d e v e n t o o p p o r t u n i s t i c b e h a v i o r b yo u t s i d e r s ( s e e L o r s c h a n d L i p t o n ( 1 9 9 3 ) ) . A l s o , d u a l l e a d e r s h i p m a k e s i t m o r ed i f f ic u l t t o p i n p o i n t th e b l a m e f o r b a d c o r p o r a t e p e r f o r m a n c e . S i m i l a rl y , s o m eo u t s i d e a n a l y s t s o p p o s e s e p a r a t e t i t l e s b e c a u s e t h e p o s s i b l e c o n f u s i o n b o t h i n s i d ea n d o u t si d e t h e c o m p a n y a b o u t w h o is r ea l ly i n c h a rg e c o u l d h a r m t he c o m p a n yT h e s e a r g u m e n t s r e c e i v e s u p p o r t f r o m t h e r e s e a r c h o n s o c i a l c h o i c e t h e o r y w h i c hd e m o n s t r a t e s h o w s i g n if i c a n t i n c o n s i s te n c i e s c a n a r i s e in d e c i s i o n m a k i n g w h e na u t h o r i t y i s d i v i d e d a m o n g m o r e t h a n o n e p e r s o n ( s e e A r r o w ( 1 9 6 3 ) a n d S e n( 1 9 7 0 ) ). A n o t h e r p o t e n t ia l c o s t o f d u a l l e a d e r s h i p i s th e e x t r a c o m p e n s a t i o n f o r t h ec h a i r m a n . F o r in s t a n c e, G e n e r a l M o t o r s p a i d J o h n S m a l e 3 0 0 , 0 0 0 f o r h i s s e r v i c esa s o u t s i d e c h a i r m a n i n 1 9 9 3 .

I n t e r e s t i n g l y , o u r d i s c u s s i o n o f t h e c o s t s o f d u a l le a d e r s h i p i s r e m i n i s c e n t o f th ea r g u m e n t s m a d e y e a r s a g o b y A l e x a n d e r H a m i l t o n in hi s s u p p o r t o f a s i n g le c h i e fe x e c u t i v e o f f i c e r i n g o v e r n m e n t . I n t h e F e d e r a l i s t , H a m i l t o n ( 1 7 8 8 ) a r g u e s t h a td u a l e x e c u t i v e s i n c r e a s e t h e l ik e l i h o o d o f a g e n c y p r o b l e m s , t h e p o t e n t ia l f o r c o s t l y

9 Recent examples of new CEO s who 'dropped the baton' and w ere removed before they could earnthe addit ional t it le of chairman include Vaughn B ryson of Eli Lil ly & Co., Richard Markham of Merck& Co ., and James Paul of Coastal Corporation.10 Van cil (1987) claims th at this process is widespread based on som e large-sample data tha t he hascollected but not fully analyzed.11 See the N ew Yo rk Times, Novem ber 15, 1992, p. 4.


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196 J.A. Brickley et al . / Jo urna l o f Corporate F inance 3 1997) 18 9- 22 0

di spu tes , t he d i f f i cu l ty i n p inpo in t ing b l ame , e tc . Ham i l ton sum m ar i zes h i s pos i -t i on as fo l l ows :

I r a r e l y m e t w i t h a n i n t e l l i g e n t m a n f r o m a n y o f t h e S t a t e s , w h o d i d n o ta d m i t , a s t h e r e s u l t o f e x p e r i e n c e , t h a t t h e u n i t y o f th e e x e c u t i v e i n t h is S t a te( N e w Y o r k ) w a s o n e o f t h e b e s t o f t h e d i s t i n g u i s h i n g f e a t u r e s o f o u rcons t i t u t i on .

2 3 F u r t h e r d is c u s s io n

C o n t r a r y t o t h e a ll e g a ti o n s o f re f o r m e r s , c o m b i n i n g t h e C E O a n d c h a i r m a nt it le s d o e s n o t n e c e s s a r i ly v i o l a t e th e p r i n c ip l e o f s e p a r a t i o n o f d e c i s i o n m a n a g e -m e n t a n d d e c i s i o n c o n t r o l . I n d e e d , t h e e x t r e m e c a s e o f n o s e p a r a t i o n e x i s t s o n l yw h e n t h e ' b o a r d ' h a s t h e C E O a s it s o n l y m e m b e r . T h e m o d e m c o r p o r a t e b o a r dw i t h c o m b i n e d t i tl e s d e l e g a te s i m p o r t a n t d e c i s io n f u n c t i o n s t o c o m m i t t e e s , s u c h a sc o m p e n s a t i o n a n d a u d i ti n g . M o r e o v e r , th e b o a r d a l so r e t a in s t h e r i g h t to h i r e a n df i re s e n i o r m a n a g e m e n t , a l t h o u g h i t is p o t e n t i a l l y m o r e d i f f ic u l t f o r t h e b o a r d t oo u s t t h e C E O / c h a i r m a n t h a n it i s t o ou s t t h e C E O / n o n - c h a i r m a n . I n d e e d , b o a r d so f s e v e r a l l a r g e U . S . c o m p a n i e s h a v e o u s t e d C E O / c h a i r m a n i n r e c e n t y e a r s ,i n c l u d i n g E a s t m a n K o d a k ( K a y W h i t m o r e ) , G e n e r a l M o t o r s ( R o b e r t S t e m p e l ) ,I B M ( J o h n A k e r s ) , A m e r i c a n E x p r e s s ( J a m e s D . R o b i n s o n I I I ) , a n d W e s t i n g h o u s e( P a u l L e g o ) . C r i t i c s , h o w e v e r , a r g u e t h a t t h e s e d i s m i s s a l s w o u l d h a v e h a p p e n e ds o o n e r , h a d t h e b o a r d s b e e n m o r e i n d e p e n d e n t .

F a m a a n d J e n s e n ( 1 9 8 3 ) r e c o g n i z e th a t th e d a n g e r o f s h a r e h o ld e r h a rm f r o mc o m b i n e d t it le s c a n b e c o u n t e r - b a l a n c e d b y e f f e c t i v e i n d e p e n d e n t o u t s i d e d i re c t o r sw h o h a v e i n c e n t i v e s t o c a r r y o u t t h e i r t a sk s a n d d o n o t c o l l u d e w i t h m a n a g e r s t oexp ropr i a t e r e s idua l c l a im s 12. Ge nera l i z ing f ro m the i r i ns igh t , t he age ncy cos t so f u n i t a r y l e a d e r s h ip c a n b e m i t i g a t e d b y a v a r i e t y o f i n s ti tu t io n a l m e c h a n i s m s t h a th e l p t o a l i g n t h e i n c e n t i v e s o f t h e C E O w i t h s h a r e h o l d e r s . S u c h m e c h a n i s m si n c l u d e l a r g e C E O s t o c k h o l d i n g s o r o p t i o n s , a w e l l - f u n c t i o n i n g t a k e o v e r m a r k e t ,e f f e c t i v e m o n i t o r i n g b y a n i n d e p e n d e n t b o a r d , o r e f f e c t i v e o v e r s i g h t b y l a r g eb lock hold e r s o r i ns t i t u t iona l sh a reho lde r s ~3

12 T h e r e i s a s i g n i f ic a n t b o d y o f e m p i r i c a l e v i d e n c e t h a t o u t s i d e d i r e c t o r s i m p o s e i m p o r t a n tc o n s t r a i n t s o n m a n a g e r i a l b e h a v i o r . S e e B r i c k l ey e t a l . ( 1 99 4 a ) , B r i c k le y a n d J a m e s ( 1 9 8 7 ), B y r d a n dH i c k m a n ( 1 9 9 2 ) , M a y e r s e t a l . ( 1 9 9 3 ), R o s e n s t e i n a n d W y a t t ( 1 9 9 0 ) a n d W e i s b a c h ( 19 8 8) .

13 E v i d e n c e i n d i c a t e s t h a t t y p i c a l C E O s w e a l t h i s s i g n i f ic a n t l y re l a t e d t o t h e v a l u e o f h i s f i n n sc o m m o n s t o c k ( M u r p h y , 1 9 8 5 ) , a l t h o u g h s o m e c o m m e n t a t o r s a r g u e t h e r e l a t i o n i s r e l a t i v e l y s m a l l( J e n s e n a n d M u r p h y , 1 9 90 ). T h e r e i s a l s o e v i d e n c e t h a t i n s ti t u ti o n a l in v e s t o r s a n d o t h e r b l o c k h o l d e r sh e l p t o c o n t r o l m a n a g e r i a l b e h a v i o r t h r o u g h v o t i n g a n d l o b b y i n g . S e e B r i c k l e y e t a l . (1 9 8 8 ) , B r i c k le ye t a l . ( 1 9 9 4 b ) a n d V a n N u y s ( 1 9 9 3 ) . N u m e r o u s s t u d i e s s u g g e s t t h a t t h e t a k e o v e r m a r k e t i m p o s e sc o n s t r a i n ts o n m a n a g e r s . S e e J a r r e ll e t a l. ( 1 9 8 8 ) a n d J e n s e n a n d R u b a c k ( 1 9 8 3 ) f o r r e v i e w s o f t h i sl i te ra ture .


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J.A. Brickley et al. / Journal of Corporate Finance 3 1997) 189-220 197I n c o n c l u s i o n , i t is n o t t h e o r e t ic a l l y o b v i o u s w h e t h e r d u a l o r u n i t a r y l e a d e r s h i p

i s o p t i m a l . R a t h e r b o t h f o r m s o f l e a d e r s h i p i n v o l v e p o t e n t i a l c o s t s , a s w e l l a sb e n e f i t s . S e p a r a t i n g t h e ti tl e s is e f f ic i e n t f o r s h a r e h o l d e r s o n l y i f t h e r e d u c e da g e n c y c o s t s o f co n t r ol l i n g th e C E O ' s b e h a v i o r a r e n o t o u tw e i g h e d b y t h e s u m o ft h e a g e n c y , i n f o r m a t i o n , a n d o t h e r c o s t s a s s o c i a t e d w i t h t h e c h a n g e . A l s o , s i n c et h e c o s t s a n d b e n e f i t s o f d i f f e r e n t le a d e r s h i p s t r u c t u r e s c a n v a r y a c r o s s f i r m s , i t i sp o s s i b l e t h a t t h e o p t i m a l s t r u c t u r e w i l l v a r y a c r o s s f i r m s .

P r o p o n e n t s o f d u a l l e a d e rs h i p m i g h t c o n c e d e t h e s e a r g u m e n t s , b u t a s s e r t t h a tt h e f a c t s in d i c a t e t h a t t h e b e n e f i t s o f d u a l l e a d e r s h i p a r e l a r g e r t h a n t h e c o s t s f o rm o s t f i rm s . F o r i n s ta n c e , ex i s ti n g s t u d ie s s u g g e s t t h a t 2 0 - 2 5 o f U . S . fi r m s h a v es e p a r a t e t i t l e s a n d t h a t t h e s e f i n n s o u t p e r f o r m f i r m s w i t h c o m b i n e d t i t l e s . O u rs u b s e q u e n t e m p i r i c a l a n a l y s i s , h o w e v e r , s u g g e s t s t h a t t h e c o n v e n t i o n a l i n t e r p r e t a -t i o n o f t h e d a t a i s w r o n g .

3 E m p i r i c a l r e s u l t s3.1. Leadership structure in U.S. firms

W e b e g i n o u r e m p i r i c a l a n a l y s is b y p r o v i d i n g a d e t a il e d c h a r a c t e r iz a t i o n o f th el e a d e r s h i p s t r u c tu r e s o f la r g e U . S . fL rm s. F o r th i s a n a l y s i s , w e u s e a s a m p l e o ff i rm s f r o m t h e 1 9 8 9 Forbes s u r v e y o f e x e c u t i v e c o m p e n s a t i o n ~ 4 . T h i s s u r v e yc o n t a i n s i n f o r m a t i o n o n c o m p e n s a t i o n a n d o t h e r v a r ia b l e s f o r t h e C E O s o f 7 3 7f i r m s f o r t h e 1 9 8 8 f is c a l y e a r. T h r o u g h o u t t h is p a p e r , t h e d a t a o n C E O a g e , t en u r e ,c o m p e n s a t i o n , s t o c k o w n e r s h i p , a n d n e t s a le s o f t h e f ir m a r e f r o m F o r b e s . W ec o n s u l t e d D u n n a n d B r a d s t r e e t ' s , Reference Book of Corporate Managements, t oo b t a i n t h e e x a c t ti tl e o f e a c h C E O i n th e F o r b e s s u r v e y a t y e a r - e n d 1 9 8 8 ~5. I f t h eC E O w a s n o t t h e c h a i r m a n , w e a l s o r e c o r d e d t h e i d e n t i t y a n d e m p l o y m e n tb a c k g r o u n d o f th e c h a i r m a n . W e w e r e a b l e t o f i n d th e r e l e v a n t i n f o r m a t i o n f o r 6 6 1f i rm s .

T a b l e 1 c l a ss i fi e s t h e s a m p l e b y w h e t h e r t h e C E O h o l d s t h e t it le o f c h a i r m a n .I n s l ig h t ly o v e r 8 0 o f t h e f i rm s , th e C E O h o l d s t h e c h a i r m a n t it le . A b o u t 5 o ft h e f i r m s d o n o t h a v e a c h a i r m a n . I n th e re m a i n i n g 1 4 o f t h e c a se s th e r e is an o n - C E O c h a i r m a n o f t h e bo a r d .

A s T a b l e 1 a l s o i n d i c a te s , f o r t h e 9 3 f ir m s i n o u r s a m p l e w i t h s e p a r a t e c h a i r s ,7 6 ( 8 1 . 7 2 o f t h e d u a l l e a d e r s h ip s u b s a m p l e a n d 1 1 . 5 0 o f t h e f u ll s a m p l e ) h a v ec h a i r m e n w h o a r e e i th e r f o r m e r C E O s , f o u n d e r s , o r o t h e r to p o f f i c e r s o f t h e

14 W e are grateful to Kev in J. M urphy for pro viding us with a computer-readable version of this database.15 In at least a few c ases, this reference source does not repo rt changes in titles in a timely fashion.Thus, for so m e firms, we m ay not h ave the exa ct t it le h eld by the person at year-end 1988. Forinstance, we m ight have the title held at the beg inning of the year.


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198 J.A. Brickley et aL/ Journal of Corporate Finance 3 1997) 189-220Table 1The r e l a t ion be twe e n the C EO a nd C ha i r m a n o f t he B oa r d a t ye a r e nd 1988 f o r a s a m ple o f 66 l f i rm sc on ta ine d in F o r be s Exe c u t ive C om pe nsa t ion S u rve yPane l A: Ful l sample

Num be r P e r c e n tS a m e pe r son ho lds bo th t i tl e s 535 80 . 94Dif fe rent people hold the two r if les 93 14.07No pe r son ho lds t i tl e o f C ha i r m a n o f t he B oa r d 33 4 . 99Pane l B: Class i f ica t ion of 93 cases o f dua l leadership

Num be r P e r c e n t o f dua l P e r c en t o fleadership cases fu l l sample

On ly a f f i l ia t ion (pas t or present ) 17 18.28% 2.57%wi th c om p a ny i s c ha i r pos i t ion( a nd poss ib ly boa r d m e m be r sh ip )Former CEO or pres ident 61 65.59% 9.23%Form er off icer in an affi l ia te 10 10.75% 1.51%(subsidiary, me rger partner , e tc . )CEO of parent comp any 1 1 .08% 0.15%Form er lower-level off icer 1 1.08% 0.15 %Foun der 3 3 .23% 0.45%

c o m p a n y o r a n a ff i l ia t e . O n l y 1 7 f i r m s h a v e independent c h a i r m e n ( c h a i r m e n w h oa r e n o t c u r r e n t o r f o r m e r e m p l o y e e s o f th e c o m p a n y ) . T h e s e f i r m s r e p r e s e n t1 8 . 2 8 % o f t h e f i r m s w i t h s e p a ra t e c h a i r m e n a n d o n l y 2 . 5 7 % o f t h e o v e r a l l s a m p l e .E l e v e n o f t h e s e 1 7 f i r m s a r e f r o m t h e f i n a n c i a l s e c t o r , w h i l e o n l y s i x a r en o n f i n a n c i a l f i rm s 16. T h e f i r m s t e n d t o b e a m o n g t h e s m a l l e r f i rm s i n o u r d a t ab a s e . F o r e x a m p l e , t h e m e d i a n f i r m i n t h i s s u b s a m p l e h a s a s s e t s o f 2 . 2 4 b i l l i o n ,c o m p a r e d t o 4 . 2 4 b i l l i o n f o r t h e o th e r 6 4 4 f i r m s i n th e s a m p l e . T h e s e v a l u e s a res i g n i f ic a n t l y d i f f e r e n t w i t h a p - v a l u e o f 0 .0 3 6 f r o m t h e W i l c o x o n r a n k - s u m t e s t 17

T a b l e 2 p r e s e n t s d a t a ( f r o m p r o x y s t a t e m e n t s ) o n th e c h a i r m a n ' s s t o c k o w n e r -

16 In our sample , the inc idence of d ua l leadership for banks and thr i f t s , 15 .33%, i s abou t the same asfor o ther f i rms, 14 .66%, and the Pearson X 2 tes t does not re jec t the nu l l hypothes is of equa l ra tes o fdua l leadership s t ruc ture . On the o th er hand, the re i s a s igni f icant ly h igh er propor t ion of t ru lyindepen dent cha i rs for banks and thr if ts , 7 .94%, as comp ared to o ther f i rms, 1 .64% X 2= 12.90,p = 0.0001).27 One obvious po ss ib i l i ty for fu ture work is use the a pproach in th is paper to com pare in d e ta i ldifferenc es in the pattern of usage of leadersh ip structure across countries. Us ing a less detaileda ppr oa ch , Da l ton a nd Ke sne r ( 1987) f i nd tha t t he i nc ide nc e o f c om bine d C EO a nd C ha i r m a n o f t heBoard posi t ions i s 82 .0% in the U.S . , a s comp ared to 30.0% in the U.K. an d 10.9% in Japan. W hi le theinc idence of usage appears to h e s igni f icant ly d i f fe rent across countr ies , they f ind few di f fe rences inthe re la t ion be tween the i r re la t ive ly coarse measure of leadership s t ruc ture and other organiza t iona lfeatures, s uch as represe ntation on the board by outside directors, boa rd size, and f irm size, across thethree countries.


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J.A. Brickley et al . / J ourn al of Corporate F inance 3 1997) 18 9-2 20 199Table 2Beneficial stock ownership and years on the board as of 1988 for the chairman of the board of 11financial companies, where the chairman was not a former or current top operating officer of thecompany or an affiliate. The subsample of 11 firms meets the relevant criteria from a total sample of661 finns contained n the Forbes survey of executive compensation or 1988. Data are from the firms'proxy statementsCompany Chairman: Chairman: Chairman:Percent Years on ownershipstock board > CEOownership ownership?American National Ins. 1.23 ~ 28 yesAtlantic Financial 0.63 6 noBank South 0.63 19 yesFarm & Home Savings 3.07 20 yesFirst Commerce Corp. 7.80 5 yesNational CommunityBank 4.33 41 yesProgressive 10.00 0 yesSecurity Bancorp 0.60 25 noSecurity Capital 0.37 - - noSunwest Financial 0.37 13 yesValley Federal S&L 0.85 18 yesAverage 2.72 17.5 8 of 11a The chairman of American National Insurance is a member of a family that owns a substantialinterest in the company.

ship and tenure on the board for the 11 financial firms with ind epende nt chairmen.The average stock ownership is 2.72 . In eight out of 11 firms, the chair man' sstock ownership is greater than the CEOs. Average tenure on the board is 17.5years, ranging from 0 to 41 years. These data suggest that the potential informa-tion and agency problems associated with separate titles are mitigated in thesefirms by the chairman's stock ownership and long tenure with the firm. Table 3presents related inform ation for the six nonfi nanci al firms with in depend entchairmen. Again the chairmen tend to hold reasonably large amounts of stock(except in the case of Engelhard). In addition, the firms tend to be special cases.For example, the chairman or his family is a major blockholder, the chairman hasbeen with the firm since incepti on (for example, as a ve ntur e capitalist), or thefirm was recently acquired in a merger.

We were able to obta in inf orma tio n on the leadership structures of 14 of the 17firms (with outside chairmen in 1988) for 1994. All but one of these firms still haddual leadership five years later. Thus, for these firms, having separate people inthe two top positions appears to be a stable leadership structure. The data,however, indicate that none of the larger firms in our sample had a leadershipstructure where an ind ependen t outside director without special ties to the firmheld the chairman position. This finding implies, that unless all major firms hadsuboptimal board structures in 1988, having outside directors as chairmen is


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200 J.A. Brickley et a l . / Journal of Corporate Finance 3 1997) 189 -220Table 3Beneficial stock ownership and commentaryfor the chairman of the board as of 1988 of 6 nonfinancialcompanies, where the chairman was not a former or current top operating officer of the company or anaffiliate. The subsample of 6 firms meets the relevant criteria from a total sample of 661 firmscontained in the Forbes survey of executive compensationfor 1988. Data are from the firms' proxystatementsCompany Chairman: NotesPercentstockownershipCompaq computer 0.80Engelhard 0.01Rexene 28.71Spiegel 97.5 aTandem computers 1.1Wheeling-Pittsburgsteel 34.2

Chairman has been with the company since inceptionChairman is on the board of a foreign companythat owns 30.2 of the stockCompany involved n a recent mergerThe chairmancontrols he voting stock of the company.He owns little of the nonvotingstockChairman has been with company since inceptionFamily s the largest shareholder in the companya Ownership for class-B stock (the voting stock). The chairman disclaims beneficialownership of someof the stock.

unl ikel y to be optimal for most large firms. Whi le it is possibl e that all large firmsare suboptimal ly organized, such a sweeping assertion of ineffici ency should notbe embraced wit hout a cogent explanatio n for how such an import ant corporate-control practice can be wealth-decreasing and still survive in the competitivemarketplace for so long across so many companies.

One concern is that our data are over 5 years old. For instance, it is possiblethat increased foreign competition has motivated firms to change their leadershipstructures in the last few years. To address this concern, we examine the 1994leadership structures of the largest 100 firms in our sample. We find that onlyGeneral Motors had an outside director as chairman. The leadership structures forthe remai nin g 99 firms are as follows: 89 have unita ry leadership, 2 are no longerindep endent finns , 7 have dual leadership with former CEOs serving as chairmen,1 (Digital Equipment) has no chairman. Thus, our characterization of Americanleadership structures continues to hold with more recent data. Indeed, GeneralMotors recently went back to a unitary leadership structure.

The data in Tables 2 and 3 suggest that the potential information and agencyproblems associated with dual leadership are important considerations in thechoice of leadership structure. In particular, there is essentially no firm in the database that has an outside chairman who does not have signifi cant experience withthe firm - - either as a former officer or as a long-time board member. In addition,outside chairmen tend to own signifi cant amounts of stock. Thus, wheneve rseparate chairman are used, additional mechanisms or circumstances are observedthat help to control informatio n and agency problems. Holmstr om and Milgr om


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J.A. Brickley et al. / Journal o f Corpo rate Finance 3 1997) 1 89 -22 0 2011 9 9 4 ) a r g u e t h a t t h is t y p e o f e v i d e n c e p r o v i d e s i m p o r t a n t s u p p o r t f o r a g e n c y - r e -

l a t e d e x p l a n a t i o n s f o r o r g a n i z a t i o n a l s t r u c tu r e . I n t h e i r a n a l y s i s , t h e c h a i r m a n t i tl e ,c h a i r m a n s t o c k o w n e r s h i p , a n d y e a r s w i t h th e fL rm w o u l d b e v i e w e d a s c o m p l e -m e n t s i n c r e a s i n g o n e o f t h e se v a r i a b l e s i n c r e a s e s t h e b e n e f it s f r o m i n c r e a s i n g t h eo t h e r v a r i a b l e s ) .3 .2 . E v i d e n c e o n p a s s i n g t h e b a t o n

T a b l e 4 c o m p a r e s t h e n e t s a l es , C E O t e n u r e, a n d o t h e r s e l e c t e d v a r i a b l e s o ff i r m s t h a t s e p a r a t e th e t it l e s o f C E O a n d c h a i r m a n w i t h t h o s e f i r m s t h a t d o n o t .F o r t h i s a n d t h e s u b s e q u e n t a n a l y s is , w e e l i m i n a t e t h e 3 3 f i n n s t h a t d o n o t h a v e ac h a i r m a n 18. F i r m s w i t h s e p a r a t e c h a i r m a n t e n d t o b e s o m e w h a t s m a l l e r a n d h a v ef e w e r g r o w t h o p p o r t u n i t i e s a s m e a s u r e d b y t h e r a t io o f t h e m a r k e t v a l u e o f e q u i t yt o b o o k v a l u e o f e q u i ty ) . F u r th e r , d u a l f ir m s h a v e y o u n g e r C E O s t h a t h a v e l e s st e n u re , o w n l e ss s to c k , a n d r e c e i v e l o w e r c o m p e n s a t i o n l e v e l s c o m p a r e d w i t h th eC E O / c h a i r m a n o f t h e o t h e r fi r m s . T h i s d e s cr i p t io n , to g e t h e r w i th t h e fa c t t h a tm o s t o f th e s e p a r a t e c h a i r m e n a r e fo r m e r C E O s , a p p e a r s q u i t e c o n s i s te n t w i t h t h ep a s s - t h e - b a t o n o r r e la y ) p a tt e r n o f C E O s u c c e s s i o n i d e n t if i e d b y V a n c i l 19. U n d e rt h e V a n c i l s c e n a r i o , i n t h e c r o s s s e c t i o n w e w o u l d e x p e c t f i r m s t o b e a t d i f f e r e n ts t a g e s o f t h e ir s u c c e s s i o n p r o c e ss , w i t h f i r m s h a v i n g C E O s w i t h l i m i t e d te n u r eb e i n g m o r e l i k e l y t o b e i n t h e t r a n s i ti o n p h a s e .

R e c a l l t h a t in t h e p a s s i n g - t h e - b a t o n p r o c e s s , t h e C E O s t ar ts w i t h t h e t i tl e C E Oa n d P r e s i d e n t o r s o m e o t h e r o p e r a t i n g t i d e ). A f t e r c o m p l e t i n g th e p r o b a t i o n a r yp e r i o d , h e h o l d s t h r e e t i tl e s c h a i r m a n , C E O a n d p r e s i d e n t ) . A f t e r a f e w y e a r s , h ep a s s e s t h e o p e r a t i n g t i t l e t o a n h e i r a p p a r e n t . T a b l e 5 r e p o r t s t e n u r e s t a t is t i c s t h a ta r e c o n s i st e n t w i th t h i s p a t te r n . C E O s w h o a r e n o t a ls o t h e c h a i r m a n h a v er e l a t iv e l y s h o rt m e a n t e n u re o f 4 . 2 y e a rs . C E O s w h o a l s o p o s s e s s t h e c h a i r m a nt i tl e a n d a n o p e r a t i n g t i t l e h a v e s i g n i f i c a n t l y l o n g e r m e a n t e n u r e o f 7 .3 y e a r s .F i n a l l y , C E O s w h o a r e c h a i r m a n b u t d o n o t p o s s e s s a n o p e r a t i n g t it le h a v e t h el o n g e s t m e a n t e n u r e o f 1 0 . 4 y e a r s . T h e A N O V A F - t e s t a ll o w s r e je c t i o n o f th e n u llh y p o t h e s i s o f e q u a l m e a n s a c r o s s t h e t h r ee g r o u p s a t t h e 0 .0 1 l e v e l o f s i g n i fi c a n c e ,w h i l e t h e K r u s k a l - W a U i s t e st r e j e ct s t h e n u l l h y p o t h e s i s o f e q u a l m e d i a n s a c r o s st h e th r e e c a t e g o r i e s a t p = 0 . 0 0 0 1. B o t h m e a n s a n d m e d i a n s e x h i b i t t h e s a m e

18 One interpretation of the sam ple observations for wh ich there is no chairman is that those firmshave a u nitary leadership structure. Thus, we reclassified those 33 observations as unitary leadershipand repeated all of the analysis that follows. This reclassification does not yield results that arematerially different from the results we report below. Th e only d ifferences com e in a small num ber ofcases w her e the test statistic is less significant. It m ay b e that these 33 o bservations increase themeasurem ent error in the sam ple.19 W e p erformed the s am e statistical com parisons as in Tab le 4 fo r the 535 unitary firms versus the17 cases of dual leadership where the chair has no prior affiliation with the firm and for the 535 unitaryfirms v ersu s the 76 9 3 -1 7 ) dual firms in wh ich the chair is not completely independent. Thecom parison results are very similar to those reported in Table 4 .


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202 J.A. Brickley et al . / J ourn al of Corporate Finance 3 1997) 18 9-2 20Table 4Descriptive statistics for a sample of 628 firms contained n Forbes survey of executive compensation(data for 1988) classified by whether there is a separate Chairman of the Board a

Median Median p-valuefor the for the of test for93 firms 535 finns differencewith where (ANOVA/separate the CEO WilcoxonCEO and is a ls o Rank-Sumchairman the Test)chairmanNet sales of firm ( millions) 1,939.60 2,250.21CEO age 53.17 58.50Tenure as CEO (years) 2.92 6.92CEO's prior experience with firm (years) 15.00 15.75CEO stock ownership (percent of firm) 0.13 0.18Value of CEO stock ownership ( millions) 1.20 2.70Salary and bonus compensationof CEO ( thousands) 571.00 785.00Total compensationof CEO ( thousands) 675.00 985.00Market value of equity dividedby book value equity 1.87 1.55

ANOVA p = 0.0381/Wilcoxon p = 0.0120.0o0/0.0000.000/0.0000.761/0.6830.070/0.0960.231/0.001o.001/0.ooo0.060/0.0000.060/0.071a This table eliminates 33 firms from the original sample of 661 where there is no chairman of theboard. Data on sales, CEO age, tenure, stock ownership and compensationare from Forbes. Data onthe market and book values of equity are from Compustat. The Forbes definitionof total compensationincludes salary, bonus, value of restricted stock, savings and thrift plans, and other benefits. Somecalculations are based on slightly smaller subsamples due to missing values on the Compustat Tapes.

pattem, and the pattern serves as additional evidence of Vancil's relay successionprocess.

An indicat ion of the frequency of fin ns that use this succession process can beobtained by exa minin g the titles of newly-appo inted CEOs. Ou r sample includ es53 CEOs with less than one year of tenure. Amon g these CEOs, 64% hold the titleof chairman. Presumably, most of these CEOs were appointed chair and CEO atthe same time. Thus, roughly one-third of the firms in our sample appear to usethe baton process (assuming that most of the other firms use the baton process). Asimilar frequency can be inferred from the composition of the sample in Baliga etal. (1996).

While our data suggest that a significant num ber of firms use the relay process,an altemative interpretation of the data in Table 5 is managerial entrenchment. Inparticular, combined titles might imply that the CEO is not accountable toshareholders and is seldom fired for poor performance. In this case, the averageage and tenure would be higher in a sample of firms with unitary leadership thanin a sample of dual-leadership firms, where the managers turn over more fre-quently. Furthermore, combined titles might be associated with higher CEOcompensation.


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J.A. Brickley et al. / Journal of Corporate Finance 3 1997) 189-220 203Table 5Distributionof tenure as CEO by title of CEO for a sample of 628 firms at year end 1988 for a sampleof 628 firms contained n Forbes survey of executive compensationaTitle Sample si ze Average enure Medianenure(years) b (years) cCEO does not hold the title of chairman 93of the board (there is a separate chairman)CEO is chairmanof the board and has an 186additional operating itle(e.g., Chairman,CEO and President)CEO is also Chairmanof the board but does 348not have an additionaloperating itle

4.22 2.927.36 4.92

10.39 7.92

a This table eliminates 33 firms from the original sample of 661 where there is no Chairman of theBoard.b The ANOVA F-statistic of 30.73 allows rejection of equal mean years of tenure across titles at the0.0001 level of significance.c The KruskaI-Wallis chi-squared of 75.28 allows rejection of equal median years of tenure acrosstitles at the 0.0001 level of significance.

In fact, Table 4 indicates that both salary and bonus and total compensation(salary, bonus, options, deferred and other compensation) are higher when theCEO is also chairman. But Table 4 also shows that unitary leadership firms arelarger, and there is a well-do cumente d, positive relation between firm size andCEO compensation (e.g., see Murphy (1985)). Furthermore, differences in CEOtenure, which would imply differences in location on the earnings-experiencecurve, and firm performance during the CEO's tenure both could drive disparitiesin compensation. Thus, further evidence on CEO compensation as an indicator ofmanageria l entrench ment is provided in Table 6. We regress measures of CEOcompensat ion, either salary and bonus paid to the CEO or total compensat ion paidto the CEO, or the natural logarithm of each 20, on an indicator variable that takesthe value of one i f the CEO is also chairman and zero otherwise. In addition to theleadership structure dummy, the other explanatory variables are the logarithm ofsales (in millions), to control for firm size, either the tenure of the CEO or thelogarithm of CEO tenure, to control for work experience, and market performanceof the firm over the CEO's tenure. In none of the four specifications in Table 6 isthe leadership structure dummy significant. In contrast, both salary and bonus andtotal compens ation depend in a positive and statistica lly-significant way on firmsize and market performance of the firm. On the basis of these results, there islittle evidence, con trolling for firm size, firm pe rformance associated with theCEO, and work experience of the CEO, that CEOs who also chair the board areable to expropriate shareholder wealth to increase their own compensation.

2o In empirical work on compensation, it is customary to transform compensation evels with thenatural logarithm. See, for example, Murphy (1985).


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2 0 4 J .A . B r i c k l ey e t a l. / J o u r n a l o f C o r p o r a t e F i n a n c e 3 ( 1 9 9 7 ) 1 8 9 - 2 2 0

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J.A. Brickley et al . / J ourn al o f Corporate Fina nce 3 1997) 18 9-2 20 205Additional evidence on whether managerial entrenchment or the Vancil succes-

sion story best explains the data is provided by examining the relation betweenprior firm performance and the leadership structure. Under the relay process,presumably CEOs are promoted to chairmen after completing a successful proba-tionary period. If the CEO's performance is substandard, the probationary periodis prolonged, or in extreme cases the CEO is dismissed. (As the regressions inTable 6 suggest, increases in salary and bonus or total compensation would also bepostponed or foregone.) This succession process implies that, holding the numberof years as CEO constant, the likelihood of being chairman increases with priorfirm performance. In contrast, the entrenchment argument makes no such predic-tion. In this context, to provide additional evidence on the succession process, wefollow for five years the 50 CEOs in our sample who have less than three years oftenure in 1988 and do not hold the chairman title at that time. Of the 50 CEOs, 24were promoted CEO/chairman, of which 21 are still with the firm in 1993 andthree left the firm before 1993. Combining these two groups yields the 'promo-tion' subsample of 24 CEOs. In contrast, seven CEOs are no longer CEO andoccupy no position on the board - - call this group the 'departure' subsample. Ofthe remaining 19 CEOs in 1993, five are still CEO but are not chairmen, five arenot CEO but are on the board of directors, and nine are missing from the sampledue to acquisition of the firm.

A closer look at these data reveals that for most firms the probationary periodof the CEO results in an 'up or out' decision. The five instances where the personis still CEO but does not have the chair title, are all special cases where thechairman is a founder, co-founder, or long-time officer of the finn (since the1950s) with substantial stock ownership (ranging from 1.6 to 9.4 ).

Interestingly, as Table 7 indicates, the performance of the firms where the CEOis promoted to CEO/chairman is substantially better than for the firms where theCEO left the firm without being promoted to the chairman position. To measureperformance, we calculate return on capital and stock return over the CEO'stenure 21. Each measure is calculated over the period during which the manager isCEO but not Chairman, for the promotion subsample, and over the CEO's tenureprior to departure, for the departure subsample. For the industry-adjusted mea-sures, we subtract from f'l rm/CEO return on capital or stock performance theindustry median (same four-digit SIC code on the COMPUSTAT Tapes) of thesame performance measure. All performance measures are presented as com-pounded annual returns.

The median stock performance of the 24 CEOs in the combined promotion

21 Return on capital measures accountingperformance, while market return captures performance hatis not anticipated by the market. We use return on capital as our accounting measure because thischoice shrinks the sample less than using return on equity. The results using return on equity aresimilar.


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206 J.A. Brickley et al. / Journal of Corporate Finance 3 1997) 189-220

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J .A . Br ick ley e t a l. / Jo ur na l o f Corpora te F inance 3 1997) 189 -22 0 2 0 7

s u b s a m p l e i s 5 . 3 8 c o m p a r e d t o - 2 8 . 3 8 f o r t he d e p a r tu r e s u b s a m p l e . T h e s er e t u r n s a r e s i g n i f ic a n t l y d i f f e re n t a t t h e f i v e p e r c e n t l e v e l o n t h e b a s i s o f s t a n d a r dA N O V A ( p = 0 . 0 0 38 ) a n d t h e W i l c o x o n r a n k - s u m t e st ( p = 0 . 00 9 3) . A c o m p a r i -s o n o f i n d u s t r y - a d j u s t e d s t o c k r e t u r n s y i e l d s a s i m i l a r re s u lt . T h e m e d i a n i n t h ep r o m o t i o n s u b s a m p l e i s 3 . 39 v e r s u s - 2 4 . 6 0 f o r C E O s w h o w e r e n o t p r o -m o t e d t o C h a i r m a n . A g a i n , t h e r e t u r n s a r e s i g n i f i c a n t l y d i f f e r e n t : A N O V Ap = 0 . 0 0 0 1 a n d W i l c o x o n r a n k - s u m p = 0 . 0 0 2 8 . D i f f e r e n c e s i n a c c o u n t i n g re t u r n so v e r t h e t e n u re o f t h e C E O a s C E O a r e l e s s a p p a r e n t . R e t u r n o n c a p i t a l a n di n d u s t r y - a d j u s t e d r e t u r n o n c a p i t a l a r e b o t h l a r g e r f o r t h e p r o m o t i o n s u b s a m p l e ,1 5 . 10 a n d 4 . 1 2 , t h a n f o r t h e d e p a r t u r e s u b s a m p l e , 8 . 5 2 a n d - 0 . 1 5 ,r e s p e c t i v e l y . O n l y t h e W i l c o x o n r a n k - s u m t e s t f o r u n a d j u s t e d r e t u r n o n c a p i t a l ,h o w ev er , su g g es t s a s ig n i f i can t d i f f e ren ce 2 2

T o t e st th e p o w e r o f C E O p e r f o r m a n c e t o p r e d i c t w h e t h e r th e C E O i s p r o m o t e dt o c h a i r m a n o r l e a v e s t h e f i r m , w e r e g r e s s a n i n d i c a t o r v a r i a b l e t h a t a s s i g n s av a l u e o f o n e t o t h e p r o m o t i o n s u b s a m p l e a n d z e r o t o t h e d e p a r t u r e s u b s a m p l e o no u r v a r io u s m e a s u r e s o f C E O p e r f o r m a n c e . W e c o n t ro l f o r w h e t h e r th e f i r m i s ab a n k , t h r i f t , o r i n s u r a n c e c o m p a n y ( t h e f i n a n c i a l d u m m y v a r i a b l e e q u a l s o n e ) a n df i r m s i z e ( n a t u r a l l o g a r i t h m o f s a l e s ) . T h e r e s u l t s a r e p r e s e n t e d i n T a b l e 8 .C o n s i s t e n t w i t h t h e r e s u lt s i n T a b l e 7 , s to c k m a r k e t r e tu r n o v e r t h e C E O ' s t e n u r eh a s m o r e p o w e r t h a n a c c o u n t in g r e tu r n t o e x p la i n w h e t h e r t h e C E O i s p r o m o t e d t oC E O / c h a i r m a n . T h e e s t i m a t e d c o e f f i c i e n t s o n s t o c k r e t u r n a n d i n d u s t r y - a d j u s t e ds t o c k r e t u r n a r e p o s i t i v e a n d h i g h l y s i g n i f ic a n t ( p = 0 . 0 0 1 6 a n d p = 0 . 0 00 1 ,r e s p e c t i v e l y ) . I n t h o s e t w o s p e c i f i c a t i o n s , t h e d u m m y v a r i a b l e f o r f i n a n c i a l f i r m sa l so i s p o s i t i v e an d s ig n i f i can t . In co n t ras t , f i rm s i ze an d acco u n t in g r e tu rn a rein s ig n i f i can t i n a l l sp ec i f i ca t io n s in w h ich th ey a re in c lu d ed 2 3 ,2 4

C o l l e c t i v e l y , t h e e v i d e n c e p r o v i d e s r a t h e r s t r o n g s u p p o r t f o r t h e p r o p o s i t i o nt h a t a re a s o n a b l e f r a c t i o n o f f ir m s i n t h e U . S . u s e t h e p a s s i n g - t h e - b a t o n p r o c e s ss u g g e s t e d b y V a n c i l ' s c a s e s t u d i e s . I n a d d i t i o n , o u r e v i d e n c e s u g g e s t s t h a t t h e s e

22 T h e m e d i a n a g e o f t h e C E O s i n 1 9 9 3 f o r t h e d e p a r tu r e s u b s a m p l e is 5 8 , s u g g e s t i n g t h a t m o s t o ft h e s e a r e n o t o r d i n a r y r e t i r e m e n t s . T h e s e r e s u l t s a r e c o n s i s t e n t w i t h t h e f i n d i n g s i n T a b l e 7 , w h i c hs u g g e s t th a t s o m e f i n n s u s e t h e t it le o f c h a i r m a n ( a l o n g w i t h r e t e n t io n ) a s a r e w a r d f o r C E O s , w h op e r f o r m w e l l d u r i n g t h e i r p r o b a t i o n a r y p e r i o d s .

23 T h e a n a l y s i s p r e s e n t e d i n T a b l e 8 i s a n a l o g o u s t o w o r k o n t h e e f f e c t o f f i n n p e r f o r m a n c e o n t h el i k el i h o o d o f t h e C E O . S e e C o u g h l a n a n d S c h m i d t (1 9 8 5 ) , W a r n e r e t a l. ( 1 9 8 8) , a n d W e i s b a c h ( 1 9 8 8 ),f o r e x a m p l e .

24 W e a l s o e s t i m a t e d t h e s o r t o f s p e c i f i c a t i o n p r e s e n t e d i n T a b l e 8 u s i n g t h e c r o s s - s e c t i o n o f 1 9 8 8d a t a f o r 6 2 8 f i r m s . O n t h e l e f t - h a n d si d e i s t h e l e a d e rs h i p s t r u c tu r e d u m m y , a n d e x p l a n a t o r y v a r i a b l e si n c l u d e s e p a r a t e i n d u s t r y d u m m i e s fo r u t i l it i e s , i n s u r a n c e c o m p a n i e s , a n d b a n k s a n d t h r i f t s , t h el o g a r i t h m o f s a l e s , t e n u r e o f t h e m a n a g e r a s C E O , m a r k e t v a l u e o f e q u i t y d i v i d e d b y b o o k v a l u e o fe q u i t y , a n d e i t h e r r e t u r n o n c a p i t a l o r s t o c k r e t u r n ( u n a d j u s t e d a n d a d j u s t e d b y i n d u s t r y m e d i a n ) o v e rt h e C E O s t e n u r e . N a m i n g o n l y p a r a m e t e r e s t i m a t e s t h a t a r e s t a t i s t i c a ll y - s i g n i f i c a n t , t h e p r o b a b i l i t y t h a tt h e p o s i t i o n s a r e c o m b i n e d i s n e g a t i v e l y r e l a t e d t o m a r k e t - t o - b o o k , p o s i t i v e l y r e l a t e d t o t h e l o g o f s a l e s ,p o s i ti v e l y re l at e d t o C E O t e n u r e a s C E O , a n d p o s i t i v e ly r e l at e d t o C E O / f i r m a c c o u n t i n g re t u rn .


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ZA. Brickley et al. / Journal of Corporate Finance 3 1997) 189-220 209firms use the chairman title as a reward to CEOs for good performance. Thesefindings suggest that officials, considering requirements to combine the titles,should be careful to evaluate the potential costs of forcing these firms to changetheir succession processes and incentive systems.

Our results also call into question the interpretation of studies that compare theperformance of fin ms based on leadership structure. For instance, the sample of Piand Timme (1993) includes any bank that had the same leadership structure for atwo-year period. Our data suggests that many of the banks classified as havingdual leadership are likely to have the same long-run leadership structures as manyother banks, but they are simply at different stages in the same basic successionprocess. Thus, their study may be picking up differences in accounting perfor-mance over the life cycle of CEOs, rather than differences in performance acrossleadership structures 25. One potential defense of their work, however, is asfollows. Firms can be categorized into three types of leadership structures: Thosethat maintain dual leadership, those that maintain unitary leadership, and those thatswitch leadership structures through the baton process. Banks observed with dualleadership at a point in time either are firms that are passing the baton or firms thatmaintain dual leadership. In contrast, banks that are observed with unitaryleadership either are firms that use the baton process or that maintain unitaryleadership. If maintaining unitary leadership is the worst structure, Pi and Timmewould expect to find better performance for the firms that are observed to havedual leadership structures 26. Indeed, Baliga et al. (1996) find that firms thatswitch from unitary leadership structure to dual leadership structure (which arelikely to be firms passing the baton) have better long-term performance than firmsthat maintain unitary leadership. Rechner and Dalton (1991) avoid these issues byconcentrating on firms that have the same leadership structure for a six-yearperiod. Our analysis, however, indicates that there are very few large firms thathave dual leadership and that meet this criterion. Thus, their analysis mustconcentrate on relatively small firms. In contrast, the financial press and regulatorsfocus their attention on large firms.

3.3. Leadership structure and accounting performance

This discussion suggests that differences in accounting returns across subsam-pies with alternative leadership structures are hard to interpret. Nevertheless, it isinteresting to see if the association between returns and leadership structuredocumented in previous work is present in our data.

25 Murphy and Zimmerman (1993) provide evidence on the possible existence of systematic patternsin accountingreturns over the tenure of the typical CEO.26 Nevertheless, as we document below, the results in Pi and Timme (1993) are not borne out in thesubsample of our finns that are banks and thrifts.


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210 J.A. Brickley et al. /Journal of Corporate Finance 3 1997) 189-220I n t h e s pi r it o f p r e v i o u s w o r k o n t h i s t o p ic , i n T a b l e 9 w e c o m p a r e t h e

a c c o u n t i n g p e r f o r m a n c e f o r t h e t w o s u b s a m p l e s f o r f is c a l y e a r 1 9 8 8 a n d b e y o n d .M e d i a n re t u r n o n c a p i t a l i n 1 9 8 8 w a s 1 3 . 8 f o r f i r m s w i t h s e p a r a t e d p o s i t io n s ,a n d 1 5 . 2 f o r f i r m s t h a t c o m b i n e t h e p o s i t i o n s . T h e s e re t u r ns a r e s i g n i f i c a n t l yd i f fe r e n t b a s e d o n t h e s t a nd a r d A N O V A F - t e s t ( p = 0 . 0 1 3 ) a n d th e W i l c o x o nr a n k - s u m t e s t ( p = 0 . 0 4 3) . O v e r th e p e r i o d 1 9 8 9 - 1 9 9 1 , u n i t a r y f ir m s a n d d u a lf i r m s e a r n e d e s s e n t i a l l y t h e s a m e r e t u rn o n c a p i ta l . I n c o n tr a s t , o v e r t h e p e r i o d1 9 8 9 - 9 1 t h e m e d i a n s t o c k r e t u rn f o r u n i t a ry f i r m s , 1 3 . 5 , w a s s i g n i f i c a n t l y l a r g e rt h a n t h e m e d i a n s t o c k re t u r n o f d u a l f ir m s , 9 . 1 , a t t h e f i v e p e r c e n t l e v e l u s i n gA N O V A ( p = 0 .0 3 1 ) a n d a t t h e te n p e r c e n t le v e l o n t h e b a s is o f t h e W i l c o x o nr a n k - s u m t e s t ( p = 0 . 0 6 3 ) . S t o c k r e t u r n i n 1 9 8 8 w a s 1 7 . 1 f o r u n i t a r y f i r m s , asc o m p a r e d t o 1 0 . 6 f o r d u a l f i rm s . T h e d i ff e r e n c e i s n o t s i g n i f i c a n t u s i n g A N O V A( p = 0 . 2 04 ) , b u t i s s i g n i f i c a n t u s i n g t h e n o n p a r a m e t r i c t e s t ( W i l c o x o n r a n k - s u mp = 0 . 0 3 2 ). W h e n c o m p a r i n g a c c o u n t i n g a n d m a r k e t r e t u rn s a d j u s t e d b y in d u s t r y

Table 9Com parison of accounting and stock performance measures, both raw and industry-adjusted, fo r 1988and 1989-1991, for firms that combine th e positions of CEO and chairman of the board versus finnsthat separate the two positions. Sample o f 628 firms is derived fro m the Forbes survey o f exe cutiv ecompensation a.Performance measure b Median Median

annualized annualizedperformance performancefor the 93 for the 535firms with firms whereseparate the CE OCE O and is alsochairman of chairman ofthe board the board

A N O V Ap - v a l u e /Wilcoxonrank-sump-value

Return on capital: 1988 13.8 15.2

Stock return: 1988 10.6 17.1Industry-ad justed return on capital: 1988 2.4 1.2Industry-adjus ted stock return: 1988 - 2.5 1.0Return on Capital: 1989-91 12.4 12.6Stock Return: 1989-91 9.1 13.5Industry-adjus ted return on capital: 1989-91 2.7 0.3Industry-adjusted stock return: 1989-91 4.0 2.4

A N O V A p = 0 . 0 1 3 /W ilcoxon rank-sump = 0.0430 .204/0 .032O.225/0.5700 .341/0 .0460 .514/0 .5860 .031/0 .0630.170/0.0610 .245/0 .563

This analysis excludes 33 of the original 661 sample finns because there is no chairman of the board.Some calculations are based on slightly smaller subsamples due to missing values on the CompustatTapes.b Return on capital is inco m e before extraordinary items and discontinued operations plus interest andminority interest (income account) all divided by invested capital (total) at end of prior fiscal year. Allreported values are medians. Industry benchmarks are the median value of the performance measurefrom all companies with same 4-digit SIC code.


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J.A. Brickley et a l . / Journal of Corporate Finance 3 1997) 189-2 20 211m e d i a n s , t h e d i f f e r e n c e s i n b o t h p e r i o d s a c r o s s t h e t w o s u b s a m p l e s g e n e r a l l y a r ein s ig n i f i can t . T h ese r e su l t s a re in t e res t in g b ecau se , i n co n t ras t t o p rev io u s s tu d ies ,t h e y s u g g e s t t h a t f i r m s w i t h d u a l l e a d e r s h i p d o n o t n e c e s s a r i l y h a v e l o w e racc o u n t in g r e tu rn s th an f i rm s w i th u n i t a ry l ead e r sh ip 27. I f an y th in g , o u r r e su l t ss u g g e s t j u s t t h e o p p o s i t e . T h e y s h o u l d b e i n t e r p r e t e d w i t h c a u t i o n , h o w e v e r ,b e c a u s e t h e u n i v a r i a t e t e s t s d o n o t c o n t r o l f o r o t h e r p o t e n t i a l d e t e r m i n a n t s o f f i r mp e r f o r m a n c e .

T o a d d r e s s th is p r o b l e m , f o r e a c h o f t h e p e r f o r m a n c e m e a s u r e s i n T a b l e 9 , w er e g r e s s t h a t m e a s u r e o n th e l e a d e r s h i p s t ru c t u r e in d i c a t o r v a r i a b l e e q u a l s o n e i ft h e p o s i t io n s a r e c o m b i n e d , z e r o i f s e p a r a t e d ) a n d o t h e r e x p l a n a t o r y v a r i a b l e s . T h el o g a r i t h m o f s a l e s i s o u r p r o x y f o r f i r m s i z e , a n d w e i n c l u d e a d u m m y v a r i a b l e f o rf i na n c i a l c o m p a n i e s . M u r p h y a n d Z i m m e r m a n 1 9 9 3 ) fi n d t h a t a c c o u n t in g n u m -b e r s f o l l o w a p a t te r n a s s o c i a t e d w i t h t h e l if e - c y c l e o f t h e m a n a g e r a s C E O . W ei n c l u d e C E O t e n u r e t o a c c o u n t f o r t h i s e f f e c t .

I n s e v e n o f th e e i g h t s p e c i f i c a t i o n s p r e s e n t e d in T a b l e 1 0, t h e e s t i m a t e dc o e f f i c i e n t o n l e a d e r s h i p s t r u c t u r e i s p o s i t i v e , t h e e x c e p t i o n b e i n g i n d u s t r y - a d -j u s t e d R O C f o r 1 9 8 9 - 9 1 . F u r t h e r m o r e , i n th r e e c a s e s t h e e s t im a t e d c o e f f i c i e n t i sp o s i t i v e a n d s i g n if i c a n t a t th e f i v e p e r c e n t l e v e l 1 9 8 8 R O C , p = 0. 0 0 2 8 ; 1 9 88i n d u s t r y - a d j u s te d R O C , p = 0 . 0 2 61 ; 1 9 8 9 - 1 9 9 1 s t o c k r e t u rn , p = 0 . 0 49 7 ) . N o t et h a t C E O t e n u r e a n d f i r m s i z e a r e g e n e r a l l y i n s i g n i f i c a n t , w h i l e t h e d u m m y f o rf i n a n c i a l fi r m s i s a l m o s t a l w a y s s i g n i fi c a n t, b u t w i t h v a r y i n g s i g n . O n c e a g a i n , t h ee v i d e n c e f r o m o u r s a m p l e c o u nt e r s t h e c o n v e n t i o n al w i s d o m . I f a n yt h in g , c o m b i n -i n g t h e p o s i t i o n s i s a s s o c i a t e d w i t h b e t t e r p e r f o r m a n c e .

F i n a ll y , a s a b a s is o f c o m p a r i s o n w i th P i a n d T i m m e 1 9 9 3) , w e p e r f o r m e d th es a m e c o m p a r i s o n s in T a b l e 9 f o r t h e 1 3 0 b a n k s a n d t h ri f ts i n o u r s a m p l e , o f w h i c h1 1 6 c o m b i n e t h e p o s i t i o n s a n d 1 4 s e p a r a t e th e p o s i t io n s . F o r s e v e n o f th e e i g h tp e r f o r m a n c e m e a s u r e s i n T a b l e 9 , p e r f o r m a n c e o f t h e u n i ta r y f i rm s e x c e e d s t h a t o ft h e d u a l f i r m s t h e e x c e p t i o n w a s R O C o v e r 1 9 8 9 - 9 1 ) . I n n o c a s e is a c c o u n t i n gp e r f o r m a n c e s i g n i f i c a n t l y d i f f e r e n t a c r o s s t h e t w o o r g a n i z a t i o n a l m o d e s . I n c o n -t ra s t, m a r k e t p e r f o r m a n c e i n 1 9 88 A N O V A p = 0 .1 6 9; W i l c o x o n r a n k - s u mp = 0 . 0 2 8) , i n d u s t r y - a d j u s te d m a r k e t p e r f o r m a n c e in 1 9 8 8 A N O V A p = 0 . 2 57 ;W i l c o x o n r a n k - s u m p = 0 . 0 45 ) , m a r k e t r e tu r n o v e r 1 9 8 9 - 9 1 A N O V A p = 0 .0 1 3;W i l c ox o n r a n k- s u m p = 0 . 0 2 1 ) , a n d m a r k e t- a d ju s te d r et ur n o v e r 1 98 9 - 9 1

A N O V A p = 0 . 1 15 ; W i l c o x o n r a n k - s u m p = 0 . 0 6 3 ) w e r e s i g n i f ic a n t l y o r n e a r l ys o ) h ig h e r f o r f i n n s w i t h c o m b i n e d p o s i

brickley et al leadership structure

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