Too Many Cooks in the Kitchen?
Drexel University, Department of Finance
Ankira Patel, Dr. David Becher
After financial collapses such as Enron and WorldCom,
regulators (e.g. SEC and NYSE) suggested a role to ensure
independent oversight of management. This new position, Lead
Independent Director, works with the CEO and/or Chair to
minimize conflicts of interest where executive roles may overlap.
Key LID responsibilities:
• preside at executive sessions of independent directors
• act as a liaison between the Board and CEO
• communicate with shareholders
• oversee director evaluations
To determine the importance of LIDs, our research analyzes
their financial contribution. Given the central role management
has played in the past, it is imperative to understand which board
structures work best to prevent future financial mishaps.
Well performing firms over time tend not to add LIDs,
likely due to their confidence in their existing board structure.
Firms where performance varies are more likely to add a LID.
Results do not demonstrate that a LID improves stock
return or ROA. While firms may have a positive intention for
adding LIDs, the execution does not pay off (-9% return).
LIDs may not create firm value, but there is still a
movement towards independence. For example, LIDs can ease
tension and responsibilities for a CEO, as well as provide an
extra set of eyes on major decisions.
LIDs are not a universal solution or
guarantee for financial prosperity.
What is a Lead Independent Director?
Our research suggests LIDs are not an appropriate solution for
all situations, so future work can establish which situations would
benefit most from a LID and why. This will provide firms with a better
understanding of how to structure their board structure in the future.
Adding a LID to existing CEO-Chair will provide
the most financial benefit to a firm.
1. Examine 1,700 annual company filings from 2000 to
2011, through a SEC search database. Study various
outside directors, and identify the most prominent
director as “lead independent director.” Example:
2. Analyze variables including firm size, percent of inside
directors, industry type, etc. to determine why a firm
creates a LID.
3. Focus on firms financials (annual stock return and ROA) to
determine LID importance.
4. Compare financial performance among 5 firm types: CEO-
Chair, independent chair, transition from CEO-Chair to
independent chair or vice versa, and added LID to an
Charan, Ram & J. Neff, Thomas. “Separating CEO and Chairman Roles.” Bloomberg Business.
Web. 15 Jan. 2010.
Hodgson, Paul. “The Cost of a Combined CEO/Ch.” The Harvard Law School Forum on Corporate
Governance and Financial Regulation. Web. 13 July 2012.
S. Lubin, Joann. “More CEO’s Sharing Control at the Top.” The Wall Street Journal. Web. 6 June
All three firms (Advanced Micro Devices, Affiliated Computer Services, and
Taser International) began with a CEO-Chair and added a LID.
Inconsistent reactions to this change cannot suggest a correlation between
LIDs and a firm’s financial performance.
CEO-Ch Indep Ch Switch to
Add LID to
Average Stock Return Per Year
Despite the negative
of LIDs, firms still
transition to greater
independence on their
A. Identify types of outside directors and independent
leadership positions noted in company filings.
B. Determine the importance of these positions in regards to
the operations of a company, particular how their presence
may affect a firm financially.
I would like to sincerely thank my STAR mentor, Dr. David Becher, for his guidance, patience, and
knowledgeable support throughout my STAR experience. He fostered an environment for my own
research passion to grow, which I hope to model after his own enthusiasm and positivity.
Additionally, my fellow STAR scholar, Jared Edelstein was a wonderful partner to work during our
data collection and analysis phases.
Firms with a CEO-Chair have a 17% stock return
per year, firms with independent chair have 13.7%
stock return per year; both are similarly successful.
Firms with a LIDs, however, have a -9% stock
return. If firms alter their board structure from CEO-
Chair to an independent chair or vice versa, their
stock return is also negative.
Added LID Examples
Change in Stock
Change in ROA
LID vs Indep Chair Growth
LID Indep Ch