Leadership structure and firm performance

Abstract

Two theories have been offered to explain why some firms have different people hold the chairman of the board and CEO positions (a dual leadership structure). The agency problem theory suggests that firms employ this dual leadership structure to control agency costs created by the separation of ownership and control. The normal succession theory implies the dual leadership structure emerges as a part of the normal succession process employed to replace a retiring chair/CEO. We tested these theories on a sample of firms which adopt dual leadership structures and found that both theories have merit. Firms most likely to use a dual leadership structure to control agency problems experienced a statistically significant improvement in performance after they switched to a dual leadership structure. Additionally, firms in this subsample that also replaced at least one senior manager experienced a greater improvement in performance than those firms that only changed leadership structure. These results indicated that the shift to a dual leadership structure did reduce agency costs for these firms. Firms most likely to use a dual leadership structure as a part of the normal succession process showed no improvement in performance after the leadership structure change. This suggests that these firms used the dual leadership structure merely to insure an orderly transfer of authority when a chair/CEO retires.