Risk & Compliance

Splitting Top Jobs Pays, Says New Study

Large companies that separated the chairman and CEO positions during the past 10 years enjoyed an average annual return of 22 percent, according to...
Stephen TaubOctober 22, 2004

Is a company better off when two people hold the positions of chairman and chief executive officer?

Shareholder activists have clamored for this arrangement for years, and the number of companies following the practice has been climbing, albeit very slowly. In May, CFO.com reported on a study that suggested this was unwise; Booz Allen Hamilton found that on average, companies that split the two positions performed worse than companies that had a single chairman and CEO.

Now a new survey has concluded just the opposite. Companies that separated the chairman and CEO positions outperformed those that didn’t, according to Richard Bernstein, Merrill Lynch’s chief U.S. market strategist.

Bernstein examined the returns of the 100 largest stocks (by market capitalization) in the Standard and Poor’s 500 from 1994 through the second quarter of this year, rebalancing the portfolio each quarter. One-fifth of these companies separated the chairman and CEO positions; they enjoyed an average annual return of 22 percent, compared with 18 percent for the companies that had one person handling both jobs.

From 1996 to 2000, the gap is even wider: companies that split the positions saw their share price surge an average of nearly 37 percent, compared with 25 percent for companies that didn’t divide the tasks. Excluding tech companies from the mix during that dotcom-heavy period, the difference is still substantial: 26 percent compared with 20 percent, respectively.

Merrill looked at only 100 companies, but the study maintained that this was a manageable number that was also roughly representative of the larger S&P 500 it typically examines. “In fact, the correlation between monthly returns of the equal-weighted largest quintile of the S&P 500 and those of the S&P 500 itself was 96.5 percent,” the firm pointed out.