The Effects of Organizational Stability and Leadership Structure on Firm Performance

Most large corporations today are not managed by their owners or shareholders. Instead, they are managed by a leader - CEO or President - and a team of officers. The CEO is accountable to the stockholders through their elected representatives, the Board of Directors. When the CEO functions simultaneously as the Chair of the Board, the firm is described as having a dual CEO (Alibrandi, 1985; Anderson and Anthony, 1986; Levy, 1981; Steckmest, 1982; Vance, 1983). When the CEO and Chair of the Board are two different individuals, the firm is said to have a non-dual or independent organization structure. There is controversy surrounding the issue of CEO duality. Shareholder activist groups, governmental agencies and some researchers suggest that CEO duality threatens Board independence, and can erode the essential oversight responsibilities of the Board (Daily and Dalton, 1994; Daily and Dalton, 1997; Finkelstein and D'Aveni, 1994). On the other hand, defenders of CEO duality argue that it provides a focal point for the company's management team (Anderson and Anthony, 1986; Boyd, 1995; Daily and Dalton, 1997), which provides a potentially clearer organization mission and strategy. The relationship between CEO duality and firm performance has been studied to a limited extent by researchers, with conflicting results (Baliga et al., 1996; Berg and Smith, 1978; Boyd, 1994, 1995; Cannella and Lubatkin, 1993; Daily and Dalton, 1992; Rechner and Dalton, 1989, 1991; Sridharan and Marsinko, 1997). In practice, dual structures are becoming more common, even as the controversy over their effectiveness builds (Baliga et al., 1996). A recent stream of research has focused on the stability of leadership structure (Baliga et al., 1996). Some firms maintain a commitment to a dual structure or a non-dual structure for years at a time, while other firms change the division of responsibilities from dual to non-dual and vice versa. On the one hand, stability in leadership structure should have some advantages because it allows for clear delineation of leadership and control responsibilities that over time are well understood by management, Board members, and the investment community (Daily and Dalton, 1995; Wallace et al., 1990). On the other hand, changes in duality status would signal a significant change in control structure or, possibly, a period of temporary instability (Wallace et al., 1990). Since leadership roles and organizational control mechanisms are essential to effective strategy formulation and implementation (Galbraith and Nathanson, 1978), it is likely that duality status and changes in status will have important strategy, and performance implications. The limited research thus far in this area is ambiguous (Baliga et al., 1996). One issue that may be confounding studies of changes in duality status is its use in providing for an orderly leadership succession. In some organizations, as a dual Chair/CEO reaches retirement age, the intended successor will be given responsibilities as CEO, with the former CEO continuing as Board Chair for a year or longer. What may seem to be significant instability in type of leadership structure may instead be part of a planned, orderly succession. In other cases, movement from a dual to a non-dual structure or vice versa could signal leadership instability that could undermine the development and implementation of a consistent strategic direction, or that may be a response to a shift in industry or organizational conditions. In assessing the implications of a duality status change for firm performance, the distinction between an orderly succession and instability must be made. These arguments lead to the purpose of our study. We investigate whether stability in duality structure is consistent with superior organization financial and stock market performance, with special consideration given to those instances where instability could be attributed to orderly succession. …