Is an Outside Chair Always Better? The Role of Non‐CEO Inside Chairs on Corporate Boards

Published date01 November 2015
Date01 November 2015
The Financial Review 50 (2015) 547–574
Is an Outside Chair Always Better? The
Role of Non-CEO Inside Chairs
on Corporate Boards
Shawn Mobbs
University of Alabama
Proponents of separating the CEO and chairman positions advocate having an outside
chairperson, although having an inside chairperson can be valuable for some firms. I find
inside chairs are more likely where firm-specific human capital is more important and, in these
firms, inside chairs are associated with higher firm valuationand better operating performance.
Furthermore, skilled inside chairs increase forced CEO turnover sensitivity to performance.
The evidence suggests that certain inside chairs can be valuablewhen firm-specific information
is important for monitoring and an outside chair may be costly.
Keywords: board of directors, CEO turnover, inside chair, CEO succession, CEO duality
JEL Classifications: G30, G34
1. Introduction
For years, corporate governance proponents have encouraged firms to separate
the roles of the CEO and the chairman of the board (Jensen, 1993). The 1992 Cadbury
Corresponding author: Box 870224, Alston Hall, 361 Stadium Drive, Tuscaloosa, AL 35487; Phone:
(205) 348-6097; Fax: (205) 348-0590; E-mail:
I am grateful to the editor (Robert Van Ness) and to two anonymousreferees for very helpful comments
and suggestions.
C2015 The Eastern Finance Association 547
548 S. Mobbs/The Financial Review 50 (2015) 547–574
report stated, “Given the importance and particular nature of the chairman’s role, it
should in principle be separate from that of the chief executive.”Almost 20 years later,
the California Public Employees’ Retirement System (CalPERS) stated, “The board
should be chaired by an independent director.”1As the CalPERS quote indicates,
those promoting separation of these two roles often advocate having an outside
chairman. However, this can be costly for many firms, especially when information
asymmetry between management and the board is high (Brickley, Coles and Jarrell,
1997). An alternative arrangement that separates the CEO from the board chair, and
yet can minimize this information asymmetry, is to havea non-CEO inside chair. This
occurs often following a succession process, initially noted by Vancil (1987), where
the retiring CEO retains the chair position while handing off the CEO title to his or
her heir, though it is not necessary that the inside chair is the former CEO. Founders
or other long-time firm employees can be an inside chair. It is also not necessary that
this organizational structure lasts only for the few months following a succession.
Firms can chose to maintain an inside chair for several years. Given their greater
board authority over the CEO, separate inside chairs are similar to outside chairs and
in certain cases can be more beneficial. Yet, current research on board leadership
devotes little attention to inside chairs and focuses primarily on outside chairs. The
purpose of this study is to examine the role of the separate inside chair on corporate
I identify any director within the Risk Metrics database classified as an employee
and with the title of chairman, but without the title of CEO, as a separate inside chair.
I do not consider inside chairs in firms in which there is also an outside chair. I
begin by examining the determinants of firms with a separate inside chair and find
that separate inside chairs are more likely in heterogeneous industries where firm-
specific human capital is more important for monitoring. I also find that a separate
inside chair is more likely in larger and, thus more complex, firms and in firms where
agency concerns are greater and when the current CEO is less experienced. Thus,
the evidence is consistent with firms with greater information asymmetry between
managers and directors being more likely to maintain a separate inside chair.
The greater ownership and historical connections with the firm create strong
incentives for inside chairs to act on behalf of shareholders, which can translate into
better board decision making and ultimately greater firm value. Consistent with this
hypothesis, I find strong evidence that inside chairs are associated with significantly
higher industry-adjusted Tobin’s Q. This finding is robust to several methods of
accounting for possible endogenous relations between the presence of a separate
inside chair and firm value. Specifically, I incorporate firm fixed effectsand a matched
control sample. I also find evidence that firms with a separate inside chair on their
board are associated with better firm operating performance.
1See section 4.9 of the 1992 Cadbury Report and section 1.4 of the 2011 CalPERS Global Principles of
Accountable Corporate Governance document.

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