CENTRAL UNIVERSITY OF SOUTH BIHAR

PROJECT-TOPIC

Research Title- “A critical analysis of the role of function of CEO

and Chairman.”

Submitted To Course Instructor Submitted By Student

Dr. P. K. Das Divya Meghna

Associate Proffesor BA.LLB.(Hons)
School of Law & Governance IXthSemester
Central University of South Enrollment No. CUSB1613125016
Bihar

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 ACKNOWLEDGEMENT

At this point of time I would like to express my gratitude to all those who gave me their support to
complete this project.

I am grateful to my teacher who is Dr. P. K. Das, for giving me permission to commence this
project in the first instance and to do necessary study and research. I want to thank law faculty
members and other faculty members for all their professional advice, value added time, effort and
enterprise help, support, interest and valuable hints that encouraged me to go ahead with my
project.

I am deeply indebted to my colleagues for their meticulous planning, layout, presentation and
above all for their consideration and time.

My heartfelt appreciation also goes to seniors and my classmate for their stimulating suggestions
and encouragement which helped me at each level of my research and in writing of this project.

Especially, I would like to give my special thanks to my parents, family members and god whose
patient love enabled me to complete this project.

I have tried my best to enclose practical approach on the topic assigned to me and also theoretical
approach to my project.

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 CHAPTERISATION

S.No. Title Page No.

01. Research Title………………………...……………..……..… 04

02. Research Methodology…………………...………….….…… 04

03. Research Questions………….………………….....……..….. 04

04. Hypothesis…………………….…….…………......……..….. 04

05. Abstract…….………..……………………………..................05

06. Literature Review…….………...………………….....…….…06-07

07. Introduction…….………...…………………………………...08-09

08. Role And Function of CEO…….………...…………………...09-10

08. Role And Function of Chairman…….………...……………...10-11

09. Relationship Between CEO And Chairman…………..............11-12

10. Need of Bifurcation of Power Between CEO and Chairman....12-13

11. Reason for separation of CEO and Chairman Position…....….13-14

11. Critical Analysis and Conclusion…………………..…………15-16

10. Bibliography…………………………………..………………17

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RESEARCH TITLE: A critical analysis of the role of function of CEO and Chairman.

RESEARCH OBJECTIVE

This paper is, therefore, expected to enhance the understanding of the concerned policymakers
and researchers about the roles of CEO characteristics. Overall, the outcomes of the review
indicate that the roles of CEO characteristics have impacts on firm performance and financial
reporting quality attributes. This paper indicate the relationship between CEO and Chairman.

RESEARCHQUESTION

RQ1. What is relationship between CEO and Chairman?

RQ2. How do CEO and Chairman’s characteristics important to firm performance?

RQ3. How do CEO and Chairman’s characteristics namely, CEO and Chairman’s power,
CEO and Chairman’s ownership and CEO and Chairman’s religiosity affect firm
performance?

RESEARCH METHODOLOGY

This Research Work is basically based upon Doctrinal Method of research, basing upon the
research through Primary sources including contemporary literature review, Books, Journals,
Digests and Secondary Sources including websites, online articles and the data collected from
World Wide Web.

Method of writing: The research paper is in theoretical in nature.

ModeofCitation: The mode of citation used in this paper is ILI Citation.

RESEARCH HYPOTHESIS

The CEO and Chairman are sometimes same or sometimes different person. When they are
different individuals the their role must be explicitly separated otherwise the whole responsibility
of efficiency and effectiveness of the company depends on the single person who is CEO and
Chairman. They have great role in the development of the company.

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 ABSTRACT

This paper reviews existing literature related to the different facets of the Chief Executive Officer
(CEO) and that may add value to firms. The focus of this paper is on CEO and Chairman
characteristics as the CEO position is very crucial in the management hierarchy, CEOs and
Chairman become part of the important factor that enhances the firms’ performances as well
as financial reporting quality, and their characteristics are claimed to play essential roles in
the firms. Many firms have excelled in business as a result of their CEO’s and Chairman's
characteristics. However, prior studies havemanifested mixed and inconclusive results as
well as several gaps in the literature have also been identified due to the inconsistent results
of previous studies. In addition, previous research highlights the individual CEO’s and Chairman's
characteristics that impact the firm’s performance and also the quality of financial reporting and
provides an impetus for conducting more studies in related areas. This paper provides a better
understanding of the roles of CEO and Chairman characteristics and future directions for research.
In addition, this paper recommends to the regulators about the CEOs characteristics that affect
firm performance and financial reporting quality. Finally, the paper suggests that firms should
focus on these characteristics in enhancing their performances and financial reporting quality.

Keywords: CEO Characteristics, Financial Reporting Quality, Firm Performance.

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 LITERATUREREVIEW

The Cadbury Committee Report on Corporate governance (1992), stated that “Corporate
governance is the system by which companies are directed and controlled”. Cornelius (2005)
defined corporate governance as “the stewardship responsibility of corporate directors to provide
oversight for the goals and strategies of a company and foster their implementation”. According
to the Organization for Economic Cooperation and Development (OECD) corporate governance
referred to “procedures and processes by which an organization is directed and controlled.
Corporate governance structure specifies the distribution of rights and responsibilities among the
different participants in the organization – the Board, managers, shareholders and other
stakeholders – and lays down decision making rules and procedures”.

Hambrick (2007) posits that the best way to understand a particular firm’s performance is to
consider its fundamental dispositions and biases of the powerful actors, who are the top
executives. These assumptions are based on the upper echelons theory that was proposed
byHambrick & Mason (1984). The theory opines that, the characteristics of managers can be
usefulin predicting the outcomes of the firm. The theory argues that the cognitive base and values
of the executives influence the basis of their personalized interpretations of the strategic situations
they face. It shows a person’s knowledge base, skills, values and the ability to process
information, which influences the process of making decisions (Hambrick, 2007).

There has been a growth of studies on managerial characteristics topics as seen in the past decade.
Shefrin (2001) indicated that managers’ sociological and physiological characteristics may
impact various management decisions. Several studies have shown that the characteristics of
CEOs influence decision-making. For example, Byrnes et al. (1999) studied the CEOs’ gender and
risk-taking attitudes; Brown & Sarma (2007) researched the CEO’s overconfidence and
corporate acquisitions; Barros & Da Silveira (2007) studied the CEO founder and the use
of leverage; Bamber et al. (2010) investigated the age of CEOs and voluntary choice of
financial disclosure; Li et al. (2011) and Serfling (2012) studied the age of CEOs and
investment decisions; and Tomak (2013) examined the CEO’s overconfidence and capital
structure decisions. In addition, the CEOs have a substantial amount of control on the reported
financialresults of their firms. Several empirical studies have supported these allegations
(Jiang et al., 2010; Bamber et al., 2010 and Demerjian et al., 2013), and those on CEO turnover

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(Kramarz & Thesmar, 2013) and corporate governance (Brown et al., 2012). Ting et al. (2015)
examined theimpacts of the personal characteristics of the CEOs on financial leverage.

The two dimensional role of Board of Directors was a corner stone evolving sound, efficient,
vibrant and dynamic corporate sector alive persistent strive for attaining role models of high
standards in integrity, transparency, code of conduct, accountability as well as social responsibility.
According to Dahya et al. (2009), between 1994 and 2003, policymakers in 15 advanced nations
and the United Kingdom recommended that the chairman or chairperson of a Board should not be
the CEO. According to a study in Sri Lanka, it was stated that the country’s code of best practice
on corporate governance recommended that when there was a duality in a firm, a number of
independent directors on a Board should be a majority to provide balance and an effective and
efficient operation of a Board, (Hewa-Wellalage and Locke 2011).

The issue relating to the division of responsibilities of ‘chairman and managing director’, the
Cadbury Committee Report (1992) placed stress on the need for a clear division of responsibilities,
between the ‘chairman’ and ‘chief executive officer’. If the roles of Chairman and CEO were
combined, the proportion of independent directors within the Board structure assumes greater
importance.

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 INTRODUCTION

A chief executive officer (CEO) is the highest-ranking executive in a company, whose primary
responsibilities include making major corporate decisions, managing the overall operations and
resources of a company, acting as the main point of communication between the board of
directors (the board) and corporate operations and being the public face of the company. A CEO
is elected by the board and its shareholders. CEO's role varies from one company to another
depending on the company's size, culture, and corporate structure. In large corporations, CEOs
typically deal only with very high-level strategic decisions and those that direct the company's
overall growth. In smaller companies, CEOs often are more hands-on and involved with day-to-
day functions. CEOs can set the tone, vision, and sometimes the culture of their organizations.
Because of their frequent dealings with the public, sometimes the chief executive officers of large
corporations become famous. Mark Zuckerberg, the CEO of Facebook (FB), for example, is a
household name today. Similarly, Steve Jobs, founder and CEO of Apple (AAPL), became such a
global icon that following his death in 2011, an explosion of documentary films about him
emerged.1

The CEO directs the operational aspects of a company; the board of directors oversees the company
as a whole, while the leader of the board is called the chairman of the board (COB). The board has
the power to overrule the CEO's decisions, but the chairman of the board does not have the power
to overrule the board. Instead, the chairman is considered a peer with the other board members. 2
In some cases, the CEO and the chairman of the board can be the same person, but many companies
split these roles between two people. 3 It would indeed appear that the separation of powers may
be more beneficial for a company in the long run. In an ideal corporate world, there would be input
from two strong minds on the board – an executive salaried CEO and an independent non-executive
Chairman. Indeed, separating the chair and CEO roles can promote overall board independence
while allowing the CEO to focus on the everyday demands of managing a company. But, it is also

1
"PSUs fare poorly in corporate governance: Study. (Corporate Trends)", The Economic Times, Nov 24 2015 Issue.
2
Ibid
3
India Means Business: How the Elephant earned its Stripes’, Kshama V Kaushik, and Kaushik Dutta, Oxford, 2012,
Page 324.

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true that personality conflict between the CEO and the independent chair can create a boardroom
culture of distrust and dysfunction, which in turn can create larger problems for the company.4

Role And Function of CEO

A CEO, which stands for Chief Executive Officer, is the highest-ranking individual in
a company or organization. The CEO is responsible for the overall success of a business entity or
other organization and for making top-level managerial decisions. They may ask for input on major
decisions, but they are the ultimate authority in making final decisions. There are other titles for
CEOs, such as chief executive, president, and managing director. The Chief Executive Officer
reports directly to, and is accountable to, the Board of Directors for the performance of a company.
The Board of Directors (BoD) is a group of individuals who are elected to represent the
shareholders of the company. The CEO often sits on the board and, in some cases, she or he is the
chairperson.5

In addition to the overall success of an organization or company, the CEO is responsible for leading
the development and execution of long-term strategies, with the goal of increasing shareholder
value.

The roles and responsibilities of a CEO vary from one company to another, often depending on
the organizational structure and/or size of the company. In smaller companies, the CEO takes on
a more “hands-on role”, such as making lower-level business decisions (e.g., hiring of staff). In
larger companies, he or she usually only deals with high-level corporate strategy and major
company decisions. Other tasks are delegated to managers or departments. 6

There is no standardized list of the roles and responsibilities of a chief executive officer. The
typical duties, responsibilities, and job description of a CEO include:

4
Need of CEO and chairman, available at https://insights.diligent.com/ceo/are-ceo-chairman-
board-same-person#:~:text.html(visted on 25th sept'2020 5:00 PM)

5
Ammann, M., Oesch, D., Schmid, M.M. (2011). Corporate governance and firm value: International evidence.
Journal of Empirical Finance, 18(1), 36-55. https://doi.org/10.1016/j.jempfin.2010.10.003
6
Aniruddha Vilas Thuse. "chapter 10 Knowledge Perspective in Indian Public Sector Undertakings", IGI Global, 2018

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 • Communicating, on behalf of the company, with shareholders, government entities, and
the public
• Leading the development of the company’s short- and long-term strategy
• Creating and implementing the company or organization’s vision and mission
• Evaluating the work of other executive leaders within the company, including directors,
vice presidents, and presidents
• Maintaining awareness of the competitive market landscape, expansion opportunities,
industry developments, etc.
• Ensuring that the company maintains high social responsibility wherever it does business
• Assessing risks to the company and ensuring they are monitored and minimized
• Setting strategic goals and making sure they are measurable and describable
• Ensuring that a company is appropriately organised and properly stamped and he has
authority to hire and terminate staff as per requirement to achieve the strategy
• Ensuring that expenditure of the company are within the authorised annual budget of the
company
• Ensuring that company is conducting its activities both lawfully and ethically
• Acting as a laison between management and the board7

Role And Function of Chairman

The Chairperson of the Board is technically superior to the Chief Executive Officer, as he or she
cannot make major moves without the approval of the board. The chairperson could essentially
become the ultimate boss of the company or organization. However, this is rare, as most board
chairpersons are not so directly involved in day-to-day business operations, leaving the CEO with
flexibility in running the company. 8

A chairman is an executive elected by a company's board of directors who is responsible for

presiding over board or committee meetings. A chairman often sets the agenda and has significant

7
Lisma, L. (April 2017). The transperency Principle in Realize Good corporate Governance: Limited Company. IOSR
Journal of Humanities and Social Science, 22(4), 50-57.
8
MARKET WATCH: Coal India meets listing norms with 2 more directors.” Business Line, August 5 2010 Issue

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sway as to how the board votes. The chairman ensures that meetings run smoothly and remain
orderly, and they work at achieving a consensus in board decisions.The CEO runs the company
and is the person that company executives report to, but since the CEO is appointed by the board,
the chairman can influence who will be chosen as CEO. In some companies, the roles of CEO and
chairman are combined, which can reduce transparency and accountability

There is no uniformity as to task of chairman. It differs from company to company. However

typical tasks of a Chairman are:

• providing leadership to the board

• taking responsibility for the board’s composition and developmentincluding the regular
refusal of the overall size of the board
• ensuring proper information for the board
• planning and conducting board meetings effectively
• getting all directors involved in the board’s work
• ensuring the board focuses on its key tasks
• engaging the board in assessing and improving its performance
• overseeing the induction and development of directors
• supporting the chief executive/MD
• Acting as counselor, advisor, listener to the chief executive and where necessary other
members of the board
• Establishing basic priorities, ethical values and policy of the company9

Relationship Between CEO and Chairman

The chairman is a different position than that of the CEO and can be either a non-executive or
executive position. In some companies, the roles of CEO and chairman are combined, which can
reduce transparency and accountability due to fewer checks and balances, which are created by
having two separate positions with separate job functions.

9
Lisma, L. (April 2017). The transperency Principle in Realize Good corporate Governance: Limited Company. IOSR
Journal of Humanities and Social Science, 22(4), 50-57.

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While the chairman of the board has several supervisory abilities, the CEO’s primary
responsibilities include all major corporate decisions, ranging from day-to-day operations to
managing company resources, serving as the main point of communication between the board of
directors and other executives. Also, a CEO often has a position on the board. 10

The CEO's role depends on the size, culture, and industry of the company. For example, in small
companies, the CEO will often take on a more hands-on role, making a range of lower-level
choices, such as interviewing and hiring of staff.

CEO focuses on strategic issues in accordance with the company’s goal. He is the captain of the
ship and he is accountable to the company’s board of directors and its chairman. The performance
of the CEO is ultimately evaluated by the board of directors. So, it can be said that CEO is the
company’s top decision maker and all other executives will be answerable to him. But from these
technical point of view, chairman is the superior to the CEO. In fact between the Chairman and
CEO, there is balance of power.

In larger (e.g., Fortune 500) companies, the CEO typically deals with macro-level strategy and the
direction of growth. Other tasks are delegated to division executives. CEOs set the tone and the
vision for their organization and are responsible for executing the strategy to achieve that vision.
Typically, CEOs of major corporations are well known to investors, shareholders, and analysts,
while chairmen or chairpersons usually remain out of the spotlight. 11

Although the CEO runs the company, the chairman is considered a peer with the other board
members, and it's possible to overrule a CEO's decisions if the board votes together.

The chairman can have significant power and clout when it comes to influencing decisions made
by the board including choosing the CEO.12

10
Qazi, M. (2017). Corporate Governance and its efficacy in present era. Jamia Law journal, 2, 61- 77.
11
MARKET WATCH: Coal India meets listing norms with 2 more directors.” Business Line, August 5 2010 Issue
12
Lisma, L. (April 2017). The transperency Principle in Realize Good corporate Governance: Limited Company.
IOSR Journal of Humanities and Social Science, 22(4), 50-57.

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 Need of Bifurcation of Power Between CEO and Chairman

In some cases, the position of Chief Executive Officer and Chairperson of the Board are held by
the same person. Most organizations and companies permit the Chief Executive Officer to become
the chairperson, which can cause conflict of interest problems 13

The two examples below show how a conflict of interest problem can arise if both positions are
held by the same person:

The Board of Directors votes on increasing executive pay. If the Chief Executive Officer is also
the chairperson, a conflict of interest arises because he would be voting on her/his own
compensation.

The Board of Directors is responsible for evaluating the performance of executives such as the
CEO. If the Chief Executive Officer also holds the position of Chairperson, she or he exercises the
power to decide if her/his performance is satisfactory.14

Reasons to Separate CEO and Chairman Positions15

• Executive Compensation

An increase in executive pay generally gets the attention of company shareholders. Increases come
at the expense of shareholder profits, although most understand that competitive pay helps to keep
talent in the business. However, it is the board of directors that votes to increase executive pay.

When the CEO is also the chairman, a conflict of interest arises, as the CEO is voting on his or her
own compensation. Although a board is required by legislation to have some members who are
independent of management, the chair can influence the activities of the board, which allows for
abuse of the chair position.

13
Aniruddha Vilas Thuse. "chapter 10 Knowledge Perspective in Indian Public Sector Undertakings", IGI Global,
2018
14
Qazi, M. (2017). Corporate Governance and its efficacy in present era. Jamia Law journal, 2, 61- 77.
15
K., M. (2017). Corporate Governance and whistle blowing in India: promises or reality? International journal of
Law and Mangement, 59(3), 430-441.

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 • Corporate Governance

One of the board's main roles is to monitor the operations of the company and to ensure that it is
being run in conjunction with the mandate of the company and the will of the shareholders. As the
CEO is the management position responsible for driving those operations, having a combined role
results in monitoring oneself, which opens the door for abuse of the position. A board led by an
independent chair is more likely to identify and monitor areas of the company that are drifting
from its mandate and to put into place corrective measures to get it back on track. 16

• Audit Committee Independence

In 2002, the Sarbanes-Oxley Act legislated as a response to several high-profile corporate failures,
set out stronger regulations for corporate oversight, including a requirement that the audit
committee consists of only external board members. 17 This means that no member of management
can sit on the audit committee. However, because the committee is a sub-group of the board of
directors and reports to the chair, having the CEO in the chair role limits the effectiveness of the
committee.1

This is especially true for the whistleblower clause. Sarbanes-Oxley requires that the audit
committee have a procedure where employees and other connected individuals can report fraud
and other abuse directly to the committee without reprisal. When the board is led by management,
employees may be less likely to report such activities and the audit committee may be less likely
to act on such reports.18

Therefore, good corporate governance usually prescribes a separation of duties between the Chief
Executive Officer and the Chairperson of the Board. In the UK and other countries, it is forbidden
by law for the CEO and Chairman of the Board to be the same person.

16
Ibid
17
Chattopadhyay, (2011). Corporate Governance and public Sector Units in India: A review. International Conference
on Humanities, Society and Culture, 20, pp. 167-172. Singapore
18
Supra Note 15

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 Critical Analysis and Conclusion

The CEO is a company’s top decision-maker, and all other executives answer to him or her. The
CEO typically delegates many of the tactical responsibilities to other managers, focusing instead
on strategic issues, such as which markets to enter, how to take on the competition, and which
companies to form partnerships with. This is in contrast to the chief operating officer or president,
who oversees day-to-day operations and logistics. The CEO is ultimately accountable to the board
of directors for the company’s performance. 19

The chairman of a company is the head of its board of directors. The board is elected by
shareholders and is responsible for protecting investors’ interests, such as the company’s
profitability and stability. It usually meets several times a year to set long-term goals, review
financial results, evaluate the performance of high-level managers, and vote on important strategic
moves proposed by the CEO. Directors appoint–and can fire–upper-level managers such as the
CEO and president. The chairman typically wields substantial power in setting the board’s agenda
and determining the outcome of votes. But he or she does not necessarily play an active role in
everyday management.

It is vital to company's success to decide whether the CEO should be the chairman of the board,
because there is no "right" answer. If you are a large corporation, there is a high probability that
the CEO is the chairman. If you are a high-growth company, it is strongly recommended that the
CEO not be the chairman. To be or not to be--a combined CEO/chairman role, that is the question.

While it is frequently believed that the primary purpose of a board is "governance," recently in
both Europe and the U.S., board members have wanted to spend more time providing value to the
CEO and the senior management team. Their reasoning is that they can make your job easier with
their varied industry experience and their understanding of macro-level trends occurring outside
the company.20

19
Singh, J. P. (2010). Satyam fiasco: Corporate Governance Failure and lessons therefrom. IUP Journal of Corporate
Governance, 9(4), 30-39.
20
S. Mohanan. "Productivity in public sector industrial undertakings: the Indian scenario", International Journal of
Indian Culture and Business Management, 2009

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Anyone who thinks that being a CEO is not a full-time job does not understand high- growth
companies. Anyone who thinks that being the chairman is not an intensive job does not understand
the importance of the board. CEOs who choose to be the chairman must shift focus from one of
the two distinct roles to perform the other. There is no clear answer, and the debate has gone on for
years.

While most people think that this is about governance, it is not. Findings, including those of
Stanford University researchers, indicate that an independent chairman: 21

• Clearly distinguishes between the roles of the board and management.

• Eliminates conflicts in the areas of performance evaluation, executive compensation, and
the recruitment of new senior staff and other directors.
• Gives one director clear authority to speak on behalf of the board.
• Allows the CEO to focus completely on operations, and organizational issues in strategy
execution.
• Represents individual director perspectives to the CEO.
• Ensures that board meetings encourage others to share their viewpoints and raise questions
that challenge and cause the CEO to think differently.Conducts executive sessions that
allow for open and candid conversations between the independent directors and the CEO.
• Helps in a crisis situation by coordinating communications between the board and
management, as well as communications between the company and external groups, such
as investors or members of the media.

Those in favor of separation argue that if the role of the board is to oversee management, a conflict
of interest is unavoidable if the CEO chairs the board. At most companies, an independent
chairman can provide a necessary balance to the CEO.

It is necessary to do the right thing to accelerate the growth and maintain the stability of company.

21
What is difference between CEO and Chairman, available at https://slate.com/news-and-
politics/2000/01/what-s-the-difference-between-ceos-and-chairmen.html(visted on 25th sept'2020
5:00 PM)

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 BIBLIOGRAPHY

Books:

1.Puliani Ravi & Puliani Mahesh, “Corporate Laws Manual”, Bharat Law House Pvt. Ltd.

2.Pathak, Girish (2018), Research Methodology, Symbiosis Centre for Distance Learning,

Pune.

3.Datey, V.S., Taxmann’s Business and Corporate Laws, 4th Edition, Taxmann Allied Services

Private Limited.

Websites:

1. https://www.gktoday.in/gk/chair/

2. https://www.researchgate.net

3. https://www.investopodia.com

4. https://www.google.com/url?sa=t&source=web&rct=j&url=http://shodhganga.inflibnet.ac.in
/jspui/bitstream/10603/104448/9/09_chapter3.pdf&ved=2ahUKEwjo_JHKlKlpHsAhWA

5. https://www.investopedia.com/terms/c/chairman.asphttps://www.icsi.edu/media/webmodule
s/publications/ACLP.pdf

6. https://insights.diligent.com/ceo/are-ceo-chairman-board-same-person#:~:text.html

7. https://slate.com/news-and-politics/2000/01/what-s-the-difference-between-ceos-and-
chairmen.html

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