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When a firm's chief executive officer is also the chairperson of its board, directors have opposing objectives. According to organization theory, such CEO duality establishes strong, unambiguous leadership. But according to agency theory, duality promotes CEO entrenchment by reducing board monitoring effectiveness. We developed a contingency framework to remove these perspective. Sampling three industries to enhance generalizability, we found that board vigilance was positively associated with CEO duality. Duality was less common, however, when CEOs had high informal power and when firm performance was high.
Boards of directors are charged with ensuring that chief executive officers (CEOs) carry out their duties in a way that serves the best interests of shareholders (Vance, 1983). Thus, boards can be seen as monitoring devices that help align CEO and shareholder interests (Fama & Jensen, 1983). Although monitoring activity can take many forms, such as designing compensation contracts and hiring and firing CEOs (Walsh & Seward, 1990), in this study we focused on structural arrangements, specifically, the incidence of CEO duality. CEO duality occurs when the same person holds both the CEO and board chairperson positions in a corporation (Rechner & Dalton, 1991). CEO duality has opposing effects that boards must attempt to balance. On the one hand, duality can firmly entrench a CEO at the top of an organization, challenging a board's ability to effectively monitor and discipline (Mallette & Fowler, 1992).(1) On the other hand, the consolidation of the two most senior management positions establishes a unity of command(2) at the top of the firm, with unambiguous leadership clarifying decision-making authority and sending reassuring signals to stakeholders.
The juxtaposition of these two perspectives and the underlying theories that support them make the study of CEO duality compelling. Advocates of agency theory, which focuses on monitoring and entrenchment, argue that avoiding duality limits potential CEO entrenchment. Proponents of organization theories, which focus on issues of structure, leadership, and legitimacy, argue that duality enhances unity of command. Thus, CEO duality can be conceptualized as a double-edged sword forcing boards to choose between the contradictory objectives of unity of command and entrenchment avoidance. The double-edged nature of CEO duality makes this study especially relevant to research on corporate governance. Although there is much work in organization theory on the substantive,...