“For investors...If your company allows too much power to reside in the hands of the chief executive, do not be surprised if they abuse that power.” Writes John Authers in the FT 6 Sep, link here.

“We all know why companies manipulate their earnings. They do it because they can. Accounting principles necessarily allow some discretion beyond the direct moves that show up in cash terms each quarter. And there are rewards for manipulation — stronger earnings will be greeted by higher share prices. That means cheaper equity finance for the company, and more pay for any executives whose remuneration is linked to share performance.”

Authers looks at this paper by Chu et al, A Reputation for Beating Analysts' Expectations and the Slippery Slope to Earnings Manipulation.  (Link here, first posted 2015, last revised June 2017, as of writing)

“We analyze firms subject to SEC enforcement actions and find that these firms are both more likely to consistently beat analysts’ quarterly earnings forecasts during the manipulation period as well as in the three years prior to the manipulation period. We examine whether manipulating firms appear to be under strong external market pressure to meet expectations. Consistent with market pressure playing a role, we find that manipulating firms have high long-term growth expectations, growing institutional investment, high market values relative to fundamentals, and are strongly recommended by analysts. We also investigate whether pressure from within the organization influences the likelihood of manipulation. We find that while CEO power plays a role, the evidence on CEO overconfidence is weak. Overall, our results suggest that maintaining a reputation for meeting analysts’ expectations can encourage aggressive accounting and, ultimately, earnings manipulation.” Chu writes.

Chu quotes: ““(T)he Wall Street number was pure. It was somebody else independent of me saying, “Stephen, this is what you need to aim for this quarter.” I would judge my success on the ability to make that number. If we achieved that number, it was an endorsement that we were doing the right things. If we missed that number, then it was a reflection that we hadn’t performed as well as we should have. My goal was just to get to or over that number – and if I did that, I succeeded.” Stephen Richards Global Head of Sales at Computer Associates.”

“If a CEO sets meeting expectations as an organization goal, then a powerful CEO is more likely to be able to influence employees to achieve this outcome. We measure CEO power in three ways:

1) the CEO has the dual role of CEO and Chairman of the 2) the board of directors has fewer independent board members; and 3) the CEO receives a larger cash “pay slice” measured as the ratio of cash-based CEO compensation relative to the second highest paid executive.

Our evidence suggests that executives at manipulating firms could face strong internal pressure to continue the trend of consistently beating expectations. In univariate analysis, we find that manipulating firms are more likely to have overconfident and powerful CEOs.”

There may be exceptions, such as Warren Buffet, but my conclusion is - despite what many CEOs say particularly in the US - this is evidence that a separate Chair and CEO structure is a superior structure to a combined CEO/Chair.