Leadership structure and corporate governance in Switzerland

The question of whether the CEO should also serve as chairman of the board is one of the most hotly debated issues in the recent corporate governance discussion. While agencytheoretic arguments advocate a separation of decision and control functions, the empirical evidence focusing on U.S. companies is not conclusive. In this context evidence from a country with a different practice of CEO succession may provide important new insights with respect to the question of whether one leadership structure should generally be preferred to the other one. This article fills this gap by investigating the valuation effects of leadership structure in Switzerland where - in contrast to the U.S. - a separation of the CEO and chairman functions is common. Consistent with the majority of prior research focusing on the U.S., the authors found no evidence of a systematic and significant difference in valuation between firms with combined and firms with separated functions. They also investigated whether leadership structure is related to firm-level corporate governance characteristics and found a similar curvilinear relationship between leadership structure and managerial shareholdings as is observed between firm value and managerial shareholdings. An implication is that possible agency costs associated with a combined function are mitigated by a higher incentive alignment of the CEO/chairman through an adequate level of managerial shareholdings. Over the last few years corporate governance became an important investment criterion, which is for example reflected in the emergence of various corporate governance ratings. The authors of this article additionally investigated whether firm value is significantly related to firm level corporate governance as measured by a broad survey-based index for a representative sample of Swiss firms. They documented a positive and significant relationship between the corporate governance index and firm valuation. This finding is robust to controlling for a series of additional governance mechanisms related to ownership structure, board characteristics, and leverage as well as a potential endogeneity of these mechanisms.