Connecting Governance to CEO Replacement and Organizational Recovery
Keywords:
corporate governance, social network theory, board composition, CEO dismissalAbstract
STRUCTURED ABSTRACT
Manuscript Type: Conceptual/Theoretical
Research Question/Issue: Why do CEOs overstay and, in some cases, long overstay their welcomes? Social Network Theory may offer some explanation for delays in dismissing CEOs that, in the eyes of shareholders, should have been long gone. Social Network Theory also suggests that delaying the dismissal of a CEO will in turn delay firm performance recovery. Social Network Theory is reviewed in the context of board monitoring and its effects on CEO dismissal and subsequent recovery. It is ultimately suggested that certain board attributes will have an indirect effect on recovery time, as mediated by CEO dismissal time. A model and propositions are laid out and potential next steps are outlined for pursuing this line of inquiry.
Research Insights: Based on the literature review, it seems likely that board composition will have an indirect effect on how long it takes for organizations to recover from poor performance, after replacing an underperforming CEO.
Theoretical Implications: This paper makes important contributions to the corporate governance literature. First and foremost, it extends the research agenda on board composition, CEO turnover, and performance, to include the element of time. More specifically, it suggests that certain characteristics of corporate boards are more likely to inhibit the types of governance necessary to remove underperforming CEOs, and this in turn will impact the time it takes for organizational performance to recover. The paper also deepens the application of Social Network Theory to the study of corporate governance, addressing several elements of social networks that are found in non-independent boards and with “overboarded” directors.
Practitioner Implications: Risks of poor performance due to inadequate governance are far reaching, and shareholders and D&O (Directors and Officers) liability insurers are particularly vulnerable. Even with new management in place, shareholders might lose faith in the board if important strategic actions were delayed and especially if they negatively impact their investments. The anticipated effects of recovery can also discourage future investment in the company. Vigilant boards, composed of independent directors with optimal bandwidth, would be more likely than dense and embedded boards to replace the CEO when it is warranted. It would therefore behoove shareholders to participate in the election of directors, rather than turning that privilege over to the very board that took too long to replace the CEO due to its strong network structure.
References
Abebe, M. (2010). Top team composition and corporate turnaround underr environmental stability and turbulence. Leadership and Organization Development Journal, 31(3): 196-212.
Adams, R., Ferreira, D. (2007). A Theory of Friendly Boards. Journal of Finance, 62(1): 217-250.
Barney, J., Ouchi, W. (Eds.). (1986). Organizational Economics. Jossey-Bass, San Francisco.
Bebchuk, L., Weisbach, M. (2010). The state of corporate governance research. Review of Financial Studies, 23(3): 939-961.
Burrough, B., Helyar, J. (Eds.). (1990). Barbarians at the Gate. Harper & Row, New York.
Burt, R. (1980). On the functional form of corporate cooptation: Empriical findings linnking the intensity of market constraint with the frequency of directorate ties. Social Science Research, 9(2): 146-177.
Byrne, D. (1997). An overview (and underview) of research and theory within the attraction paradigm. Journal of Social and Personal Relationships, 14(3): 417-431.
Carter, D., Simkins, B., Simpson, W. (2003). Corporate governance, board diversity, and firm value. Financial Review, 38(1): 33-53.
Condon, J., Crano, W. (1988). Inferred evaluation and the relations betwee attitude similarity and interpersonal attraction. Journal of Personality and Social Psychology, 54(5): 798-797.
Daily, C., Dalton, D., Cannella, A. (2003). Corporate governance: Decades of dialogue and data. Academy of Management Review, 28(3): 371-383.
Drucker, P. (1981). The Bored Board. In Toward the Next Economics and Other Essays. Harper & Row, New York.
Dyl, E. (1988). Corporate control and management compensation: Evidence on the agency problem. Managerial and Decision Economics, 9(1): 21-25.
Fich, E., Shivdasani, A. (2006). Are busy boards effective monitors? Journal of Finance, 61: 689-724.
Friedman, S., Singh, H. (1989). CEO succession and stakeholder reaction: The influence of organizational context and event content. Academy of Management Journal, 32(4): 718-744.
Gamson, W., Scotch, N. (1964). Scapegoating in baseball. American Journal of Sociology, 70(1): 69-72.
Giambatista, R., Rowe, W., Riaz, S. (2005). Nothing succeeds like succession: A critical review of leader succession literature since 1994. Leadership Quarterly, 16(6): 963-991.
Gibelman, M., Gelman, S. (2002). On the departure of a chief executive officer: Scenarios and implications. Administration in Social Work, 26(2): 63-82.
Gladstein, D., Reilly, N. (1985). Group decision-making under threat: The tycoon game. Academy of Management Journal, 28(3): 613-627.
Glazer, J. (1994). The United Way Scandal. John Wiley and Sons, New York.
Granovetter, M. (1985). Economic Action and Social Structure: The Problem of Embeddedness. American Journal of Sociology, 91(3): 481-510.
Haleblian, J., Rajagopalan, N. (2006). A cognitive model of CEO dismissal: Understanding the influence of board perceptions, attributions and efficacy beliefs. Journal of Management Studies, 43(5): 1009-1026.
Hambrick, D., D'Aveni, R. (1988). Large corporate failures as downward spirals. Administrative Science Quarterly, 33(1): 1-23.
Hambrick, D., Misangyi, V., Park, C. (2015). The quad model for identifying a corporate director's potential for effective monitoring: Toward a new theory of board sufficiency. Academy of Management Review, 40(3): 323-344.
Harris, I., Shimizu, K. (2004). Too busy to serve? An examination of the influence of overboarded directors. Journal of Management Studies, 41(5): 775-798.
Hazarika, S., Karpoff, J., Nahata, R. (2012). Internal corporate governance, CEO turnover, and earnings management. Journal of Financial Economics, 104: 44-69.
Hermalin, B. (2005). Trends in corporate governance. Journal of Finance, 60(5): 2351-2384.
Hu, J., Kim, J., Lin, Z. (2015). Does timely loss recognition improve the board's ability to learn from market prices? Evidence from worldwide CEO turnovers. Journal of Interational Accounting Research, 14(1): 1-24.
Hwang, S. (1993), August 23. Fired Tambrands CEO was unusually close to consulting firm. Wall Street Journal, p. A1.
Jiraporn, P., Gleason, K. (2007). Capital structure, chareholder reights, and corporate governance. The Journal of Financial Research, 30(1): 21-33.
Katz, R. (1982). Project communication and performance: An investigation into the effects of group longevity. Administrative Science Quarterly, 27: 81-104.
Kay, M. (1994, June 30). JCC board uncovers financial scandal. Washigton Jewish Week, pp. 4, 23.
Kim, J.-Y., Kim, J.-Y., Miner, A. (2006). Organizational learning from extreme performance experience: The impact of success and recovery experience. Organization Science, 20(5): 958-978.
Libit, W., Freier, T. (2015). Is 75 the new 68: Director tenure, mandatory director retirement and related issues. Insights, 29(3): 2-11.
Lublin, J. (1991, June 6). More chief executives are being forced out by tougher boards. Wall Street Journal, p. A1.
Milliken, F., Martins, L. (1996). Searching for common threads: Understanding the multiple effects of diversity in organizational groups. Academy of Management Review, 21(2): 402-433.
Mizruchi, M. (1996). What do interlocks do? An alysis, critique, and assessment of research on interlocking directorates. Annual Review of Sociology, 22: 271-298.
Mobbs, S. (2013). CEOs under fire: The effects of competition from inside directors on forced CEO turnover and CEO compensation. Journal of Financial and Quantitative Analysis, 48(3): 669-698.
Monks, R., Minow, N. (1996). Watching the watchers: Corporate governance for the 21st century. Blackwell Business, Cambridge, MA.
Montoya, R., Horton, R. (2004). On the importance of cognitive evaluation as a determinant of interpersonal attraction. Journal of Personality and Social Psychology, 86(5): 696-712.
Nystrom, P., Starbuck, W. (1984). To avoid organizational crisis, unlearn. Organizational Dynamics, 12(4): 53-65.
Palmer, D. (1983). Broken ties: Interlocking directorates and intercorporate coordination. Administrative Science Quarterly, 28(1): 40-55.
Palmer, D., Friedland, R., Singh, J. (1986). The ties that bind: Organizational and class bases of stability in a corporate interlock network. American Sociological Review, 51(6): 781-796.
Perry, T., Peyer, U. (2005). Board seat accumulation by executives: A shareholder's perspective. Journal of Finance, 60: 2083-2123.
Phan, P., Lee, S. (1995). Human capital or social networks: What constrains CEO dismissals? Academy of Management Journal, 37-41.
Pulliam, S., Pereira, J. (1995), August 14. Reebok CEO Fireman faces criticism by institutional holders. Wall Street Journal, pp. C1, C2.
Robinson, G., Dechant, K. (1997). Building a business case for diversity. Academy of Management Executive, 11(3): 21-31.
Shivdasani, A., Yermack, D. (1999). CEO involvement in the selection of new board members: An empirical analysis. Journal of Finance, LIV(5): 1829-1853.
Sinclair, M. (2000), December. Mismanaged finances: Food for the Poor, Feed the Children come under fire. Nonprofit Times, pp. 1, 10, 12.
Smith, M. (1996). Shareholder activism by institutional investors: Evidence from CalPERS. Journal of Finance, 51: 227-252.
Triana, M., Miller, T., Trzebiaowski, T. (2014). The double-edged nature of board gender diversity: Diversity, firm performance, and the power of women directors as predictors of strategic change. Organizational Science, 25(2): 609-632.
Uzzi, B. (1996). The sources and consequences of embeddedness for the economic performance of organizations: The network effect. American Sociological Review, 61(4): 674-698.
Vafeas, N. (2003). Length of board tenure and outside director independence. Journal of Business Finance & Accounting, 30(7 & 8): 1043-1064.
Van Knippenerg, D., De Dreu, C., Homan, A. (2004). Work group diversity and group performance: An integrative model and research agenda. Journal of Applied Psychology, 89: 1008-1022.
Wahid, A. (2012). Director heterogeneity and its impact on board effectiveness (Doctoral Dissertation). UMI Dissertation Publishing.
Wellman, B. (1999). Networks in the global village: Life in contemporary communities. Westview, Boulder, CO.
Westphal, J., Bednar, M. (2005). Pluralistic ignorance i corporate boards ad firm's strategic persistence to low firm performance. Administrative Science Quarterly, 50(2): 262-298.
Wiley, C. (1995). The ABC's of business ethics: Definitions, philosophies and implementation. Industrial Management, 37(1): 22-26.
Zahra, S., Pearce, J. (1989). Boards of directors and corporate financial performance: A review and integrative model. Journal of Management, 15(2): 291-334.
Zhu, D., Chen, G. (2015). Naccissism, director selection, and risk-taking spending. Strategic Management Journal, 36: 2075-2098.
Zucker, L. (1977). The role of instituteonalization in cultural persistence. American Sociological Review, 42: 726-743.
Downloads
Published
Issue
Section
License
Authors who publish with this journal agree to the following terms:
- Authors retain copyright and grant the journal right of first publication with the work simultaneously licensed under a Creative Commons Attribution License that allows others to share the work with an acknowledgement of the work's authorship and initial publication in this journal.
- Authors are able to enter into separate, additional contractual arrangements for the non-exclusive distribution of the journal's published version of the work (e.g., post it to an institutional repository or publish it in a book), with an acknowledgement of its initial publication in this journal.
- Authors are permitted and encouraged to post their work online (e.g., in institutional repositories or on their website) prior to and during the submission process, as it can lead to productive exchanges, as well as earlier and greater citation of published work (See The Effect of Open Access).
