The Impact of Board Independence and Chief Executive Officer Duality on Financial Performance: Evidence from Firms Listed on the Tehran Stock Exchange

Abstract

This study empirically investigates the impact of key corporate governance mechanisms, specifically board independence and CEO duality, on the financial performance of non-financial firms listed on the Tehran Stock Exchange (TSE). A quantitative research design is employed, utilizing balanced panel data for a sample of TSE-listed firms over a six-year period from 2018 to 2023. Financial performance, the dependent variable, is measured using Return on Assets (ROA). The key independent variables are board independence (the proportion of non-executive directors on the board) and CEO duality (a dummy variable indicating if the CEO also serves as the chairman of the board). The study uses an Ordinary Least Squares (OLS) regression model, incorporating firm size and leverage as control variables to ensure the robustness of the findings. The regression results indicate a statistically significant positive relationship between board independence and financial performance. This suggests that a higher proportion of independent directors on the board is associated with improved firm performance. Conversely, the study finds a significant negative relationship between CEO duality and financial performance, implying that the concentration of power in a single individual adversely affects firm profitability. The control variables, firm size and leverage, also show a significant impact on performance. The findings offer valuable insights for regulators and policymakers in Iran, suggesting that strengthening corporate governance codes to encourage board independence and mandate the separation of CEO and chairman roles could enhance corporate performance and protect shareholder interests. For investors, the results highlight the importance of board structure as a critical factor in evaluating investment opportunities. This study contributes to the corporate governance literature by providing fresh evidence from an important emerging market, Iran. While the relationship between board structure and firm performance is well-documented in developed economies, evidence from the unique institutional context of the TSE remains limited. This research helps fill that gap.