Authors: Alexandre Di Miceli Da Silveira (University of Sao Paulo) and Lucas Ayres B. de C. Barros (Mackenzie Presbyterian University and University of Sao Paulo)
Date Published: June 2011
It’s generally assumed that CEOs call the shots. Research papers, analyst reports, and media accounts usually emphasize how a CEO’s management style and strategic vision shape a firm’s major decisions. But this paper challenges that assumption. The researchers find that at many publicly traded companies, especially those with concentrated ownership, the CEO has only day-to-day authority. An entrepreneur–founder, family-owner, or large stockholder makes the big decisions as chairman of the board.
This situation is not very common in the United States or the United Kingdom. The so-called Anglo-Saxon economy is partial to firms with less centralized ownership, in which the CEO, who also often serves as chairman, is the center of corporate power. But the chairman-as-boss model is prevalent in the rest of the world, the authors write, especially for firms headquartered in continental Europe and in emerging economies.
Companies that do business internationally should therefore take into account the powerful role that chairmen may play in shaping the strategic direction of their firms. In addition, those U.S. or British companies with a single individual as chairman and CEO might take note of this finding: Firms that have a strong chairman tend to be more profitable, and appear to be better managed, than companies with a single person filling both roles.
The researchers analyzed the largest companies in Brazil and France, focusing on those that had different people serving as chairman and CEO. In cases of split leadership, the chairman could be seen as more influential than the CEO in major decision-making processes at about 70 percent of the French companies and 75 percent of the Brazilian firms, the researchers concluded. They added that when different people occupy the two positions (in companies that are not in the Anglo-Saxon economy), the assumption should be that the chairman is a more powerful player than the CEO.
The researchers began this study by examining 2010 data on the 300 largest listed firms in France and the 250 largest in Brazil. The authors chose those countries because their corporate environments have some legal and institutional similarities — for example, publicly held companies tend to have concentrated ownership structures. However, the two countries are in very different stages of development, which provided a comparison between an emerging, fast-growing market and a more mature economy.
After excluding financial institutions (because they are managed differently as a result of more regulation and higher risk) and firms that had either incomplete data or unique governance structures, the researchers were left with 204 French companies and 215 Brazilian firms.
In the French sample, the chairman and CEO were the same person at 145 of the companies, leaving the researchers to focus on the 59 with split leadership. For the Brazilian sample, 159 companies had a different chairman and CEO.
The researchers obtained corporate governance data from the firms’ annual reports and regulatory agencies. They also gathered accounting and stock market data. Finally, they developed a scale to gauge the relative power of chairmen versus CEOs based on seven criteria gleaned from these reports and follow-up interviews, including the expertise, structural control, prestige, and level of ownership of the two leaders.
The study revealed that the chairman tends to be more powerful in family-controlled companies and in firms with long-tenured board members. Chairmen on the “very powerful” end of the scale are pictured repeatedly in annual reports, the researchers found, and they pop up more frequently in corporate documents and sign more annual letters to shareholders than do CEOs in their companies. In some instances, such chairmen receive more in annual compensation than their CEOs, the authors said, even though CEOs typically work full-time and chairmen are usually part-time.
The authors found that firms with a strong chairman tend to be more profitable, as measured by comparing three- and five-year averages for returns on assets and equity. These companies could also be seen as more efficiently run, both because in such firms other board members have longer tenures and because strong chairmen hold fewer outside directorships, allowing for more focus on their own company.
The better performance could result from a “positive founder effect,” which occurs when a founder is able to maintain a consistent vision, the researchers said. They found that more than 60 percent of the chairmen who were identified as “very powerful” were founders. Younger firms also tended to have more powerful chairmen, which makes sense because at older firms the original visionary is more likely to have departed.
The researchers stress that the CEO is still the person more apt to run a company’s day-to-day operations and make smaller decisions. But because “corporate outcomes largely depend on how major financial, strategic, and organizational decisions are made,” they write, “...the possibility that the de facto corporate leaders hold the chairman title instead of that of CEO should thus be taken into account” by analysts, shareholders, and firms seeking to do business.
When the CEO and chairman positions are held by different people, especially in companies with concentrated ownership, the chairman is usually more powerful and more heavily involved in the strategic direction of the firm than the chief executive. Firms with a powerful chairman tend to be more efficiently managed and to have higher profitability.