Here are some interesting statistics. How many US companies (up to 2010) combined the roles of CEO and Chairman; and how many Chinese companies (A-shares, to 2014) permitted the same duality?
The answers are 54% and 26% respectively. So that’s good for investors in Chinese companies right? Not when you discover the China number has increased from 13% (in 2005) and the US number has decreased from 80% (in 1990). The trend therefore is positive for investors in the US but unambiguously negative for investors in listed Chinese companies. Assuming you agree a separation of CEO and Chairman is positive for corporate governance? N.B. Section 972 of the Dodd-Frank legislation suggests it is desirable but, by avoiding recommending it’s implementation, recognizes studies in the US have been inconclusive about its long term benefit.
In the paper highlighted this week from Xiding Chen, from the Wenzhou University of China et al., it’s demonstrated that a combined CEO/Chairman is not just a mere not-to-like from a broad governance standpoint, it’s a reliable red-flag ahead of complete melt-down; in China at least.
The researchers show a number of factors are at work; the two most important are, first, too much power which means information, when concentrated encourages the hoarding of bad news. The second is without proper oversight negative NPV projects get green-lighted more often than they would if put to a committee.
Especially at risk are firms where information asymmetry is high. Be especially cautious therefore of companies operating with high R+D expenses, high advertising spend, low industry competition and poor analyst coverage. These, the researchers demonstrate, are especially vulnerable to calamity when a combined CEO and Chairman is at the helm.
You have been warned.
Happy Sunday
[You can access the paper in full at CEO Duality]