What is CEO Duality?

In nearly all companies, the Chief Executive Officer (CEO), holds a seat on the board of directors. More often than not, the CEO is actually the chairman of the board. This situation is known as CEO Duality.

In this article, we discuss the internal corporate structure and the reasons why the CEO generally holds a seat on the Board of Directors.

Corporate Governance Structure

Corporations have a very defined ownership structure. Corporations are owned by the stockholders or shareholders. These individuals acquire stock (a share of the company’s equity interest) by providing capital or other resources to the company. The shareholders do not generally take part in the active management of the company. Their role is vote for an elect the individuals charged with managing the company. Those individuals are known as directors. (Note: Some shareholders — primarily holders of some class of preferred shares — may forgo their rights to vote for directors. Others may have enhanced voting rights, such as the right to elect specific seats to the board.)

The number and role of the company directors will be outlined in the organizational and governance documents (the articles of incorporation and bylaws). These documents will control whether voting is straight or cumulative, when voting takes places (whether voting is all at once or staggered), etc. The directors will control the high-level affairs of the company. This means approving operational plans, approving budgets, approving funding or other major transactions, etc. The directors bear the primary responsibility for reporting of company information to the public and to shareholders.

Once elected, the board of directors then appoint or hire the company’s top officers. The single top officer is the CEO. She manages the daily affairs of the company. As such, she is often seen as the primary driver behind a company’s operational success.

Why is a CEO Often the Chairman of the Board?

In modern society, the role of the CEO has changed significantly from its historical role. The change is primarily the result of investor expectations. Today, managers of large capital funds hold approximately 80% of public company stock in their portfolio. This centralizes voting control of many companies with these powerful money fund managers. When these managers are activist in nature — meaning they seek to exercise extensive control over the company — they effect how the board of directors and CEO are selected. Generally, these investors will work backwards and choose their desired CEO as board chairman. Because public companies require 1/2 of all board members to be unrelated to the company (I.e., not officers or major shareholders) they CEO chooses loyalists to fill the ranks. The activist investor (as controlling shareholder) pushes to elect these individuals to the board. In effect, the CEO is given a blank check to run the company.

This modern trend in public companies explains many things about the role of the CEO. The CEO is pushed every harder to make short-term returns for the activist investor. The compensation packages for directors and officers has soared in comparison to the average company employee — as the board of directors set these company salaries.

Related Topics

• Corporate Governance Law (Intro)
• What is Business Governance?
• Berle-Means Thesis 
• Corporate Governance Rating Definition
• Who are the members of a corporation?
• Corporate Charter
• Shareholder Register
• Common Stock
• Preferred Stock
• Par Value
• Authorized Shares
• Issued Shares of Stock
• Unissued Shares of Stock
• Outstanding Shares
• Institutional Shares
• Dual Class Shares
• What is a closely-held corporation?
• Close Corporation Plan Definition
• What is a Private Company vs a Public Company?
• What is the role and purpose of the corporation?
• What is the Agency theory of corporate governance?
• Shareholder-Centric Perspective
• Shareholder Value
• What is the Stakeholder theory of corporate governance?
  
• What is the role & rights of Shareholders in the corporation?
  
• Shareholder Democracy Definition
• Quorum Definition
• Information Circular
• Straight and Cumulative Voting
• Statutory (Straight)
  
• Cumulative Voting
• Plurality Voting
• Class Voting Shareholders
• Changing the Voting Rules
• Supermajority (Voting)
• Shareholder Sponsored Proposal 
• What are the variations on attributes of Ownership structure?
• Stock Split
• What are the fiduciary duties owed by shareholders?
• When is a shareholder personally liable for corporate obligations?
• Appraisal Rights
• Dissenter's Rights
• Say on Pay Rights
• How can shareholder enforce their rights (direct and derivative actions)?
• Amotion
• What is the process for bringing a Derivative action?
• What are corporate vote Proxies?
• Proxy Statement
• Proxy Fight or Contest Definition & Explanation 
• What is Shareholder Activism and the significance of Institutional Investors?
• Activist Investor
• Overview of Board of Directors
• Board Decision Making
• Advisory Board (Observer Directors)
• What is the role of the Board of Directors?
• Board of Trustees
• Board of Governors
• What is the composition of the board of directors?
• Chairman of the Board
• CEO as Chairman of the Board
• Inside Director
  
• Outside Director
• Outside Director or Non-Executive Director Definition
• Independent Outside Director
• Budget Committee
• Audit Committee
• Compensation Committee
• Nomination Committee (Corporate Board)
• What standards govern the actions of the board of directors?
• Duty of Candor Definition
• Duty of Care (Board of Directors)
• Duty of Loyalty (Directors) 
• Self-Dealing
• Board Evaluation Definition
• What is the Business Judgment Rule?
• What is D&O insurance?
• Codetermination (Foreign)
• What is the role of Managers of the corporation?
• What standards govern manager actions?
• Chief Executive Officer (CEO)
• Chief Financial Officer
• Chief Information Officer (CIO)
• Chief Investment Officer (CIO)
• Chief Legal Officer
• Chief Operating Officer
• Chief Risk Officer
• Chief Security Officer
• Chief Technology Officer (CTO)
• What are the primary state and federal corporate governance laws?
• What is the role of the state in corporate governance?
• What is the role of Securities Laws in corporate governance?
• What is the role of the Foreign Corrupt Practices Act in corporate governance?
• What is the Sarbanes-Oxley Act (SOX) effect on corporate governance?
• Sarbanes-Oxley Act (SOX)
• What is the Dodd-Frank Wall Street Reform and Consumer Protection Act effect on corporate governance?
• Corporate Monitors
• What industry organization standards affect corporate governance?
• How do proxy advisory firms affect corporate governance?
• What is the role of ethics in corporate governance?
• What are the major causes of corporate governance issues?
• What are the access to information issues?
• What are decision-making structure issues?
• What are the power struggle or competition issues?
• Holding Company
• What are hostile takeovers and defenses to hostile takeovers?
• Williams Act
• Staggered Board
• Shark Repellent Defenses?
• Poison Pill Defenses?
• Flip Over Poison Pill Definition
• Flip In Poison Pill Definition
  
• Voting Poison Pill Plan
• Delay-Tactic Defenses?
• Legal Lockup Defenses?
• White Knight and Pac Man Defenses?
• Jonestown Defense
• Lady Macbeth Strategy
• Macaroni Defense
• Yellow Knight
• Back-end Plan Definition
• Backflip Takeover Definition
• Dead Hand Provision Definition
• Kamikaze Defense
• Operating Company Property Company Model
• Whitemail
• Scorched Earth Policy Definition
• Revlon Rule
• What are benefit-alignment issues?
• Cadbury Rules Definition