Leadership-structure-Duality-versus-Non-duality

European Journal of Social Science Review Vol.1.issue, 2.2015
11International Society for Research and Innovation, USA
Leadership structure: Duality versus Non-duality
Ishaku Vandi Ishaya
ishaqvandi@gmail.com
+60109448584
Student, Univerisiti Utara Malaysia
Abstract
The Malaysian Code of Corporate Governance (MCCG) recommended that organizations should split the office
of the chairman and CEO so as to create a balance of power and authority in an organization. Those arguing in
favour of duality stated that leads to faster decision making and absence of clash of interest between the chairman
and CEO. Both views have its pros and cons. The study aimed at highlighting the difference of these two
leadership structure.
Keywords: CEO, Chairman of the board, Duality, Non-duality, Corporate Governance.
1.1 Introduction
Instituting a good form of governance practice in an
organization is a critical issue that needs proper
research. Separation of a firm’s ownership and
control may result in information asymmetry or
selfish acts in a way that is detrimental to the
shareholders of that organization. Corporate
Governance stresses on the agency problems that are
triggered as a result of this separation. An important
concern in the subject of Corporate Governance that
is gaining popularity is the issue of Chief Executive
Officer (CEO) duality, much due to the trend of
corporate scandals/collapse (e.g Enron Corporate in
the United States) that has been happening globally.
As stated by Cadbury Committee (1992), duality
occurs if the Chief Executive Officer role is
combined with the chairman’s role, while non-
duality is when the two roles are separated. Cadbury
Committee (1992) asserted that the office of the
Chief Executive Officer and Chairman of the board
are the most sensitive and important office in an
organization. While the Chief Executive Officer is
charged with the responsibility of managing the
daily activities of a company, the chairman on the
other hand, is charged with the responsibility of
board management, selecting new members of the
board, overseeing the performances of executive
directors and resolving disputes which may arises in
the course of a meeting.
Different organizations have different form of
leadership structure running in that particular
organization. While some of these organizations
have decided to separate the office of the Chief
Executive officer with the office of the Chairman of
the board (Non-duality), other organizations have
combined the office of these two influential posts
(Duality). Believers of Non-Duality stated that CEO
duality hinders governance effectiveness in a
company. The further stated that an organization
will likely face a clash on conflict of interest due to
board’s inability to monitor and observe the CEO if

the office is held by one individual (Fama and
Jensen, 1983; Jensen, 1993 and Lipton and Lorsch,
1992). Advocates of duality argued that combining
the two most significant office to one individual
maybe best suited to the organization’s business
conditions (Anderson and Anthony, 1986; Brickley,
Coles and Jarrell; 1997). This contradicting and
continuing argument regarding CEO duality shows
the need for more studies in this area. To that, the
study aims at reviewing conceptual differences
regarding organizations with Duality leadership
structure versus organizations with Non-Duality
leadership structure.
2.1 Corporate Governance
The Malaysian Code of Corporate Governance
(MCCG, 1999) defined Corporate Governance as
“The process and structure used to direct and
manage the business and affairs of the company
towards enhancing business prosperity and
corporate accountability with the ultimate objective
of realizing long-term shareholder value while
taking into account the interests of other
stakeholders”
Cadbury Committee (1992, p. 15) defined
“Corporate Governance as the system by which
companies are directed and controlled”. Corporate
Governance entails the process by which boards
manage the activities of an organization through its
managers and how in turn, board members are
accountable to the organization and shareholders. A
good Corporate Governance strengthens the
integrity and effectiveness of financial markets
while a bad corporate governance creates ways for
fraud in an organization and weakens the
organization’s potentials. Well managed
organizations tends to attract investors the more and
will surely outperform other organizations (Said et
al; 2005).
According to Said, Omar, Roshima, Ropidah,
Zuraini and Ismail (2005), Commitment and sense
of conviction is required for good corporate
governance practice from the people who manage
the organization, such as the senior management and
board members. The board should ensure that all
parties’ interest are protected, and the organization
is managed in a way that is acceptable, fair, just and
equitable to the shareholders. Good governance
begins with the shareholders, which goes down to
the board and management in an organization, then
further down to its employees.
2.1.1. Malaysian Corporate Governance
The journey of corporate governance started in
March 1998 in Malaysia. In that period, the high
level Finance Committee on Corporate Governance
was established by the Ministry of Finance to re-
assess the toughness of the effort of the state towards
catching up with the contemporary capital market
environment. The Malaysian Institute of Corporate
Governance (MICG) was also established in that
period, which comprised of various professional
groups: Malaysian Institute of Directors, Malaysian
Association of Certified Public Accountants,
Malaysian Association of the Institute of Chartered
Secretaries and Administrators and Malaysian
Institute of Accountants. In the year 1998, the
country went into partnership with the Asian
Development Bank and the World Bank in order to
coordinate the Asia-Pacific Economic Cooperation
(APEC) to investigate ways of enhancing corporate
governance. In February 1999, the high level
committee through the report on corporate
governance made the foundation for the drafting of
Malaysian Code of Corporate governance (MCCG).
In 2007, the MCCG was revised with a number of
amendments made regarding the board of directors.
The Securities Commission in 2009, issued sections
317A and 320A of Capital Markets and Services Act

2007 (CMSA) to improve corporate governance.
The MCCG which was revised in 2012 became the
first to deliver blueprints of Corporate Governance
which emphases on board structure strengthening
and composition recognizing the directors functions
as active and responsible fiduciaries. The MCCG
recommend that Malaysian companies should
separate the office of the Chief Executive Officer
and the Chairman of the Board.
The Kuala Lumpur Stock Exchange required firms
to limits its numbers of directors to be held by a
single individual to not more than ten for PLCs and
not more fifteen for non-PLCs. For non-listed firms,
directors includes affiliates of listed companies. The
Kuala Lumpur Stock Exchange (now BURSA
Malaysia) would take legal action against firms that
breach its rulings. Each director is expected to
forward a statutory declaration sanctioning full
compliance with the rulings.
On January 22, 2001, a new listing requirement was
released by the Kuala Lumpur Stock Exchange
which outlined that quoted firms are mandated to
reveal the application and compliance with the
principles of MCCG’s best practice in the financial
reports. The motive is to ensure that shareholders are
provided with relevant information on listed firms’
corporate governance practice. However, this ruling
was not compulsory, but provides listed firms with
flexibility to establish a good corporate governance
framework best fitting to them. Under the new
listing requirement, it is mandatory to disclose
corporate governance practices.
A board of directors is mandatory to all public listed
companies in Malaysia. The Malaysian Companies
act, 1965 (CA) stated that “the business and affairs
of a company must be managed by, or under the
direction of, the board of director”. It further stated
that “the board of directors has all the powers
necessary for managing, directing and supervising
the management of business affairs of the
company”.
2.2. Leadership Structure
2.2.1 Non-Duality Leadership Structure
The agency theory asserted that the objective of the
board of directors is to monitor and protect the
shareholder’s interest (Mallette and Fowler, 1992;
Fama and Jensen, 1983). They stated that when one
individual holds both titles, the board’s effectiveness
in monitoring top management is reduced, leading to
a situation which favours a manager to make
opportunistic decisions. Jensen (1993) further
revealed that absence of non-duality makes board’s
response to top management team failure quiet
difficult. Studies have revealed that duality structure
results in leadership facing conflicts of interest and
agency problems (Berg & Smith 1978, Brickley &
Coles 1997), hence given preference to non-duality
structure. Yermack (1996) asserted that agency
problems seems to be more in duality structure, and
organizations are more valued when the chairman
and CEO are separate individuals. Kyereboah-
Coleman and Bieke (2006) revealed that
organizations in Ghana implement non-duality
structure which reduces agency cost. They further
stated that non-duality reduces the tension between
board members and managers, thus improving the
performance of organizations.
According to Said et al. (2005), organizations with
an individual holding the two roles might accord him
too much power and so, will make decisions that will
not maximise shareholders value. Hence, non-
duality should be adopted to reduce the form of
problems in an organization. An organization with
duality leadership makes it difficult for the board to
checkmate the activities of the CEO since power is
already concentrated on single individual.

Therefore, non-duality is best so as to check and
balance the power of the CEO.
Weisbach (1988) stated that since external directors
are not directly allied with the management of an
organization, they tends to be stricter when
discharging their duties. Their wealth of experience
would be vital to any organization when making
decision regarding the direction of that organization.
This could however, improve the role of the board in
monitoring management’s decisions.
Lazonick and O’Sullivan (2000) argued that
separate leadership would result in better financial
reporting quality and, thus, audit scope, which will
lead to the reduction of audit fees. Peasnell, Pope
and young (2000) further revealed that the effects of
board directors on the annual reports further
confirms the high monitoring tendency of outside
director. Weisbach (1988) asserted that poorly
performing organizations benefit more from having
separate leadership
In an organization, when the chairman of the board
is also the CEO, the board’s ability to perform its
function of overseeing and monitoring management
is greatly reduced because of absence of
independence and conflict of interest (Lorsch &
Maclver, 1989; Fizel and Louie, 1990). Another
concern with duality leadership is “who monitors the
monitor?” which is expressed as “custodias ipso
custodiet” or “who will watch the watchers?” Aram
and Cowan (1983) asserted that the manager of an
organization’s influence in setting board agenda and
controlling information flows could affect the ability
of the board to carry out its functions effectively.
Daynton (1984) stated that the board is the major
factor influencing an organization into
realising/taking advantage of an opportunity and
meeting the requirements expected of them form
shareholders and stakeholders. The board of
directors will be perform the monitoring role, given
advise to the management and aid in guiding top
management through setting of strategies that to be
used in achieving long term plans.
The Hegemony theory asserted that the role of the
board of directors in accomplishing its objectives of
protecting the interests of shareholders is failing (e.g
Kosnik, 1987: Nahar, 2004). The theory further
stated that management control the boards of
directors, thus, acting more as puppets (Mallette &
Fowler, 1992, p.1014). Reservation about corporate
boards’ effectiveness majorly lies on the
appointment of external director which determines
the board’s oversight and monitoring roles.
According to Herman (1981), external directors are
respected for their capacity to recommend, set
business and personal relationship, and to reveal that
an organization is performing great as opposed to
their capacity to monitor. He further asserted that
these directors are appointed based on the title and
prestige of the candidate. He concluded that director
appointment is being influenced by the CEOs,
hence, controlling the board indirectly. Vancil
(1987) also doubts the ability of the external director
in making independent and valued judgements due
to the fact that CEOs play a dominant role in external
director’s appointment.
2.2.2. Duality Leadership Structure
According to Said et al. (2005), duality leadership
structure increases the effectiveness of an
organization leading to an improvement in its
performance. Since the heads in the organization are
separated, there is a clear and defined leadership
reducing chances of doubt which may arise as to
who has authority over a particular issue.
Nahar (2004) revealed that when there is duality in
an organization, the function of the board would be
reduced since a single individual controls the
operations (as CEO) and the internal monitoring (as

board chairman). Hence, the mandate of controlling
and leadership is on one person.
The manager of an organization’s influence to
determine the agenda of the board and information
flow is said to be greater when there is duality in that
organization. Perry (1995) stated that separate
leadership could result in conflict of interest, which
could affect an organization’s performance.
Fama and Jensen (1983) stated that “dual leadership
structure signals the absence of separation of the
decision management and the decision controls”.
Decision control means ratifying and overseeing the
implementation of resource commitment while
decision management means initiating and applying
recommendations for resource allocation. The board
of directors in all organizations is the highest
decision control rank which has the mandate of
hiring, firing and reward managers and oversee
crucial decision making. As noted by Fama and
Jensen (1983), “the board is not an effective device
for decision control unless it limits the decision
discretion of individual top managers”. The asserted
that in a duality leadership structure, the CEO would
not be able to perform both responsibilities.
2.3 Prior Studies on Leadership Structure
Several studies have been carried on effects of CEO
duality of firm performance.
Dey, Engel and Liu, (2011) investigated on the
impact of board leadership structure on corporate
performance. They result of the study revealed a
negative performance impact for firms with Non-
Duality. They study also revealed that organizations
select their choice of leadership structure after
weighing the benefits and costs of each duality
structure.
Yam and Kam, (2008) examined the relationship
between Duality and company performance. Their
results shows that there is a negative moderating
effect of family control influence on duality-firm
performance. They established that duality
leadership structure is better for non-family-control
companies while non-duality is good for family-
control companies.
Kim, Al-Shammari, Kim and Lee, (2009)
investigated on CEO duality leadership and
corporate diversification behaviour. Their findings
shows that there is a positive relationship between
unrelated diversification and CEO duality.
Nahar, (2004) investigated on the impact of board
independence and CEO duality on an organization’s
performance. They study established that neither
duality nor non-duality leadership structure has any
relationship with an organization’s performance.
Carty and Weiss, (2012) studied on the impact of
duality on firm performance, with evidence from
U.S. banking crisis. Their findings revealed that
there is no relationship between duality and bank
failure. Additionally, the study revealed that duality
is accepted by regulators for various purposes.
3.1 Conclusion
Due to the continuing argument on the best
leadership structure, the study provided a conceptual
perception on the two leadership structure. Each has
its own benefits as well as disadvantages. Some
organizations adopts the dualityleadership structure,
while others is the non-duality leadership with its
own reasons. With what has been highlighted in this
study, knowledge will be added regarding the choice
of leadership structure. The study will also provide
valuable information to organizations planning on
choosing the form of leadership structure to adopt.

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