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