CEO Duality, Agency Costs, and Internal Capital Allocations

Dennis Philip is Reader in Finance at Durham University Business School. This post is based on a recent paper authored by Dr. Philip; Nihat Aktas, Professor of Finance at WHU Otto Beisheim School of Management; Panayiotis C. Andreou, Assistant Professor of Finance at Cyprus University of Technology; and Isabella Karasamani, Lecturer in Accounting and Finance at the University of Central Lancashire, Cyprus.

When a sole individual acts as both CEO and chair of the board of a firm, the resulting CEO duality creates one of the most contentious issues in the field of strategic leadership (Dalton et al., 2007; Finkelstein et al., 2009). While the global financial crisis triggered a wave of proposals to eliminate CEO duality and achieve independent board leadership, corporate leaders and associations appear reluctant to adopt such an obligatory separation that suggests a “one size fits all” approach (Krause et al., 2014). Companies such as Bank of America, Citigroup and a number of other largest US banks chose to separate the two roles after a series of shareholder proposals demanding that they split the top jobs. Contrarily, Exxon Mobil refused to separate the two roles after the eleventh consecutive year of shareholder proposals, emphasising the cohesive leadership deriving from the combination of the roles. The Walt Disney Company recombined the two roles after splitting them for a period of time. Even as recent years have witnessed a tendency by firms to separate their CEO and chair positions, the majority of firms included in the S&P 1500 index continue to be governed by dual CEOs. In particular, the percentage of firms with dual CEO-chair roles at times reached as high as 65% in the early 2000s and has rarely dropped below 50% in more recent years. [1] These trends show that there are still questions about which leadership structure is the most effective.

Our study, entitled CEO Duality, Agency Costs, and Internal Capital Allocations, employs a large sample of diversified U.S. firms over the period 1992–2013 to answer a very important question: “Does CEO duality have any association with the firm’s policy choices regarding capital allocations across business segments and, if so, are there any valuation consequences?” In doing so, we aim to identify the channel through which CEO duality affects firm value. Furthermore, the study examines the importance of CEO compensation, an important agency risk moderating factor that could influence the impact of CEO duality on investment efficiency and firm value.

Our empirical results provide compelling evidence that firms governed by a dual CEO regime overall make less efficient capital allocation across business segments. In particular, diversified firms with dual CEOs, as compared to the industry average, invest more in segments that underperform relative to the best alternative. The findings also reveal that CEO duality leads to the allocation of relatively more capital to projects with lower growth opportunities, which negatively affects firm value. It seems that the ability to allocate corporate resources provides the CEO with an opportunity to extract private benefits, at the cost of misallocating corporate resources, such that (s)he incrementally makes investment decisions that lead to deterioration of shareholder value. Such capital (mis)allocations, however, violate the internal capital market efficiency tenet, giving support to the proponents of the agency viewpoint, who would like the two roles to be separated.

Having found that CEO duality relates to investment misallocations and inefficiencies, the study proceeds to test whether firms with key elements designed to mitigate agency problems, such as executive compensation, can alleviate this documented negative relation. In particular, we rely on statistical metrics that capture the CEOs’ equity-based incentives (which are part of its stock and option compensation) to separate the sample into firms having low and high agency problems. The findings reveal that the negative relation between CEO duality and investment efficiency and firm value is mainly driven by those firms characterized by low levels of equity-based incentives and low sensitivity of the CEO’s option-based compensation portfolio to the firm’s share price (i.e. firms that face high agency problems). Thus, there is compelling evidence that conditions of high agency risk allow dual CEOs to manifest agency behaviors with negative responses in terms of allocating capital expenditures to their firm’s investment opportunities, which incrementally erode overall firm value. This result sheds light on the risk-value trade-off faced by top executives.

To conclude, this study suggests corporate investment as a channel through which CEO duality negatively affects firm value and emphasizes that the adverse impact of CEO duality on capital allocations, investment efficiency and valuation occurs only in high agency environments, characterized by poor executive compensation. Our results add to both strategic leadership and corporate governance practice, while also illustrating that low agency risk environments alleviate the adverse effects that arise from CEO duality. The evidence from our study contributes to the debate on whether it is suboptimal for the firm to combine their CEO and chair roles—we show that CEO duality is detrimental only under conditions of high agency problems, in which case non-dual governance structures, with their independent oversight, may be beneficial for the firm. This could perhaps explain why there is no consensus in practice among corporations for implementing a non-dual leadership structure.

The full paper is available for download here.

1The figures are estimates from the Standard and Poors’ Execucomp database, which includes both active and inactive firms covered by the S&P 1500.(go back)


Dalton, D. R., Hitt, M. A., Certo, S. T. and Dalton, C. M. (2007). “The fundamental agency problem and its mitigation: Independence, equity, and the market for corporate control”, Academy of Management Annals, 1, pp.1-64.

Finkelstein, S., Hambrick, D. C., and Cannella, A. A. (2009). Strategic leadership: Theory and research on executives, top management teams, and boards. : Press.

Krause, R., Semadeni, M. and Cannella, A.A., 2014. “CEO duality: A review and research agenda. Journal of Management, 40(1), pp.256-286.

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