CEOs of firms that fail to meet performance targets have long sought to expand abroad to lift their fortunes, because these foreign markets can lift revenues through a wider customer base, boost returns due to economies of scale, and access new resources and capabilities.
Prior research has shown an inverted U-shaped curve: slight underperformance sharply boosts entry into foreign markets, but this slows if firms significantly underperform as they seek instead to reduce risks (which include lack of local knowledge and networks). It’s a question of whether aspirations prevail over survival, or vice versa, depending on the degree of performance shortfall.
Yet our new study of Spanish firms over a quarter-century shows that such overseas adventures are far less prevalent when the CEO is also chair of the board of directors (known as “CEO duality”). This is because such dual CEOs take a more conservative, risk-averse approach when shortfalls arise.
CEOs know their head can be on the chopping block
It brings headlines, but few surprises, when CEOs get fired due to poor performance. The CEO succession rate of Standard & Poor 500 firms in 2019 was 11.3% for better-performing firms compared to 20.2% for worse-performing firms, and the difference was even starker for the larger Russell 3000 index of companies at 9.4% versus 19.4%.
So CEOs of underperforming companies are under pressure to boost results, or at least take action to show they are trying to better the situation. But our study confirmed that dual CEOs face less pressure, as their control over the board lessens their risk of getting the sack over poor performance.
Study focuses on Spain post-EU membership
Our study was based on a sample of 81 listed Spanish firms over the period 1986-2010, with the starting point chosen because that was the year Spain joined the European Economic Community (now known as the European Union). The sample includes industries ranging from energy and construction to chemicals and medical equipment. We measure performance base on return on assets, while internationalisation focuses on foreign direct investment with significant management influence.
Despite corporate governance codes recommending a separation of CEO and board chair, Spanish companies are more apt to retain a dual CEO structure than in many other European countries. There have been some successful high-profile investor revolts against dual CEOs – such as last year’s ouster of Emmanuel Faber at France-based food giant Danone – but not many. Though declining in recent years, more than 40% of Standard & Poor 500 companies in the US still combine board chair and CEO roles.
The study focuses on three factors relating to internationalisation: intensity as measured by the number of new operations, scope based on the number of new countries, and dispersion measured by the number of new “cultural clusters” (such as Latin America, East Europe, Nordic, African, the Far East) of the firm’s foreign expansion. Intensity is considered the safest such strategic move, with cultural clusters the riskiest.
Findings bring a new factor, beyond oversight, to the dual CEO debate
So what are the managerial and corporate governance implications of our findings?
The study suggests that dual CEOs are more likely to underreact when firms underperform slightly or moderately, while non-dual CEOs are far quicker to respond. While we don’t examine whether such action or inaction is better for shareholders, we can conclude that CEO duality can slow down internationalisation (which can drive success) of underperforming firms.
And while risk aversion can lead to more consistent long-term strategy, it can also hold back changes that might help a firm meet new and evolving circumstances – adding another factor to the debate over combining the two roles, which has largely focused on CEO oversight and entrenchment. Given human nature, survival versus aspiration can mean different things to a CEO and to a company, so our findings underline the importance of the board to strike the right balance between these two outlooks.