If a company is not performing well, it may be time to take the CEO off the company board, new research suggests. However, in all other cases having one person serve as both the CEO and chair of a company does not affect company performance, despite conventional wisdom that suggests the contrary.
Despite this reality, many companies continue to have separate people serve as CEO and chairman or woman of the company board. Since the passage of the Sarbanes-Oxley Act in 2002, 43 percent of S&P 500 companies have split the roles of CEO and chair, up from 25 percent in 2002, the research found.
"Companies shouldn't undertake a separation process because they think they should, or because other companies have, but instead take a studied approach that looks at current performance, determines how a change will affect overall performance, and then separate only if necessary," said co-author Matthew Semadeni, associate professor of strategy at the Indiana University Kelley School of Business.
What's more, the researchers found that making a change in dividing leadership when a company is performing poorly can lead to a turnaround in the company, but doing so when the company is performing well can hurt company performance.
"Dividing leadership roles when performance is high is like taking medicine when you're not sick: It won't work and may cause other problems," Semadeni said. "Too often, the decision is made out of the blue, without any real planning or consideration of current performance, and, ultimately, it doesn't change anything."
For companies that are struggling, making a change by splitting the role of chair and CEO should only take place through a demotion strategy that keeps the CEO in place, but also brings in an independent chair to change the course of the organization. The demotion strategy led to a 150 percent reversal from the prior year's performance, the research suggests. In situations where the CEO of a company relinquished their title but remained as a chair or where a company replaced both the CEO and chair position, company performance suffered.
"Although the demotion strategy carries some risk, it is the most corrective option when used in cases of poor performance because it imposes independent oversight on the CEO and provides the best opportunity to change course," said co-author Ryan Krause, a Ph.D. candidate at the Kelley School. "It is an unambiguous signal to the CEO that the firm needs to be fixed and the CEO's only job is to provide a solution."
The research was based on a study of 309 firms in the S&P 1500 and Fortune 1000 that had separated their CEO and chair positions between 2002 and 2006. The research is set to be published in the Academy of Management Journal.