Saturday, 24 October 2015

The relationship between the CEO and the chairman of the board of directors

Elsewhere on this blog I have already argued that improving corporate governance is not as simple as increasing the number of independent, non-executive directors on the board. In some instances, increasing board independence may cause more harm than good as some firms may require friendlier boards, with an emphasis on providing advice rather than monitoring.

In a new study I have published in the Journal of Corporate Finance (the pre-publication version can be obtained from here) and which is co-authored with Peter Limbach and Meik Scholz from the Karlsruhe Institute of Technology, we find that the age difference between the CEO and the chairman of the board of directors also matters. We argue that greater age dissimilarity between the CEO and the chair is likely to increase cognitive conflict between the two, which likely results in more scrutinising by the chair of the decisions proposed  by the CEO. Such cognitive conflict is likely to be greatest when there is a generational gap, i.e. 20 years or more, between the two. Indeed, individuals from different generations have had different experiences and therefore tend to hold different attitudes and opinions.

In line with the above arguments, we find that firms with greater age dissimilarity between the CEO and the chairman tend to hold significantly more board meetings, likely reflecting the greater monitoring intensity by the board of directors. Importantly, a greater age difference between the CEO and the chair creates value in firms with a greater need for monitoring, such as firms without a large shareholder and those in more traditional industries with few intangible assets. In contrast, it destroys value in firms that require advice rather than monitoring from the board.

Again, this suggests that it is naive at best to consider that the effectiveness of the board of directors can be reduced to board independence. Relations within the boardroom are much more complex than the balance between executive and non-executive directors would suggest.

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