Is an outside chair always better? The role of non …...For Review Only Is an outside chair always...

For Review Only

Is an outside chair always better? The role of non-CEO inside chairs on corporate boards

Shawn Mobbs∗ Culverhouse College of Commerce

University of Alabama Tuscaloosa, AL 35487

Abstract

Proponents of separating the CEO and Chairman positions advocate having an outside

chairperson, although having an inside chairperson can be valuable for some firms. I find inside

chairs are more likely where firm-specific human capital is more important and, in these firms,

inside chairs are associated with higher firm valuation and better operating performance.

Furthermore, skilled inside chairs increase forced CEO turnover sensitivity to performance. The

evidence suggests that certain inside chairs can be valuable when firm-specific information is

important for monitoring and an outside chair may be costly.

JEL classification: G30; G34 Keywords: board of directors; CEO turnover; inside chair; CEO succession; CEO duality

∗ Contact Information: Shawn Mobbs Box 870224 Alston Hall 361 Stadium Drive Tuscaloosa, AL 35487, United States, tel. (205) 348-6097, fax (205) 348-0590, e-mail [email protected] I am grateful to the editor (Robert Van Ness) and to two anonymous referees for very helpful comments and suggestions.

of 33 The Financial Review

123456789101112131415161718192021222324252627282930313233343536373839404142434445464748495051525354555657585960

For Review Only

1

1. Introduction

For years, corporate governance proponents have encouraged firms to separate the roles

of the CEO and the chairman of the board (Jensen, 1993). The 1992 Cadbury report stated,

“Given the importance and particular nature of the chairman’s role, it should in principle be

separate from that of the chief executive.” Almost 20 years later the California Public

Employees’ Retirement System (CalPERS) stated, “The board should be chaired by an

independent director.”1 As the CalPERS quote indicates, those promoting separation of these two

roles often advocate having an outside chairman. However, this can be costly for many firms,

especially when information asymmetry between management and the board is high (Brickley,

Coles and Jarrell, 1997). An alternative arrangement that separates the CEO from the board

chair, and yet can minimize this information asymmetry, is to have a non-CEO inside chair. This

occurs often following a succession process, initially noted by Vancil (1987), where the retiring

CEO retains the chair position while handing off the CEO title to his or her heir, though it is not

necessary that the inside chair is the former CEO. Founders or other long-time firm employees

can be an inside chair. It is also not necessary that this organizational structure last only for the

few months following a succession. Firms can chose to maintain an inside chair for several

years. Given their greater board authority over the CEO, separate inside chairs are similar to

outside chairs and in certain cases can be more beneficial. Yet, current research on board

leadership devotes little attention to inside chairs and focuses primarily on outside chairs. The

purpose of this study is to examine the role of the separate inside chair on corporate boards.

I identify any director within the Risk Metrics database classified as an employee and

with the title of chairman, but without the title of CEO, as a separate inside chair. I do not

consider inside chairs in firms in which there is also an outside chair. I begin by examining the 1 See section 4.9 of the 1992 Cadbury Report and section 1.4 of the 2011 CalPERS Global Principles of Accountable Corporate Governance document.

of 33The Financial Review

123456789101112131415161718192021222324252627282930313233343536373839404142434445464748495051525354555657585960

For Review Only

2

determinants of firms with a separate inside chair and find that separate inside chairs are more

likely in heterogeneous industries where firm-specific human capital is more important for

monitoring. I also find that a separate inside chair is more likely in larger and, thus more

complex, firms and in firms where agency concerns are greater and when the current CEO is less

experienced. Thus, the evidence is consistent with firms with greater information asymmetry

between managers and directors being more likely to maintain a separate inside chair.

The greater ownership and historical connections with the firm create strong incentives

for inside chairs to act on behalf of shareholders, which can translate into better board decision

making and ultimately greater firm value. Consistent with this hypothesis, I find strong evidence

that inside chairs are associated with significantly higher industry-adjusted Tobin’s Q. This

finding is robust to several methods of accounting for possible endogeneous relations between

the presence of a separate inside chair and firm value. Specifically, I incorporate firm fixed

effects and a matched control sample. I also find evidence that firms with a separate inside chair

on their board are associated with better firm operating performance.

An inside chair’s strong connections to the firm also provides another valuable benefit to

their boards. Specifically, they are excellent interim CEO candidates. Having a strong leader who

is able to step in on an interim basis and “steady the ship” in a crisis when broad management

changes are necessary affords the board time to undertake a careful search for a permanent

replacement without enduring continued poor management that could be costly for shareholders.

This was the case for the OfficeMax board when they removed CEO Christopher Milliken and

several other executives following allegations of accounting fraud in 2005 and appointed the

inside chair, former CEO George Harad, as interim CEO2 for two months until hiring an outside

CEO. Similarly, P&G’s board, when they fired CEO Durk Jager in 2000 after the stock price 2 Forbes.com article “Harad: OfficeMax Names Exec Chair Interim CEO as Milliken Quits” February 14, 2005, http://www.forbes.com/2005/02/14/0214autofacescan02.html


123456789101112131415161718192021222324252627282930313233343536373839404142434445464748495051525354555657585960

For Review Only

3

dropped 50%, called upon its board chair and former CEO John Pepper before eventually

appointing another inside officer, A.G. Lafley, as CEO.3 Retention of the former CEO on the

board indicates that the board values their skills (Brickley, Linck and Coles, 1999), firm-specific

information (Raheja, 2005), greater ownership (Jensen and Meckling, 1976), authority over the

CEO and the option of having a credible CEO replacement threat (Hermalin, 2005). The inside

chair’s authority over the current CEO is an important aspect of this board leadership structure

that distinguishes it from a co-CEO leadership structure (Arena, Ferris and Unlu, 2011), where

both individuals have equal authority.

I find that among non-CEO chairs separate inside chairs are significantly more likely to

become the CEO than are outside chairs. I also find they are more likely to serve as an interim

CEO than are other inside officer-directors and outside chairs. Thus, consistent with the

anecdotal evidence, when a firm has a separate inside chair they have a readily available CEO

replacement, which can serve to strengthen the board’s monitoring ability by providing the board

with a valuable option to replace a poor CEO. To understand better how firms use this option I

also examine forced CEO departure and its sensitivity to firm stock performance.

Consistent with the popular perspective of outside directors, I find that having a separate

outside chairperson on the board is associated with a significantly greater threat of forced CEO

departure. However, there is no evidence of outside chairs increasing forced CEO departure

sensitivity to performance. On the other hand, I find that inside chairs with additional board seats

are associated with greater forced CEO departure sensitivity to firm stock performance. These

results are robust to using the propensity score based matched sample, which alleviates

endogeneity concerns. Thus, there are differences among inside chairs as there are among other

inside director-officers (Masulis and Mobbs, 2011).

3 CNN article “P&G CEO quits amid woes” June 8, 2000, http://money.cnn.com/2000/06/08/companies/procter/


123456789101112131415161718192021222324252627282930313233343536373839404142434445464748495051525354555657585960

For Review Only

4

These findings contribute to the literature in several important ways. First, the findings in

this study contribute to the ongoing debate surrounding CEO-Chair duality (e.g. Booth, Cornett

and Tehranian, 2002). Many shareholder activists for years have advocated separating the CEO

and board chair roles to reduce agency concerns. Brickley, Coles and Jarrell (1997) nicely

summarize the costs and benefits of separating the CEO and Chair position on the board. One

significant cost is the transfer of information from the CEO to the board chair. When the chair is

an outside director with less firm-specific knowledge, the transfer can be costly and outweigh the

benefits of separating the two positions for many firms. However, when the chair is a non-CEO

inside director, the information transfer cost to the board is greatly reduced due to the greater

firm-specific knowledge possessed by the inside chair. Furthermore, the benefits of having a

separate CEO and chairman remain. Thus, for some firms having a separate inside chair can lead

to a better cost-benefit trade-off of having a separate CEO and chair.

Second, the findings extend recent research on the role of former CEOs. Fahlenbrach,

Minton and Pan (2011) find that former CEOs can also be valuable permanent CEO

replacements. The findings in this study differ from theirs in several ways. First, they consider

former CEOs at any time. Since former CEOs are technically inside directors for only three years

following their retirement,4 if they are not founders, the former CEOs in their sample need not be

insiders. Furthermore, not all former CEOs who are insiders may be in a position with greater

authority over the current CEO. In such cases, the former CEOs are less likely on the board due

to their talent. This study excludes those former CEOs who remain on the board, but not as the

chair. Finally, they exclude instances where the former CEO became CEO again specifically to

serve as an interim, which is one of the roles examined in this study.

4 Former employees can be deemed independent three years after they are no longer employed. See Section 303A.2.b.i of the NYSE listed company manual and NASDAQ listing rules section 5605.a.2.A.


123456789101112131415161718192021222324252627282930313233343536373839404142434445464748495051525354555657585960

For Review Only

5

In another study of former CEOs, Evan, Nagarajan and Schloetzer (2010) examine a

firm’s decision to retain an outgoing CEO on the board. My findings are a natural extension of

their analysis, by examining the subsequent behavior of an inside chair (i.e. a retained former

CEO) relative to an outside chair and how their retention can influence subsequent CEO turnover

events. This serves to further our understanding of the CEO succession process (Vancil, 1987).

Third, the findings extend the recent literature on non-CEO inside directors. Recent

research on variation among non-CEO inside officer-directors has uncovered valuable insights

into their unique monitoring (Mobbs, 2013) and advisory role (Masulis and Mobbs, 2011) within

the board. However, prior literature on board composition has overlooked this very influential

separate inside chair, which is another important difference among inside directors.

Fourth, the findings contribute to our understanding of the role of inside chairs in CEO

turnover and succession by providing new insights into the utility of retaining a former CEO on

the board. Most CEO succession studies focus on the selection process (e.g. Rose and Shepard,

1997; Naveen, 2006; Kale, Reis and Venkateswaran, 2009; Kini and Williams, 2012; Mobbs

and Raheja, 2012; or the performance of the chosen successor (e.g. Huson, Parrino and Starks,

2001) and Huson, Malatesta and Parrino, 2004) but there is little research on the outgoing CEO

(Brickley, Linck and Coles (1999) and Evans, Nagarajan and Schloetzer (2010) are notable

exceptions). The findings in this study reveal that retaining the outgoing CEO on the board can

provide a valuable tool for monitoring the successor, if they have strong incentives.

2. Related literature and hypotheses development

Relative to an outside chair, an inside chair can have a significant portion of their human

capital invested in the firm. Even if an inside chair is not a member of the founding family, they

likely have greater tenure with the firm or have experience leading the firm as CEO and have

likely accumulated a greater ownership stake in the firm relative to an outside chair. These


123456789101112131415161718192021222324252627282930313233343536373839404142434445464748495051525354555657585960

For Review Only

6

stronger links with the firm make them more like founding family members relative to outside

chairs, which is valuable (Anderson and Reeb, 2003). Their greater tenure provides them with a

greater understanding of firm operations allowing them to monitor more precisely current

management operations and decision-making (Drymiotes, 2007). In addition, greater ownership

provides greater monitoring incentives to minimize agency cost (Jensen and Meckling, 1976).

The historical connections and the greater ownership of inside chairs provide strong

incentives to ensure the long-run viability of the firm, which can increase measures of firm

value. In fact, when Peter McCausland recently stepped down as CEO of Airgas Inc. and

remained the chairman of the board he stated “I am going to focus on some key areas, ‘with a

longer horizon’…”.5 Conversely, outside chairs, by definition, have weaker ties to the firm and

likely have other outside obligations that can consume much of their time and attention, which

can detract from their incentives and ability to contribute to firm value.

H1:Boards with a separate inside chair will act more in shareholder’s interests and therefore are associated with higher firm valuations and better firm performance.

One advantage to having a separate board chairperson is that the board chair can use their

authority over the CEO to take the reins of the company if needed, at least on an interim basis.

There are multiple anecdotal examples of this occurring, which suggestion that being willing to

serve as CEO is a valuable assets a separate chair provides their board. While inside and outside

chairs are both likely capable of serving as CEO should the need arise, their different incentives

and firm-specific knowledge can lead to distinctly different predictions as to when they will act.

Outside chairs can lack the firm-specific skills required to lead the firm or they simply may not

wish to serve as CEO. For example, recently when the board of J.C. Penney Co. fired their CEO

Ron Johnson, the outside chairman Thomas Enigbous, called upon the former CEO Myron

5 Wall Street Journal Article May 4, 2012, “A New CEO is Named; Quarterly Net Rose 40%”


123456789101112131415161718192021222324252627282930313233343536373839404142434445464748495051525354555657585960

For Review Only

7

Ullman to serve as CEO rather than stepping in as CEO himself.6 Even if outside chairs can be

willing to serve as CEO, the extensive firm-specific experience of inside chairs makes them a

more attractive replacement should the board need to an interim CEO. Thus, the next hypothesis:

H2: Inside chairs are more likely to move into a CEO position than are outside chairs.

Outside chairs have fewer ties to the current CEO and can therefore be more willing to

remove a poor performing CEO, but as observed in the JC Penney incident they are not

necessarily willing to serve as CEO. This can delay a forced departure decision until the board

finds a suitable replacement. However, if an inside chair is present and they are willing to serve

as interim CEO; this creates a valuable option for boards and shareholders (Hermalin, 2005).

Alternatively, from an agency perspective, an inside chair can use their position and influence to

adversely affect shareholders. For example, an inside chair who likely had significant influence

in the selection of the current CEO, can have incentives to see that their heir succeeds (Acharya,

Myers and Rajan, 2011) and can be unwilling to fire them.

Given these varying possibilities, it is important to consider difference in inside chairs.

One difference is to distinguish those who are founders and those who are not. Several studies

have argued that strong family ties can impede monitoring (e.g. Bertrand and Schoar, 2006;

Villalonga and Amit, 2006; Villalonga and Raphael, 2010). While other studies like Anderson

and Reeb (2003) imply founders have strong incentives to monitor the current CEO and when

combined with their greater focus on long-term value can lead boards with a founder inside chair

to be more responsive to decreases in firm stock price.

Another mechanism for distinguishing among inside chairs is the demand for their

director services by external firms. Masulis and Mobbs (2011) and Mobbs (2013) find that the

external labor market for directorships is useful in identifying differences in inside operating

6 Wall Street Journal Article, “J.C. Penney Ousts CEO Ron Johson” April 8, 2013.


123456789101112131415161718192021222324252627282930313233343536373839404142434445464748495051525354555657585960

For Review Only

8

officer-directors’ independence from the current CEO and director talent, respectively. Similarly,

inside chairs with outside directorships are likely more skilled and less beholden to their

successor than other inside chairs, which will allow them respond swiftly to poor performance.

The final hypothesis reflects these two differences among inside chairs.

H3: Forced CEO departure is more likely and more sensitive to firm stock performance in firms with an inside chair who holds an outside directorship or who is a founder.

3. Data and descriptive statistics

The sample period is from fiscal years 1997 through 2012 and covers approximately

1,500 firms in the Risk Metrics database.7 Risk Metrics has director level information for each

firm-year including the number of other directorships, their classification as either an employee

of the firm, an outsider affiliated with the firm, or an independent outsider and indicators for

whether the director is the CEO, Chairman or Vice Chairman of the board. If Risk Metrics listed

no CEO for a firm-year, but the firm had one President or Chairman or only one insider listed I

consider that insider the CEO. If no insider is listed and a CEO is not mentioned the observation

is deleted. I also exclude firms with multiple CEOs listed. A separate inside chair is a director

classified as an employee of the firm and who holds the title of Chairman. I do consider a Vice

Chairman as a separate inside chair, since the chair could be an outsider or the CEO. I also only

consider a director a separate inside chair if the firm does not have an outside chair.

In the director-level data set there are 7,187 director-year observations of non-CEO

chairs. Among these director-years, there are 1,738 separate inside chair director-year

observations and 5,449 outside chair director-year observations. Table 1 Panel A reports

descriptive statistics for these chair-years within the sample. The average chair is about 61.5

years old and has 11.3 years of experience on the board. Their mean ownership, including stock

options, is 1.95%. The average non-CEO chair holds 1.08 additional public board seats. 7 The sample is hand corrected to account for the database changes incurred by Risk Metrics in 2007.


123456789101112131415161718192021222324252627282930313233343536373839404142434445464748495051525354555657585960

For Review Only

9

[Insert Table 1 about here]

The next set of columns of Table 1 Panel A report the sample statistics for separate inside

chairs and for non-CEO outside chairs. The last two columns report the differences in the

variable means and medians between these two subsamples. Compared to outside chairs, inside

chairs are older, have more board experience, and greater ownership. However, outside chairs

hold significantly more board seats. These differences are consistent with inside chairs having

greater alignment with shareholders through their ownership and human capital invested with the

firm. Consistent with this, Table 1 Panel A also reveals that over half of the inside chairs have

very strong historical connections with the firm. Of the separate inside chairs, 13% are founders,

4% are related to the founder and 38% are former firm CEOs (non-founders).

When I aggregate all of the director-year data up to the firm-year level, there are 18,178

firm-year observations. Just over 9% of these firm-year observations have a separate inside chair

on their board.8 The frequency of inside chairs is lower than the 53.7% of former CEOs as

directors found by Fahlenbrach, Minton and Pan (2011) from 1994 to 2004, which highlights the

differences discussed previously between their measure and the measure used here. Table 1

Panel B reports firm-level descriptive statistics for the full sample as well as for the two sub-

samples of firm-years with and with a separate inside chair.

The mean (median) firm has assets of $15.2 ($1.8) billion with 2.8 (2) business segments.

The average board size is 9.3 members, with just over 72% independence. Forced CEO turnover,

occurs in 2% of the firm-year observations.9 I identify forced CEO turnovers by examining press

releases. They also include CEO departures when the departing CEO is less than 60 years of age

8 Because some firms have multiple inside chairs, there are fewer firms with a separate inside chair than there are inside chairs. 9 This represents over 24% of all CEO turnover events during the sample. Earlier studies by Fich and Shivdasani (2006) and Parrino, Sias and Starks (2003) find forced departures rates of 18% with 1989-1995 data and 19% with 1982-1993 data, respectively. The slightly higher rate here for the later period is also consistent with the increasing trend of forced CEO departures (Hermalin, 2005).


123456789101112131415161718192021222324252627282930313233343536373839404142434445464748495051525354555657585960

For Review Only

10

and there was no mention of health concerns, another position or no retirement announcement at

least six months prior. I exclude those due to death. These criteria are similar to other recent

CEO turnover studies (e.g. Guo and Masulis, 2014).

Firms with a separate inside chair are smaller by total assets, have fewer business

segments, hold less debt, have more capital expenditure, are younger and have a significantly

higher Tobin’s Q. There is no difference in firm R&D or the frequency of forced CEO departure.

Finally, not surprisingly, firms with a separate inside chair have larger boards and boards that are

less independent than are other firms without this additional insider on their boards.

4. Results

4.1 Are inside chairs likely CEO candidates?

The evidence in Table 1 reveals that separate inside chairs have strong ties to the firm

arising through their greater tenure and ownership, which creates strong incentives to step in as

CEO if needed. On the other hand, other directors, such as outside chairs, likely have weaker

historical connections to the firm and less firm-specific knowledge, which makes them less

attractive as CEO candidates. This section, examines how often separate inside chairs are

appointed as CEO relative to other directors.

Table 2 Panel A reports the frequency of all non-CEO chairs (inside and outside) being

appointed as CEO for all firms in the sample. The first row in Panel A reveals that just less than

1% of the non-CEO chairs are appointed as CEO. While this is a small percentage, there are

significant differences between inside and outside chairs. Even though there are much fewer

inside chairs, they are appointed as CEO nearly ten times as often as an outside chair. This is

consistent with firms valuing the inside experience and stronger ties to the firm more than

outside independence when needing to appoint a CEO. As the anecdotal evidence suggest, when

firms appoint an inside chair to the CEO position it is most likely for an interim position. To


123456789101112131415161718192021222324252627282930313233343536373839404142434445464748495051525354555657585960

For Review Only

11

examine these intances, the last column of in Panel A only considers CEO appointments that

subsequently last two years or less. Although these are even less frequent events, inside chairs

are significantly more likely to be appointed as interim CEOs than are outside chairs.


Though the results in Panel A reveal statistically significant differences between inside

and outside chairs, the economic magnitudes seems small because the sample considers all non-

CEO chair directors in all firm-years of the sample, even those when a new CEO is not selected.

To better measure the economic impact, Panel B reports the frequency of CEO appointments

among all director types in firms that appointed a CEO. On average 4.5% of all directors are

selected as CEO. However, among the separate inside chairs, almost 1 in 3 (31.7%) are

appointed as CEO. For interim CEO positions, almost 12% of the separate inside chairs are

appointed as CEO. It is clear that separate inside chairs are significantly more likely than other

directors to be selected as CEO when firms need a change in CEO.

Panel C considers only inside directors, since most new CEOs are appointed from within

(Mobbs, 2013) and the most likely candidates are often on the board (Mobbs and Raheja, 2012).

Among non-CEO insiders in firms that appoint a new CEO, non-chair insiders are more likely to

be appointed as CEO. However, when I only consider interim appointments, I find that separate

inside chairs are significantly more likely to be selected as CEO. This result is consistent with

separate inside chairs being more inclined to step in on an interim basis rather than to assume a

full-time CEO position. As noted previously, many separate inside chairs are former firm CEOs

and thus have intentionally stepped down from the fulltime role and are less inclined to become a

full-time CEO again. Thus, the value that separate inside chairs bring to their board differs from

other inside directors who represent a potential full-time replacement.


123456789101112131415161718192021222324252627282930313233343536373839404142434445464748495051525354555657585960

For Review Only

12

Finally, Table 2 Panel D considers only the non-CEO chairs at firms where a new CEO is

appointed. In this sample, 13.69% of the chairs are appointed as CEO. However, the difference

between inside and outside chairs is dramatic. While only 3.56% of the outside chairs ever step

in as CEO, 31.72% of the inside chairs become CEO. The difference in interim CEO

appointments is also significant. Thus, inside chairs can provide their boards with a valuable

option that other inside directors or even other outside chairs cannot equivalently provide. In

summary, the evidence in Table 2 reveals that inside chairs can serve as a valuable interim CEO

replacement and while this occurs less often, when it is necessary it can be at a very crucial time

for the firm, as the anecdotal evidence suggests. This can make inside chairs valuable to firms.

4.2 Determinants of inside chairs

The evidence in Table 1 reveals that firms with a separate inside chair are systematically

different from other firms. These differences could also be associated with firm value and the

board’s subsequent responsiveness to a poor performing CEO. This section explores the

determinants of firms with a separate inside chair and then creates a matched sample based on

these multiple determinants to use in the subsequent analyses to help address these concerns.

Retention by the board of an inside chair director with valuable firm-specific information

can be more beneficial in larger or more complex firms where monitoring is more difficult (e.g.

Adams and Ferriera, 2007; Harris and Raviv, 2008). I use the natural logarithm of total assets

and the number of business segments to capture firm size and firm age, leverage and R&D

spending as additional measures of firm complexity. Evans, Nagarajan and Schloetzer (2010)

find that former CEOs are more likely to remain as an inside chair when past performance is

better. I control for recent performance with lagged annual stock return and ROA. Because

founder influence can also lead to the retention of a separate inside chair, I use indicators for the


123456789101112131415161718192021222324252627282930313233343536373839404142434445464748495051525354555657585960

For Review Only

13

presence of the founder or a founding family member. I also control for outside director

ownership as a measure of the board’s alignment with shareholders.

In addition, the uncertainty of the current CEO and the skills required for leading the firm

are associated with the likelihood and difficulty in finding an interim CEO, which can therefore

influence the board’s decision to retain a separate inside chair. When a firm has a new or young

CEO at the helm, there is greater uncertainty regarding the CEO’s abilities and when a current

CEO has little ownership or incentive alignment from compensation, these concerns are

exacerbated. CEO age, ownership and the percentage of equity compensation capture the

uncertainty and agency concerns associated with a CEO. Mobbs and Raheja (2012) find that

boards choose successors early in firms where firm-specific human capital is more important for

the CEO. Similarly, the more unique a firm is, the more difficult it can be to find a qualified

interim CEO. I use the Parrino (1997) industry homogeneity measure for the Fama-French

defined industry groups to capture the degree of uniqueness of a firm. Finally, I control for the

period following the exchange listing requirements and the Sarbanes-Oxley Act of 2002.

Table 3 reports results from probit analyses of the likelihood of firms having a separate

inside chair present on their board. Model 1 reports results using the full sample of firm-years.

The marginal effects are reported to the right of each corresponding coefficient estimate. The

results in model 1 reveal that inside chairs are more likely in larger firms. This is consistent with

complex firms being more likely to employ a separate inside chair structure. Additionally, there

is some evidence that separate inside chairs are associated with younger firms with less leverage

and less R&D, though the coefficient estimates for leverage and R&D are not statistically

significant. These results are surprising and different from the theoretical predictions of when

inside directors bring value to boards (e.g. Raheja, 2005). One reason for the difference can be


123456789101112131415161718192021222324252627282930313233343536373839404142434445464748495051525354555657585960

For Review Only

14

that these inside directors are distinctly different from inside officer-directors, which is the focus

of most theoretical models of board composition and inside directors.


Recent past operating performance is associated with a greater likelihood of the board

having a separate inside chair consistent with Evans, Nagarajan and Schloetzer (2010). However,

recent past stock performance is marginally associated with a lower likelihood of the presence of

a separate inside chair. The weak relation with lower stock performance could be evidence of

some inside chairs being detrimental to their firms by limiting the managerial freedom of the

current CEO.10 Thus, there may be variations among inside chairs that are important to consider.

I will examine this possibility in later sections.

Founding family influence is strongly associated with the likelihood of the board having

a separate inside chair. Based on the marginal effects estimate, the presence of a founder or

founding family member can increase the likelihood of the firm having a separate inside chair by

almost 68% (.053/.078). Outside director ownership is significantly negatively related to the

presence of a separate inside chair. This is consistent with greater outside director monitoring

incentives serving as a substitute for the greater incentive alignment of an inside chair relative to

an outside chair. Separate inside chairs also are significantly associated with firms in less

homogenous industries where it can be more difficult to find a CEO with the proper skills to

manage the firm. Similarly, separate inside chairs are more likely when there is more uncertainty

regarding the current CEO or less alignment with shareholders due to their young age and lower

ownership. Finally, there is a significant positive relation between the regulation indicator and

the presence of a separate inside chair. Thus, while the increased emphasis on independent

10 This is the case in the recent conflicts at Occidental Petroleum, Corp., where the inside chairman and former CEO, Ray Irani, tried to oust the current CEO, Stephen Chazen, against the wishes of other directors and shareholders. Wall Street Journal Article “Occidental Faces a New Fight at the Top” March 29, 2013.


123456789101112131415161718192021222324252627282930313233343536373839404142434445464748495051525354555657585960

For Review Only

15

directors has forced some firms to remove separate inside officer directors from their board

(Masulis and Mobbs, 2011), the opposite effect has occurred for separate inside chairs. This

perhaps reflects the value that this particular type of inside director provides to some firms.

These results indicate that firms with a separate inside chair are distinctly different from

other firms. Similarly, these differences may also influence the factors in the subsequent analysis

and bias the corresponding results and their interpretation. Ideally, when analyzing the effect of

having an inside chair on particular board decisions, I would like to compare a firm with an

inside chair to the same firm but without an inside chair. To implement this empirically, I match

each treatment firm (firm with an inside chair) to a control firm (firm without an inside chair)

that is as similar to the treatment firm as possible. To achieve this I use the coefficient estimates

from model 1 of Table 3 to estimate the probability of each firm in the sample of having an

inside chair, its propensity score. Then for each treatment firm I find the firm without an inside

chair that is in the same Fama-French defined industry and has the closest propensity score. The

result is a matched sample of very similar firms that only differ primarily in whether or not they

have a separate inside chair. In model 2, I re-estimate model 1 using only the matched sample.

No explanatory variables load with significant coefficient estimates and the overall explanatory

power of the model using the matched sample drops to less than 1%. This reveals that the

treatment and control firms in the matched sample are indeed similar. Thus, I use this sample in

the subsequent analysis to test for the robustness of the primary results to endogeneity concerns.

4.3 Separate inside chairs and firm valuation and performance

In this section, I examine the effect of a separate inside chair on firm valuation and

performance. I measure firm valuation with the market-to-book approximation of Tobin’s Q and

firm performance with ROA. I follow similar studies in the literature on firm performance for

controls (e.g. Anderson and Reeb, 2003; Fich and Shivdasani, 2006; etc.). Table 4 reports the


123456789101112131415161718192021222324252627282930313233343536373839404142434445464748495051525354555657585960

For Review Only

16

results from OLS regression analysis where the dependent variable is the industry-adjusted

(Fama-French 49 Industry definitions) natural logarithm of Tobin’s Q in models 1 through 5 and

the industry adjusted ROA in models 6 through 8. Each model includes year and industry fixed

effects and employs robust standard errors clustered by firm.


Model 1 reports the results using the full sample. The indicator for a separate inside chair

is positive and significant (p-value<.01). This is consistent with a separate inside chair providing

valuable benefits for shareholders. The coefficient estimate suggests that firms with a separate

inside chair, on average have an industry-adjusted Tobin’s Q that is 4.5% higher than firms

without a separate inside chair. However, it is possible that other endogenous relations are

causing these results. Thus, I control for this possibility using two different methods in the next

two models. In model 2, I incorporate firm-fixed effects in the regression model to account for

any unobserved time-invariant firm characteristics associated with having a separate inside chair

and with firm value. The coefficient estimate for a separate inside chair is smaller, but it remains

positive and significant at the 5% level. The coefficient estimate suggests that having an inside

chair is associated with an increase of 2.6% in industry-adjusted Tobin’s Q relative to if the firm

did not have a separate inside chair. In model 3, I report results using the matched sample

described in the last section. Again, the coefficient estimate for having a separate inside chair is

positive and significant at the 5% level. The magnitude of the estimate, .039, is close to those

estimates in models 1 and 2. Thus, endogenous relations do not appear to driving the results.

Next, I consider two subsamples of inside chairs. Model 4 reports results for the full

sample using separate indicator variables for separate inside chairs who are founders and those

who hold additional directorships (talented chairs). I find no evidence that founder inside chairs

are associated with higher firm value. However, I do find evidence that talented inside chairs are


123456789101112131415161718192021222324252627282930313233343536373839404142434445464748495051525354555657585960

For Review Only

17

associated with significantly higher firm valuations.11 The coefficient estimate is positive at the

5% level and suggests that firms with a talented separate inside chair is associated with a 5.9%

higher industry-adjusted Tobin’s Q. I find similar results when using the matched sample of

firms in Model 5. Thus, the evidence for firm valuation in Table 4 reveals that having a separate

inside chair can be valuable for some firms and the benefit is greatest when the external market

for directorships recognizes the inside chair as talented.

Tobin’s Q can also proxy for other firm characteristics such as growth opportunities.

Though I control for growth opportunities in the regression models with capital expenditure, in

the next three models I use industry adjusted ROA as a measure of firm operating performance

as the dependent variable. In model 6, I find a positive and significant relation between the

presence of a separate inside chair and firm operating performance, though the statistical

significance is at the 10% level. In model 7, I incorporate firm fixed effects to account for

endogeneity and find a positive and significant coefficient estimate of 0.012 for the presence of a

separate inside chair. Finally, in model 8, I report results using the matched sample. Here the

coefficient estimate for a separate inside chair is positive, but it is not statistically significant.

The evidence for operating performance, though slightly weaker, is nonetheless consistent with

the results for firm valuation. In all, the evidence in Table 4 is consistent with H1.

4.4 Forced CEO turnover

The previous analysis and the anecdotal evidence reveal an important source of value that

some inside chairs can provide their board. Namely, it is their ability to serve as an interim CEO,

which can increase the board’s responsiveness to poor performance. This section explores this

further by examining forced CEO departure.

11 Fich and Shivdasani (2006) find that outside directors with three or more additional directorships are negatively associated with firm value, which suggests too many additional directorships can be detrimental. The separate inside chairs, on average, have less than two additional directorships, thus, they are not as busy as the outside directors in the Fich and Shivdasani (2006) study.


123456789101112131415161718192021222324252627282930313233343536373839404142434445464748495051525354555657585960

For Review Only

18

There are 366 instances of forced CEO turnover events within our sample of firms. Table

5 reports results examining the relation between forced CEO turnover and the presence of

various types of chairs and the corresponding relation between firm stock performance. Stock

performance is measured as the stock return in the year prior to the forced CEO turnover less the

return of the value weighted market return over the same period. All models are probit

regressions with robust standard errors clustered by firm. The dependent variable is one if a

forced CEO turnover occurs during the year and zero otherwise. The key independent variables

are lagged indicators for the presence of a separate chair, firm stock performance and the

interaction of these two. The control variables follow other forced CEO turnover studies (Coles,

Daniels and Naveen, 2014; Fich and Shivdasani, 2006; Huson, Malatesta and Parrino, 2004;

Parrino, 1997; Warner, Watts and Wruck, 1988; and Weisbach, 1988). All the variables are

lagged, therefore the sample size is slightly smaller since board data for 1996 are not available.

Firm size is the measured as the natural logarithm of the firm’s total assets. CEO ownership and

outside director ownership control for the influence of the CEO and the directors, respectively. I

use an indicator variable for a board with more than 60% independent directors, board size and

board co-option to control for board monitoring incentives. I also control for the presence of a

founder CEO and for CEOs near retirement age (greater than 60 years old).


In model 1 of Table 5, the coefficient estimate for the presence of a separate inside chair

is negative, but not significant. Conversely, the coefficient estimate for a separate outside chair is

positive and significant. These results are consistent with the traditional view that outside

directors are better monitors and thus associated with frequent forced departures and insiders are

weak monitors. The coefficient estimate for performance is negative and significant, consistent

with prior research. However, neither of the interactions between having a separate inside chair


123456789101112131415161718192021222324252627282930313233343536373839404142434445464748495051525354555657585960

For Review Only

19

or a separate outside chair and performance is significant. Thus, while forced CEO turnover is

more likely when there is an outside chair present, there is no evidence that these boards are

more responsive to firm stock performance.

The evidence in Table 4 reveals that there are important differences among separate

inside chairs. Thus, in model 2, I differentiate between separate inside chairs who are founders

and those who are not (other inside chairpersons). Neither is associated with a significantly

greater likelihood of forced CEO departure or a greater sensitivity of forced CEO departure to

firm stock performance. The coefficient estimate for outside chairs is consistent with model 1.

In model 3, I differentiate among inside chairs those with additional outside directorships,

talented inside chairs, and those with no additional directorships (other inside chairpersons).

Again, I find no significant association with the likelihood of either type of inside chair being

significantly associated with the unconditional likelihood of a forced CEO departure. However,

when examining the likelihood of forced CEO turnover conditioning on firm stock performance,

interesting differences emerge. The coefficient of the interaction between the presence of a

talented inside chairperson and firm stock performance is negative and significant. Conversely,

the coefficient on the interaction between other inside chairpersons and firm stock performance

is positive and significant. These findings reveal that inside chairs with outside directorships

relate to stronger forced CEO turnover sensitivity to performance. The results reveal that not all

inside chairs are equally beneficial for firms in a forced CEO turnover event. The observed

variation in their monitoring strength, as indicated by the different sensitivities of forced CEO

turnover to firm stock performance, can contribute to the different magnitudes of their effects on

firm valuation observed in Table 4.

An unreported F-Test of the net effect of performance on forced CEO turnover when a

talented inside chair is present reveals significantly greater sensitivity to firm stock performance.


123456789101112131415161718192021222324252627282930313233343536373839404142434445464748495051525354555657585960

For Review Only

20

However, to get a sense of the economic impact, panel B of Table 5 reports the implied

probabilities of annual forced CEO turnover from the results of this proit regression.12 A drop

from the top to the bottom quartile of firm stock performance, when a talented inside chair is

present, results in a 720% greater likelihood of forced CEO departure. The same drop in stock

performance when one is not present results in only a 144% increase in the likelihood of forced

CEO departure.

Model 4 reports results using only the matched sample of treatment and control firms.

Since the matched control firms are more likely to have an outside chair, I exclude this variable

in this model. In this model, both inside chairs are associated with a lower unconditional threat of

forced CEO departure. Thus, relative to firms with an outside chair or even to firms with a CEO

chair, firms with an inside chair are less likely to fire their CEO. However, I continue to find that

separate talented inside chairs differ from other inside or outside chairs by making forced CEO

turnover more sensitive to firm stock performance.

To test directly the differences between inside chairs and outside chairs I create a second

matched sample. I still match based on the propensity score derived from Table 3 Model 1 within

industry, but I further restrict the control firms to have an outside chairman (instead of allowing

for a CEO chairman). Model 5 reports the results using this modified matched sample. Again,

firms with either type of inside chair are significantly less likely to experience a forced CEO

turnover, unconditionally, than are similar firms with an outside chair. However, when

conditioning on firm stock performance, firms with a talented inside chair exhibit significantly

greater forced CEO turnover sensitivity to performance. This is consistent with these talented

inside chairs being more beneficial to shareholders by facilitating more precise monitoring of the

12 The magnitudes and standard errors of the marginal effects of the interactive variables are estimated by taking discrete differences (Ai and Norton, 2003 and Powers, 2005).


123456789101112131415161718192021222324252627282930313233343536373839404142434445464748495051525354555657585960

For Review Only

21

CEO by the board with their greater firm-specific knowledge and by serving as a readily

available substitute CEO. Greater trust by the board in the inside chair’s ability to step in and

successfully run the firm while they search for a replacement creates a valuable asset for the

board and allows them to respond more swiftly to poor performance than they could otherwise.

The other controls reveal that larger firms, those with smaller boards and greater

ownership by the outside directors are more likely to experience a forced CEO turnover.

Whereas, boards with a greater fraction of directors elected since the current CEO took office are

less likely to experience a forced CEO turnover. In unreported results, I also examined the

interaction between firm stock performance and board size and board co-option and found no

significant effect for these interactions. In all models, boards with a majority of independent

directors are associated with a greater threat of forced CEO departure.

5. Conclusions

Much research has been devoted to the separation of the CEO and chairman of the board

positions. However, there has been much less research on whether the non-CEO chairman should

be an insider or an outsider. Most proponents of a separate non-CEO chair often presume, at least

implicitly, that an outside chair is the optimal governance structure. However, there has been

little research examining the differences between inside and outside non-CEO chairpersons.

I study non-CEO chairs and find important differences in separate inside chairs relative to

outside chairs. Specifically, inside chairs are more likely in larger firms and in firms where firm-

specific human capital is more important for firm leadership and in firms where the CEO

requires greater monitoring. Furthermore, the incentives of inside chairs through their greater

ownership and historical ties to the firm differ from those of outside chairs. An important

consequence of these differences is that inside chairs have stronger incentive alignment with

shareholders, which can improve board decision making.


123456789101112131415161718192021222324252627282930313233343536373839404142434445464748495051525354555657585960

For Review Only

22

I find that separate inside chairs are associated with significantly higher firm value and

better operating performance. The results are robust to multiple methods of accounting for

possible endogenous relations. I also explore one specific mechanism by which inside chairs can

add value; that is by serving as a valid CEO replacement. Having this option facilitates stronger

board monitoring, which can benefit shareholders. However, not all inside chairs are as valuable

to shareholders through this mechanism. I find that inside chairs with additional outside

directorships are more likely to facilitate stronger monitoring and exhibit greater forced CEO

turnover sensitivity to firm stock performance.

In all, the evidence in this study reveals that inside chairs are distinctly different from

outside chairs in ways that are important to shareholders. Although it is still important to

recognize the individual incentives of the inside chairs. Recognizing these differences provides

researchers with a better understanding of boardroom dynamics and contributes to the continued

development of corporate governance best practices. For example, the findings here reveal a

potentially beneficial and less costly way for some firms to separate the CEO and chairman

positions.


123456789101112131415161718192021222324252627282930313233343536373839404142434445464748495051525354555657585960

For Review Only

23

Appendix Variable Definitions∗∗∗∗

Variable Definition _____________ Key Independent Variables- different types of non-CEO inside directors: Source Risk Metrics Separate inside chair non-CEO firm employee and chairperson of the board of directors.

This does not include vice chairpersons who are firm employees. Founder inside chair non-CEO firm employee and chairperson of the board of directors

who is also a founder of the company. Talented inside chair non-CEO firm employee and chairperson of the board of directors

who holds an unaffiliated outside directorship. Outside chairperson non-firm employee chairperson of the board of directors. Firm characteristics: Source Compustat and CRSP Total assets Total assets ($1,000,000): data6 Num. of business segments Number of business segments listed in COMPUSTAT. Firm age Current year less the first year the firm was listed in CRSP. Leverage Long-term debt plus debt in current liabilities scaled by total assets:

(data9 + data34)/data6 Capital expenditure/sales Capital expenditure/total sales: data128/data12 R&D/assets Max(data46,0) / Total Assets Tobin’s Q (Total Assets – Book Equity + Market Value of Equity) /Total

Assets: (data6 – data60 + data199*data25)/data6 Annual firm performance measures: Source CRSP and Compustat ROA EBITDA / Beginning-year Total Assets or data13/lag(data6) from

Compustat. Stock return Abnormal returns (compound annual returns adjusted with market

model). Director and CEO characteristics: Source Risk Metrics/hand collection from proxy statements Age Age of director from Risk Metrics. Board tenure Current year minus the year the director was first appointed. ∗ All dataxx variables refer to the corresponding variable identifiers in the COMPUSTAT data base


123456789101112131415161718192021222324252627282930313233343536373839404142434445464748495051525354555657585960

For Review Only

24

Ownership % Percent of common shares outstanding held by the director,

including stock options, from Risk Metrics. Founder-director Dummy variable: 1 if the director is a founder: Hand collected

from proxy statements. Founder family member Dummy variable: 1 if a the director is a relative of the founder:

Hand collected from proxy statements. CEO ownership % Percent of common shares outstanding held by the CEO, including

stock options, from Risk Metrics. CEO tenure Current year minus the year the CEO joined the board from Risk

Metrics. CEO age > 60 Dummy variable: 1 if the CEO is older than 60. Forced CEO turnover Dummy variable: 1 if the firm announced the forced departure of

their CEO in the current quarter. Forced is identified by manually searching press releases for CEO turnover within the sample period.

CEO equity compensation Total equity compensation, stock options and restricted stock

grants, received by the CEO in the fiscal year ($1,000) from ExecuComp.

Board characteristics: Source Risk Metrics Outside director ownership Percent of common shares outstanding held by all outside directors

of the board, excluding the CEO, including stock options, from Risk Metrics.

Board size Number of directors on the board from Risk Metrics. Percent independent Percentage of directors on the board classified as independent in

Risk Metrics. Independence refers to no business or family connections to the firm or its management.

Co-option The fraction of directors on the board with tenure less than the

current CEO as measured in Risk Metrics. 60% Independent outsiders Dummy variable: 1 if the percentage of independent outside

directors is at least 60%.


123456789101112131415161718192021222324252627282930313233343536373839404142434445464748495051525354555657585960

For Review Only

25

References Acharya, V., Myers, S., Rajan, R., 2011. The internal governance of firms, Journal of Finance 66, 689-720. Adams, R., and D. Ferreira, 2007. A theory of friendly boards, Journal of Finance 62, 217-250.

Ai, C., E. C. Norton, 2003. Interaction terms in logit and probit models, Economic Letters 80, 123-129. Anderson, R. and D. Reeb, 2003. Founding-Family ownership and firm performance: Evidence from the S&P 500, Journal of Finance 58, 1301-1328. Arena, M. P., Ferris, S. P. and E. Unlu, 2011. It takes two: The incidence and effectiveness of Co-CEOs, The Financial Review 46, 385-412. Bertrand, M. and A. Schoar, 2006. The role of family in family firms, Journal of Economic Perspectives 20, 73-96. Brickley, J., J. Coles and G. Jarrell, 1997. Leadership structure: Separating the CEO and chairman of the board, Journal of Corporate Finance 3, 189-220. Brickley, J., J. Linck and J. Coles, 1999. What happens to CEOs after they retire? New evidence on career concerns, horizon problems, and CEO incentives, Journal of Financial Economics 52, 341-377. Booth, J. R., M. M. Cornett and H. Tehranian, 2002. Board of directors, ownership and regulation, Journal of Banking and Finance 26, 1973-1996. Coles, J., N. Daniels and L. Naveen, 2014. Co-opted boards, Review of Financial Studies 27, 1751-1796. Drymiotes, G., 2007. The monitoring role of insiders, Journal of Accounting and Economics 44, 359-377. Evans, J. H., N.J. Nagarajan and J. D. Schloetzer, 2010. CEO turnover and retention light: Retaining former CEOs on the board, Journal of Accounting Research 48, 1015-1047. Fahlenbrach, R., B. A. Minton and C. H. Pan, 2011. Former CEO directors: Lingering CEOs or valuable resources? Review of Financial Studies 24, 3486-3518. Fich, E. and A. Shivdasani, 2006. Are busy boards effective monitors? Journal of Finance 61, 689-724. Guo, L. and R. Masulis, 2014. Board structure and monitoring: New evidence from CEO turnovers,” Working Paper, University of New South Wales. Harris, M. and A. Raviv, 2008. A theory of board control and size.” Review of Financial Studies 21, 1797-1832. Hermalin, B., 2005. Trends in corporate governance, Journal of Finance 60, 2351-2384. Huson, M. R., P. H. Malatesta, and R. Parrino, 2004. Managerial succession and firm performance, Journal of Financial Economics 74, 237-275. Huson, M. R., R. Parrino and L. Starks, 2001. Internal monitoring mechanisms and CEO turnover: A long-term perspective, Journal of Finance 56, 2265-2297.


123456789101112131415161718192021222324252627282930313233343536373839404142434445464748495051525354555657585960

For Review Only

26

Jensen, M. and W. Meckling, 1976. Theory of the firm: Managerial Behavior, agency costs and ownership structure, Journal of Financial Economics 3, 305-360. Jensen, M., 1993. The modern industrial revolution, exit and the failure of internal control systems, Journal of Finance 48, 831-880. Kale, J., E. Reis and A. Venkateswaran, 2009. Rank order tournaments and incentive alignment: the effect on firm performance, Journal of Finance 64, 1479-1512. Kini, O. and R. Williams, 2012. Tournament incentives, firm risk, and corporate policies, Journal of Financial Economics 103, 350-376. Masulis, R. and H. S. Mobbs, 2011. Are all inside directors the same? Evidence from the external directorship market, Journal of Finance 66, 823-872. Mobbs, H. S., 2013. CEOs under fire: The effects of competition from inside directors on forced CEO turnover and CEO compensation, Journal of Financial and Quantitative Analysis 48, 669-698. Mobbs, H. S. and C. Raheja, 2012. Executive promotions: compensation, CEO influence, and CEO succession, Journal of Corporate Finance 18, 1337-1353. Naveen, L., 2006. Organizational complexity and succession planning, Journal of Financial and Quantitative Analysis 41, 661-683. Parrino, R., 1997. CEO turnover and outside succession: A cross-sectional analysis, Journal of Financial Economics 46, 165-197. Parrino, R., R. Sias, and L. Starks, 2003. Voting with their feet: Institutional ownership changes around forced CEO turnover, Journal of Financial Economics 68, 3-46. Powers, E. A., 2005. Interpreting logit regressions with interactive terms: An application to the management turnover literature, Journal of Corporate Finance 11, 504-522. Raheja, C., 2005. Determinants of board size and composition: A theory of corporate boards, Journal of Financial and Quantitative Analysis 40, 283-305. Rose, N. and A. Shepard, 1997. Firm diversification and CEO compensation: Managerial ability or executive entrenchment? Rand Journal of Economics 28, 489-514. Vancil R., 1987. Passing the baton: Managing the process of CEO succession, Boston: Harvard Business School Press. Villalonga, B., Amit, R., 2006, “How do family ownership, control and management affect firm value?” Journal of Financial Economics 80, 385-417. Villalonga, B. and A. Raphael, 2010. Family control of firms and industries, Financial Management 39, 863-904. Warner, J., R. Watts and K. Wruck, 1988. Stock prices and top management changes, Journal of Financial Economics 20, 461-492. Weisbach, M., 1988. Outside directors and CEO turnover, Journal of Financial Economics 20, 431-460.


123456789101112131415161718192021222324252627282930313233343536373839404142434445464748495051525354555657585960

For Review Only

27

Table 1 Descriptive statistics

Panel A: Director-Year Non-CEO chairs Inside chairs Outside chairs Difference (In-Out) Chairman director characteristics N Mean Median N Mean Median N Mean Median Mean Median Age 7,187 61.49 61 1,738 65.27 65 5,449 60.28 60 4.99*** 5.0*** Board tenure 7,187 11.34 8 1,738 21.79 18 5,449 8.00 6 13.79*** 12.0*** Ownership 7,187 1.95 0 1,738 5.43 1.39 5,449 0.84 0 4.59*** 1.36*** Outside public board seats 7,187 1.08 1 1,738 0.44 0 5,449 1.28 1 -0.83*** -1.0*** Founder 7,187 0.03 0 1,738 0.13 0 5,449 0.00 0 0.13*** 0*** Founder family member 7,187 0.01 0 1,738 0.04 0 5,449 0.00 0 0.04*** 0*** Former firm CEO 7,187 0.09 0 1,738 0.38 0 5,449 0.00 0 0.38*** 0*** Panel B: Firm-Year Full sample Seperate inside chair firms Other firms Difference Firm characteristics N Mean Median N Mean Median N Mean Median Mean Median Separate inside chair 18,178 0.09 0.00 1,655 1 1 16,523 0 0 1 1*** Assets 18,178 15,225 1,810 1,655 11,087 1,835 16,523 15,639 1,807 -4,552.16** 28.54 Number of business segments 18,178 2.84 2.00 1,655 2.70 1.00 16,523 2.86 2.00 -0.16*** -1.00*** Leverage 18,178 0.21 0.20 1,655 0.19 0.16 16,523 0.21 0.20 -0.02*** -0.04*** Capital expenditure / sales 18,178 0.08 0.04 1,655 0.09 0.04 16,523 0.08 0.04 0.01* 0.00** R&D / assets 18,178 0.03 0.00 1,655 0.03 0.00 16,523 0.03 0.00 0.00 0.00 Firm age 18,178 24.64 19.00 1,655 21.38 17.00 16,523 24.96 19.00 -3.58*** -2.00*** Tobin's Q 18,178 1.97 1.50 1,655 2.10 1.63 16,523 1.96 1.48 0.14*** 0.15*** Board size 18,178 9.34 9.00 1,655 9.70 9.00 16,523 9.30 9.00 0.40*** 0.00*** Percent independent 18,178 72.10 75.00 1,655 63.65 66.67 16,523 72.94 75.00 -9.29*** -8.33*** Outside director ownership 18,178 2.61 0.43 1,655 1.80 0.32 16,523 2.69 0.45 -0.89*** -0.13*** Forced CEO turnover 18,178 0.02 0.00 1,655 0.02 0.00 16,523 0.02 0.00 0.00 0.00

*, **,*** indicate significance at the 10%, 5% and 1% levels respectively.

This table presents the descriptive statistics for the sample of 6,830 director-year observations for the non-CEO chairs from fiscal years 1997 through 2012. The data are from Risk Metrics. Board Tenure is the number of years the director has served on the board. Outside Public Boards is the number of additional directorships held by the director in other public companies as reported by Risk Metrics. All other variables are defined in the appendix. Statistical significance for the difference in the means (medians) of the two subsamples is based on a two-tailed t-test (a Wilcoxon signed rank test).


123456789101112131415161718192021222324252627282930313233343536373839404142434445464748495051525354555657585960

For Review Only

28

Table 2 Separate inside chair CEO appointments

Panel A: All Non-CEO chairs for all firms N

Appointed as CEO

Appointed as interim CEO

All Non-CEO chairs 7,187 0.96% 0.32%

Non-separate-inside-chair directors 5,449 0.31% 0.11% Separate inside chairperson 1,738 2.99% 0.98% Difference -2.68%*** -0.87%*** p-value (<.01) (<.01)

Panel B: All directors in firms appointing a new CEO N

Appointed as CEO


All directors 22,731 4.54% 0.50%

Non-separate-inside-chair directors 22,463 4.21% 0.37%

Separate inside chairperson 268 31.72% 11.57%

Difference -27.51%*** -11.2%*** p-value (<.01) (<.01)

Panel C: All Non-CEO inside directors in firms appointing a new CEO N Appointed as CEO


All Non-CEO inside directors 2,131 38.90% 3.28%

Non-separate-inside-chair directors 1,863 39.94% 2.09%

Separate inside chairperson 268 31.72% 11.57%

Difference 8.22%*** -9.47%***

p-value (<.01) (<.01)

Panel D: All Non-CEO chairs in firms appointing a new CEO N Appointed as

CEO Appointed as interim CEO

All Non-CEO chairs 745 13.69% 4.97%

Non-separate-inside-chair directors 477 3.56% 1.26% Separate inside chairperson 268 31.72% 11.57%

Difference -28.15%*** -10.31%***

p-value (<.01) (<.01) *, **,*** indicate significance at the 10%, 5% and 1% levels respectively.

This table presents univariate comparisons of the occurrence of CEO appointments among Separate Inside Chairs and other directors. 1998 is the first promotion year and 2012 is the last promotion year. All Panels report comparisons for all appointments to CEO as well as those most likely to be an interim appointment (serves as CEO for 2 years or less). Panel A reports CEO appointments for all non-CEO Chairs in all sample firms. Panels B through D report results for only firms in the sample that appoint a new CEO during the sample. Panel B compares separate inside chair CEO appointments with those of all other directors. Panel C compares separate inside chair CEO appointments with only those of other non-CEO inside directors. Panel D compares separate inside chair CEO appointments with only those of other non-CEO chairs (i.e. outside chairs). The bottom row of each panel reports the difference in means and the corresponding p-value of the difference-in-means t-test.


123456789101112131415161718192021222324252627282930313233343536373839404142434445464748495051525354555657585960

For Review Only

29

Table 3 Determinants of a separate inside chair

Model 1 Model 2 Dependent variable: (1/0) Separate inside chair

Full sample Prob(Sep inside chair)= (0.078)

dy/dx Matched sample Ln(Assets) 0.033* 0.005 0.011 (0.08) (0.67)

Number of business segments -0.008 -0.001 0.008 (0.49) (0.65)

Firm age -0.004*** -0.001 0.000 (<.01) (0.99)

Leverage -0.180 -0.027 0.110 (0.23) (0.58)

R&D / assets -0.309 -0.049 0.453 (0.58) (0.51)

ROA(t-1) 0.364** 0.050 -0.162 (0.03) (0.5)

Annual stock return(t-1) -0.0336* -0.005 0.020 (0.09) (0.54)

Founder present 0.310*** 0.054 0.080 (<.01) (0.43)

Founding family member present 0.270*** 0.053 0.170 (<.01) (0.2)

Outside director ownership (%) -0.016** -0.002 -0.006 (0.01) (0.46)

Industry homogeneity -1.670*** -0.237 -0.020 (<.01) (0.97)

CEO age -0.030*** -0.004 -0.005 (<.01) (0.31)

CEO ownership (%) -0.026*** -0.004 -0.007 (<.01) (0.47)

CEO percent equity compensation -0.001 0.000 0.000 (0.18) (0.99)

SOX 0.200*** 0.027 0.014 (<.01) (0.85)

Number of observations 18,178 3,306 Number of zero obersvations 16,523 1,651 Psuedo-R2 5.62% 0.37%

*, **,*** indicate significance at the 10%, 5% and 1% levels respectively.

This table presents the results from probit regression analysis where the dependent variable is one if the firm has a separate inside chairman and zero otherwise. Model 1 uses the full sample of firm-years and the marginal effects are reported to the right of the coefficient estimates. Model 2 only uses the matched sample of firms. The matched sample is created by matching each treatment firm (firm with an Separate Inside Chair) with the control firm (firm without a Separate Inside Chair) in the same industry-year with the closest propensity score. The propensity score is computed from the coefficient estimates of Model 1. All variable definitions are in the appendix. Standard errors are robust to heteroskedasticity and clustered by firm. p-values are in parentheses beneath the coefficients.


123456789101112131415161718192021222324252627282930313233343536373839404142434445464748495051525354555657585960

For Review Only

30

Table 4 Firm valuation and performance: Separate inside chairs

Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7 Model 8 Dependent variable: (Industry adjusted) Tobin's Q Tobin's Q Tobin's Q Tobin's Q Tobin's Q ROA ROA ROA

Full sample

Full sample firm fixed

effects Matched sample Full sample

Matched sample Full sample

Full sample firm fixed

effects Matched sample

Separate inside chair 0.045*** 0.026** 0.039** 0.008* 0.012*** 0.0003 (<.01) (0.05) (0.04) (0.08) (<.01) (0.96) Founder inside chair person -0.016 -0.031 (0.68) (0.44) Talented inside chair 0.059** 0.058** (0.03) (0.04) 60% Independent outside directors 0.005 -0.010 0.018 0.001 0.007 -0.006 -0.006* -0.009 (0.75) (0.42) (0.47) (0.94) (0.79) (0.11) (0.09) (0.27)

Board size -0.001 -0.0016 -0.0039 -0.0009 -0.0035 0.0018** 0.0016* 0.0016 (0.7) (0.54) (0.47) (0.76) (0.52) (0.04) (0.07) (0.29)

Outside director ownership -0.0002 -0.002*** 0.0011 -0.0003 0.0011 -0.0002 -0.0005*** -0.001***

(0.67) (<.01) (0.6) (0.6) (0.63) (0.2) (<.01) (<.01) CEO ownership (%) -0.008** -0.001 -0.0126** -0.0083*** -0.0127** -0.0002 0.0019** -0.0026 (0.01) (0.76) (0.03) (<.01) (0.03) (0.84) (0.02) (0.14)

CEO ownership (%)2 0.0003*** 0.0001 0.0006*** 0.0003*** 0.0006*** -0.0000 -0.00005** 0.0001* (<.01) (0.28) (<.01) (<.01) (<.01) (0.96) (0.05) (0.08) CEO founder 0.038 0.017 -0.009 0.037 -0.013 0.021* 0.013 -0.009 (0.26) (0.66) (0.88) (0.28) (0.83) (0.09) (0.18) (0.56) Founder family member present -0.040* 0.02 -0.05 -0.04 -0.05 -0.010** -0.020** -0.010 (0.1) (0.45) (0.14) (0.12) (0.19) (0.04) (0.03) (0.21)

ROA (t-1) 1.535*** 0.684*** 1.795*** 1.54*** 1.792*** (<.01) (<.01) (<.01) (<.01) (<.01) Capital expenditure / sales 0.073** -0.004 0.047*** 0.075** 0.049*** (0.04) (0.87) (<.01) (0.03) (<.01) R&D / assets -0.487*** -0.294*** -0.476*** (<.01) (<.01) (<.01) Ln(Assets) -0.018*** -0.180*** -0.02* -0.019*** -0.02** -0.005*** 0.003 -0.007** (<.01) (<.01) (0.05) (<.01) (0.04) (<.01) (0.58) (0.02) Firm age -0.000 -0.0002 -0.0004 -0.0001 -0.0004 -0.0002 -0.0004 0.000 (0.83) (0.88) (0.56) (0.79) (0.57) (0.16) (0.23) (0.19) Number of business segments -0.015*** -0.007*** -0.02*** -0.015*** -0.021*** -0.0027*** -0.0014** -0.0023 (<.01) (<.01) (<.01) (<.01) (<.01) (<.01) (0.04) (0.14) Number of observations 18,178 18,178 3,306 18,178 3,306 18,178 18,178 3,306

Adjusted-R2 21.03% 67.08% 28.30% 20.98% 28.28% 5.56% 56.05% 5.26% *, **,*** indicate significance at the 10%, 5% and 1% levels respectively.

This table reports results from regression analysis of firm performance and valuation n. The dependent variable in models 1 through 5 is the Fama-French 49 industry adjusted natural logarithm of Tobin’s Q. The dependent variable in models 6 through 8 is the industry adjusted ROA. All variable definitions are in the appendix. All models include year and industry fixed effects. Models 2 and 7 include firm fixed effects. Standard errors are robust to heteroskedasticity and clustered by firm. p-values are in parentheses beneath the coefficient estimates.


123456789101112131415161718192021222324252627282930313233343536373839404142434445464748495051525354555657585960

For Review Only

31

Table 5 Forced CEO Turnover Sensitivity to Firm Stock Performance Panel A: Probit regressions Model 1 Model 2 Model 3 Model 4 Model 5

Inside chair

Founder chair

Talented chair

Matched sample

Outside chair only matched

sample Separate inside chair present(t-1) -0.068 (0.44) Founder inside chair present (t-1) -0.037 (0.86) Talented inside chair present (t-1) -0.12 -0.40* -0.51** (0.50) (0.07) (0.01) Other inside chair present (t-1) -0.076 -0.13 -0.49*** -0.64*** (0.42) (0.21) (<.01) (<.01) Outside chair present (t-1) 0.33*** 0.33*** 0.33*** (<.01) (<.01) (<.01) 60% Independent outside directors(t-1) 0.22*** 0.23*** 0.23*** 0.51** 0.40** (<.01) (<.01) (<.01) (0.01) (0.03) Abnormal stock return(t-1) -0.79*** -0.79*** -0.81*** -1.07** -1.28*** (<.01) (<.01) (<.01) (0.02) (<.01) Separate inside chair present (t-1) x abn. stock ret(t-1) 0.22 (0.44) Founder inside chair present (t-1) x abn. stock ret(t-1) -0.09 (0.83) Talented inside chair present (t-1) x abn. stock ret(t-1) -0.98** -0.976** -1.28*** (0.05) (0.04) (<.01)

Other inside chair present (t-1) x abn. stock ret(t-1) 0.26 0.66*** 0.65 0.60* (0.39) (<.01) (0.13) (0.09) Outside chair present (t-1) x abn. stock ret(t-1) 0.05 0.05 0.05 (0.8) (0.8) (0.8) 60% Independent outside directors(t-1) x abn. stock ret(t-1) -0.002 -0.005 0.02 0.31 0.66

(0.99) (0.98) (0.91) (0.54) (0.18) Controls

Ln(Assets)(t-1) 0.032* 0.031* 0.031* 0.022 0.063* (0.08) (0.09) (0.09) (0.61) (0.1)

CEO ownership(t-1) -0.005 -0.005 -0.005 -0.040 0.0002 (0.44) (0.44) (0.43) (0.19) (0.99) Outside director ownership(t-1) 0.005** 0.005** 0.005** -0.005 0.0006 (0.05) (0.05) (0.04) (0.62) (0.91) Board size(t-1) -0.030** -0.025** -0.0253** -0.02 -0.04* (0.04) (0.04) (0.03) (0.47) (0.09) Co-option(t-1) -0.904*** -0.904*** -0.9*** -0.72*** -0.83***

(<.01) (<.01) (<.01) (<.01) (<.01) Founder CEO(t-1) 0.004 0.002 0.0042 -0.19 -0.42 (0.98) (0.99) (0.98) (0.63) (0.25) CEO age > 60 (t-1) 0.013 0.014 0.013 -0.089 0.001 (0.81) (0.81) (0.81) (0.52) (1) Number of observations 16,331 16,331 16,331 2,991 2,947 Number of zero observations 15,965 15,965 15,965 2,925 2,856

Psuedo-R2 9.92% 9.93% 10.21% 12.04% 11.92%

Panel A presents results from probit model regressions of 366 forced CEO turnover events. The dependent variable equals one if a forced CEO departure occurred during the year and zero otherwise. The key explanatory variables are the lagged indicator variables for chairpersons and industry adjusted stock performance. Firm stock performance is the most recent twelve months abnormal return. Standard errors are robust and clustered by firm with p-values in parentheses beneath each coefficient estimate. Panel B shows the implied probabilities of forced turnover in performance quartiles.


123456789101112131415161718192021222324252627282930313233343536373839404142434445464748495051525354555657585960

For Review Only

32

Panel B: Implied annual probabilities of forced turnover Talented inside chair

Quartile Stock return Present Not present

75th 0.2462 0.0033 0.0092

25th -0.1985 0.0268 0.0223 Increase in probability 0.0235*** 0.0131*** p-value of difference (<.01) (<.01) % Change 720% 144% *, **, *** indicate significance at the 10%, 5%, and 1% levels respectively


123456789101112131415161718192021222324252627282930313233343536373839404142434445464748495051525354555657585960

Is an outside chair always better? The role of non …...For Review Only Is an outside chair always...

Documents

Transcript of Is an outside chair always better? The role of non …...For Review Only Is an outside chair always...