CEO-chairman duality in business: A task for the SME regulators

The board of directors plays an important role in businesses by being responsible for making strategic decisions essential to the development of companies and it’s headed by a president or chairman. While the day-to-day activities of the organisation are run by the managing director or the chief executive officer (CEO). Family CEO duality or CEO duality in the context of business is referred to as chief executive officer (CEO) doubling as chairman of the board (COB) simply put CEO/chairman designation. 

To achieve CEO duality then, the roles of the CEO and the chair of the board of directors have to be combined and this is typically prevalent in Nigerian businesses. It is a situation where business power is centralised, where the titles of both the board chair and CEO go to one individual that is one person wearing two hats. It is usually an executive compensation where such governance structure promotes entrenchment, a negative impact on business performance in most cases and it comes with severe family dominance within the organizations.

The ownership and governing structure is one of the most important factors in shaping the corporate governance system of any business, be it large or a small enterprise. But CEO duality has become one of the most widely discussed corporate governance issues because it is a common practice among structured businesses in the country and this discourages internal checks and balances required of the board chair and other board members, resulting in a shortage of key oversight functions from them. Largely CEO duality in any business, be it large or small business is a form of governance or leadership that creates conflict of interest and could hinder the board’s ability to effectively supervise any CEO’s role within the business entity.

Most times these powerful CEOs are less checked by boards and such a set-up may create more opportunities for the CEO to promote personal interests to the detriment of the company’s shareholders and other stakeholders. In fact, the functions of the chairman and CEO by the same person will overlap, because the duties of the Chairman should be different and there should not be any concentration of power, to the detriment of proper management supervision.

CEO duality in most cases reduces the board’s monitoring capacity on behalf of the shareholders and promotes CEO opportunistic behaviour, and interests. CEO duality further promotes the entrenchment of leaders where when leaders or managers gain so much power that they can use the business to further their own interests rather than the interest of shareholders. By encouraging CEOs duality within a business it undermines and can reduce the probability of replacing such CEOs.

Within the small and medium-sized enterprises in the country from observations, there is a very high concentration of family ownership in the shareholding structure of many of the structured small businesses including large firms, as such the overlapping of responsibilities of the CEO with that of the company’s Chairman.  In these small businesses CEO duality is prevalent, yet this form of business tends to have lesser public or regulatory scrutiny than the large or listed firms. Clearly, it is an infringement on codes of corporate governance regulations, and that of professional integrity at the workplace with such acts. This is a trend that has been impacting negatively on small businesses and family enterprises and corporate governance codes by implication.

Though CEO duality has been traced to faster decision-making within an organization, the conflict, and conflict of interests that it creates makes it undesirable. Because the CEO essentially monitors themselves, and this will only serve the interest of a few individuals within the business ecosystem. Likewise in family businesses, the family CEOs may not be able to strike a balance between the interests of the family and those of other stakeholders, as family-centric that is family first investment decisions will be frequently made. 

The duality of functions of the CEO and chairman of the company can be a problem because the individuals who are responsible for the performance of the business would be the same ones that should evaluate its efficiency and control.  This can be traced to one of the major reasons business failure is prevalent, which is the lack of separation between business ownership and management control, yet less attention is paid to this.

The way businesses are managed, as well as the layout of the management structure, is important to business continuity. Therefore business owners need education and awareness to understand the need to do things right to avoid the implication of business failure because such acts have a direct impact on business performance, decision-making, and overall profitability.

In the absence of CEO duality, the board is considered independent, which is the way to go. But in Nigeria, many businesses would not be able to transition to global brands where business activities can be conducted in multiple countries and one of the reasons would be because of the CEO duality that exists largely within the business space in Nigeria. It may also impede business growth and long-term business continuity.

In many countries with friendly business environments, full disclosures and good corporate governance systems operate where those who manage a company – that is, managers and directors – are effectively held accountable for their decisions and involvement in business activities. The big question for Nigerian entrepreneurs and business leaders is, can such accountability happen without the transparency of the leadership?

Besides CEO duality, demographic characteristics, like gender, age, and CEO education, also affect business performance. But the separation of the CEO and company Chairman is considered best practice by many regulators. However, the weakness of regulatory frameworks on this all-important matter has been a long-age issue in the country and it needs to be strengthened to protect the entire business stakeholders and the longevity of the small business that is widely known as the lifeblood of any economy.

In conclusion, the Chairman of the board ought to focus on the overall control of the company; while the CEO oversees the management of the day-to-day activities of the business with the aid of other staff. In fact, the board of directors should have the power to hire and fire, CEOs and also act in favour of shareholders in various capacities if things are approached normally. Hence, it is never too late for businesses in Nigeria particularly small businesses to embrace this separation of roles, to promote business continuity and best standard practices. Good Luck!

Dr Timi Olubiyi is an entrepreneurship & business management expert with a PhD in business administration from Babcock University Nigeria. He can be reached on the Twitter handle @drtimiolubiyi and via email: [email protected].