Are Two Heads Really Better Than One? Evidence from the Thrift Crisis

By John Byrd, Donald R. Fraser, D. Scott Lee, and Semih Tartaroglu @ HLS Forum.

We employ a natural experiment that preceded the ubiquitous governance alarms of recent decades. We find that thrifts whose CEOs chaired their boards were significantly less likely to fail during the thrift crisis than their counterparts where CEOs were not board chairs. Thus, CEOs of thrifts who chair their boards appear to protect taxpayer interests by resisting shareholder pressure to adopt riskier investment strategies to exploit underpriced deposit insurance. Mandating the separation of these posts may run counter to taxpayer interests.

Despite a lack of clear evidence against unitary leadership, calls for the mandatory separation persistently surface whenever corporate governance issues are debated. As regulators across the globe once again consider how to revamp regulations to forestall future crises, there is a possibility that conventional beliefs about shareholder interests may impose unrecognized costs on society. We view our evidence as yet another example of how dangerous it is to rely on our collective intuition when regulating something as complex as a firm’s governance. These unforeseen hazards are likely greater in the financial sector with its many different and ever changing regulations. Perhaps, Congress should heed the cautionary advice of Adams (2009) that “until the governance of financial firms is better understood, it may be better not to impose restrictions on the governance of financial firms.”

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