stanord closer look series 2
where experts get it wrong: independence vs. leadership in corporate governance
practice o maintaining an independent chairmano the board. In 2012, ollowing six very successulyears at the helm, Disney awarded Iger the jointchairman/CEO title, a position he is to retain untilhis planned retirement in 2015.By contesting this decision, shareholders high-lighted the potential conicts that can arise whena managerial role is combined with a monitoring role. In its proxy proposal, the CRPF explainedthat:
We believe that the role o the Chie Executive Ocer and management is to run the business o the company and the role o the board o direc-tors is to oversee management. We believe giventhese dierent roles and responsibilities, leader-ship o the board should be separated rom lead-ership o management.
Others agreed with this position. New York City comptroller John Liu stated that “the Walt Disney Company needs a board chair who is independento the company to best oversee management.”
Proxy advisory rm Glass Lewis wrote that “we ul-timately believe vesting a single person with bothexecutive and board leadership concentrates toomuch oversight in a single person and inhibits theindependent oversight intended to be provided by the board on behal o shareholders.”
Jack Ehnes,CEO o the Caliornia State eachers’ RetirementSystem, agreed: “Tis is just a undamental prin-ciple o corporate governance. Obviously, commonsense is that there should be separation between thechairman o the board and CEO.”
Disney shareholders on the whole, however, didnot agree. When it came to a vote, the measure wasdeeated by a margin o 65 percent to 35 percent.
What is interesting about this controversy is notthe particular outcome at Disney but that such a controversy should arise over a matter that has beenextensively studied and rigorously demonstrated tohave no material impact on governance quality. Forexample, Baliga, Moyer, and Rao (1996) examinecompanies that announce a separation (or combi-nation) o the chairman and CEO roles. Tey ndno abnormal positive (or negative) stock price re-action to these announcements. Tey also nd nomaterial impact on uture operating perormance.Tey conclude that although a combined chair-man/CEO “may increase potential or managerialabuse, [it] does not appear to lead to tangible mani-estations o that abuse.”
Similarly, Boyd (1995)provides a meta-analysis o several papers on chair-man/CEO duality and nds no statistically signi-cant relationship between the independence statuso the chairman and operating perormance.
Te reason or this is simple: context matters. While the separation o the chairman and CEOroles might be advantageous in some settings, it canbe inefcient in others. Because o this, the positiveand negative results o individual companies canceleach other out, and researchers are unable to dis-cern a material impact on average.
Leadership and governance
A more instructive approach to deciding whether toseparate or combine the chairman and CEO rolesis to consider the specic individuals involved. Tisrequires evaluating the strength o their character,the quality o their leadership, and the likelihoodthat they require additional monitoring. Althoughsuch an exercise is vastly more difcult than apply-ing a single solution across all companies, there issome empirical evidence that it is worth the eort.For example, a growing body o research dem-onstrates that the personality o a CEO is related toan organization’s long-term success or ailure. Tesestudies generally nd that
—thecharacteristic o being organized, systematic, ef-cient, practical, and steady in work—is positively associated with career success. Tey also tend toshow that
—the characteristic o being moody, temperamental, envious, retul, and emo-tionally unstable—is negatively associated with ca-reer success.
In addition, there is some evidencethat the personality traits o
—the char-acteristic o being talkative, sociable, bold, asser-tive, and condent—and
—the char-acteristic o being warm, helpul, cooperative, andtrustul—positively predict the ability o a managerto motivate subordinates to exceed expectations.
Furthermore, studies nd that
—thecharacteristic o being selsh, proud, and vain—can have a positive or negative impact on a corpo-ration, depending on the individual. For example,