CEO-Chairperson Family Relationship and Financial Performance: Evidence from an Emerging Economy
Despite the voluminous literature on the association between CEO duality (i.e., the CEO also serves as Chairperson of the Board) and firm performance, there is little research on how firm performance is affected when the CEO and Chairperson have a familial relationship. We term this relationship a quasi-CEO-Chairperson duality and investigate its impact on firm performance in the context of emerging economy of Bangladesh. Importantly, there is no specific prior research on this issue when we consider the setting of Bangladesh. Although the Bangladesh Securities and Exchange Commission (BSEC) addressed the issue of CEO duality in the 2012 revision of the Corporate Governance Indexby strictly prohibiting firms from having the same person in both positions, no similar regulations have been enacted with relation to familial relationships. Using five years of hand-collected firm data from the annual reports of non-financial firms listed in the Dhaka Stock Exchange (DSE), we employ multivariate regression analysis (OLS and two-way clustered standard error) and find that the CEO-Chairperson family connection has a significant negative influence on firm performance, as measured by return on assets (ROA), and no significant impact on firm performance when measured by Tobin’s Q. This relationship holds even after controlling for board ownership and institutional ownership. These results are consistent with agency theory, which suggests that a CEO-Chairperson association would make the CEO more powerful – thus rendering the board ineffective at monitoring managers – and create opportunities for unbridled managerial opportunism that leads to deteriorating firm performance. This study has clear implications for governance, regulation, and legislation for emerging economies where family dominance in the board is a common feature of corporate firms.
Keywords - Corporate Governance, CEO-Chairperson Duality, Family Relationship, Firm Performance, Emerging Economy