Ceo selection,succession, compensation and firm performance: A theoretical integration and empirical analysis

This study seeks to extend and unify a set of research issues relating to CEO selection, succession, compensation, and firm performance. The study offers a model of these issues from a combined agency and organizational perspective, and tests the model using archival data and perceptual data from survey responses from 118 CEOs of the largest U.S. corporations. The results suggest that several CEO issues are significant predictors of variation in firm performance, supporting the paper's arguments for (1) a reinterpretation of the insiderfoutsider CEO distinction, (2) the relevance of CEO succession planning, and (3) the importance of CEOs' perceptions of the linkage between their personal wealth and firm wealth.     

Why do some outside successions fare better than others? The role of outside CEOs' prior experience with board diversity

Research summary: We develop a theory to explain why new outside CEOs can better manage their relationship with the board if they previously served on boards that were more diverse than the focal board. We predict that a new outside CEO's prior experience with more diverse boards not only reduces the likelihood of post‐succession CEO turnover and director turnover, but also improves firm performance. Results from an analysis of 188 outside CEOs in a sample of Fortune 500 companies provide support for our theory. This study contributes to upper echelon theory and research by identifying outside CEOs' prior experience with board diversity as an important aspect of their background that influences a range of major organizational outcomes, including CEO turnover, director turnover, and firm performance. Managerial summary: It is challenging to be a new CEO who comes from outside of the organization. Our study examines why some new outside CEOs fare better than others. We suggest that a positive relationship with the board of directors is a key factor in a new outside CEO's success. A new outside CEO can better manage the relationship with the board if he or she has prior experience working with other demographically diverse boards. In contrast, when the focal board is more diverse than the other boards on which the new CEO previously served, the new CEO tends to struggle in managing his or her relationship with the board, experiencing a higher likelihood of turnover and delivering worse financial performance. Copyright © 2015 John Wiley & Sons, Ltd.     

The effects of board human and social capital on investor reactions to new CEO selection

This study extends work on independent directors to examine the influence of their human capital and social capital on investor reactions to the board's CEO selection decision. We predict that human capital, as represented by the board's CEO experience and industry experience, and social capital, as represented by directors' co‐working experience on the board and external directorship ties to other corporate boards, will influence the stock market reactions to new CEO appointments. In a sample of 208 new CEO appointment events in U.S. manufacturing firms between 1999 and 2003, we found that the stock market reacted favorably to the appointments made by boards with higher levels of human and social capital. We also found that the effect of internal social capital was stronger when the new CEO was an insider rather than an outsider. The implications of the results for director selection and CEO succession are discussed. Copyright © 2010 John Wiley & Sons, Ltd.     

CEO Dismissal: The role of investment analysts

While poor firm performance has been shown to be a predictor of CEO dismissal, little is known about the role of external constituents on the board's decision to dismiss the firm's CEO. In this study, we propose that investment analysts, as legitimate third‐party evaluators of the firm and its leadership, provide certification as to the CEO's ability, or lack thereof, and thus help reduce the ambiguity associated with the board's evaluation of the CEO's efficacy. In addition, the board tends to respond to investment analysts because their stock recommendations influence investors, whom the board wants to appease. Using panel data on the S&P 500 companies for the 2000–2005 period, we find that negative analyst recommendations result in a higher probability of CEO dismissal. Copyright © 2011 John Wiley & Sons, Ltd.     

Information asymmetry and the dismissal of newly appointed CEOs: an empirical investigation

Why are some newly appointed CEOs (i.e., those with tenure of three years or less) dismissed while others are not? Drawing upon previous reseach on information asymmetry and adverse selection in CEO selection, I argue that the board of directors may make a poor selection at the time of CEO succession, and as a result, must dismiss the appointee after succession when better information about him/her is obtained. Therefore, the level of information asymmetry at the time of succession increases the likelihood of dismissal. With data on 204 newly appointed CEOs, the results of this study support this argument. After controlling for alternative explanations of CEO dismissal (e.g., firm performance and political factors), the results show that the likelihood of dismissal of newly appointed CEOs is higher in outside successions and/or if the succession follows the dismissal of the preceding CEO. Further, if at the time of succession, the firm's board has a nominating committee that is independent and/or on which outside directors have few external directorships, the likelihood of dismissal is lower. Contributions to the CEO dismissal/succession literature are discussed. Copyright © 2008 John Wiley & Sons, Ltd.     

A dual agency view of board compensation: the joint effects of outside director and CEO stock options on firm risk

This paper contributes to multiple agency theory by examining how the compensation schemes awarded to outside directors and the CEO jointly affect firm‐level risk taking. Using data of the S&P 1500 firms from 1997 to 2006, we find support for earlier arguments that providing the CEO, the outside directors, or both with stock options increases risk taking. More importantly, we find that compensating outside directors with stock options has significantly stronger effects than CEO stock options. Finally, contrary to what one would expect, we find that these effects are mutually substituting; that is, if both the outside directors and the CEO are provided with stock option compensation, outside directors' incentives weaken the effect of the CEO's incentives on firms' risk taking. Copyright © 2010 John Wiley & Sons, Ltd.     

Investor perceptions of CEO successor selection in the wake of integrity and competence failures: A policy capturing study

Research summary : Drawing on theory about signaling, sensemaking, and the romance of leadership, we extend inquiry on investors' perceptions of CEO succession following misconduct. Whereas past studies have treated misconduct monolithically, we examine failures of integrity and competence separately. Using a policy capturing methodology that isolates investors' decision making from potential confounds, we find that, following an integrity failure, investors perceive outside and interim successors positively but inside successors negatively. Following a competence failure, investors perceive outside successors positively but are ambivalent toward inside and interim successors. Our findings indicate that whether an act of misconduct was an integrity failure or a competence failure, and what type of successor the firm chooses, are important considerations when using CEO succession as a means to restore investor confidence. Managerial summary: Business headlines regularly feature episodes of organizational misconduct, such as product safety problems, environmental violations, employee mistreatment, and securities lawsuits, and their aftermath. In such scenarios, shareholders demand answers from the people at the top, even if those people were not directly responsible for the problem. As a result, companies often fire the CEO as a means to restore investor confidence. Does this work? It depends on the type of misconduct and who is the CEO's successor. Following a competence failure, investors welcome the appointment of an outsider, but they are indifferent to inside and interim successors. Following an integrity failure, shareholders greet outside and interim CEO successors favorably while frowning on the promotion of insiders. Copyright © 2015 John Wiley & Sons, Ltd.     

CEO incentives,innovation, and performance in technology‐intensive firms: a reconciliation of outcome and behavior‐based incentive schemes

Building on the agency view of corporate governance, we propose that technology‐intensive firms use both outcome and behavior‐based performance criteria for rewarding CEOs. Using a sample of 206 firms from 12 U.S. manufacturing industries, we find that as technological intensity increases CEO bonuses are more closely linked to financial results and that total CEO incentives are associated with two indicators of desirable innovation behaviors: invention resonance and science harvesting. Invention resonance refers to the impact a firm's inventions have on other firms' inventions, while science harvesting reflects a firm's commitment to scientific research. As technological intensity increases, aligning bonus with financial results, total incentives with invention resonance, and total incentives with science harvesting predict firm market performance. Copyright © 2006 John Wiley & Sons, Ltd.     

Performance consequences of new CEO ‘Outsiderness’: Moderating effects of pre‐ and post‐succession contexts

This study seeks to reconcile inconsistent findings on the performance consequences of new CEO origin. Drawing on five decades of empirical research on CEO succession outcomes, I develop a more refined theoretical conceptualization and a finer‐grained measurement of the underlying construct of the insider vs. outsider CEO, and build and test a more comprehensive and nuanced framework of the succession context. A longitudinal investigation of the U.S. airline and chemical industries (1972–2002) indicates that new CEO ‘Outsiderness’, conceptualized as a continuum raging from new CEOs who have a greater combination of firm and industry tenure to those who have no experience in the firm and the industry, has no main effect on post‐succession firm performance. However, significant moderating effects are found when environmental munificence, pre‐succession firm performance, and concomitant strategic and senior executive team changes are considered. Together, these findings highlight the need to consider both pre‐ and post‐succession contextual factors for evaluating the performance effects of new CEO outsiderness. Copyright © 2007 John Wiley & Sons, Ltd.     

Higher Highs and Lower Lows: The Role of Corporate Social Responsibility in CEO Dismissal

Research summary: Investing a firm's resources in corporate social responsibility (CSR) initiatives remains a contentious issue. While research suggests firm financial performance is the primary driver of CEO dismissal, we propose that CSR will provide important additional context when interpreting a firm's financial performance. Consistent with this prediction, our results suggest that past CSR decisions amplify the negative relationship between financial performance and CEO dismissal. Specifically, we find that greater prior investments in CSR appear to expose CEOs of firms with poor financial performance to a greater risk of dismissal. In contrast, greater past investments in CSR appear to help shield CEOs of firms with good financial performance from dismissal. These findings provide novel insight into how CEOs' career outcomes may be affected by earlier CSR decisions. Managerial summary: In this study, we examined a potential personal consequence for CEOs related to corporate social responsibility (CSR). We explored the role prior investments in CSR play when a board evaluates the firm's financial performance and considers whether or not to fire the CEO. Our results suggest that while financial performance sets the overall tone of a CEO's evaluation, CSR amplifies that baseline evaluation. Specifically, our results suggest that greater past investments in CSR appear to (a) greatly increase the likelihood of CEO dismissal when financial performance is poor, and (b) somewhat reduce the likelihood of CEO dismissal when financial performance is good. Thus, striving to deliver profits in a socially responsible manner may have both positive and negative personal consequences. Copyright © 2017 John Wiley & Sons, Ltd.     

Corporate social responsibility or CEO narcissism? CSR motivations and organizational performance

This study builds on insights from both upper echelons and agency perspectives to examine the effects on corporate social responsibility (CSR) practices of CEO's narcissism. Drawing on prior theory about CEO narcissism, we argue that CSR can be a response to leaders' personal needs for attention and image reinforcement and hypothesize that CEO narcissism has positive effects on levels and profile of organizational CSR; additionally, CEO narcissism will reduce the effect of CSR on performance. We find support for our ideas with a sample of Fortune 500 CEOs, operationalizing CEO narcissism with a novel media‐based measurement technique that uses third‐party ratings of CEO characteristics with validated psychometric scales. Copyright © 2014 John Wiley & Sons, Ltd.     

CEO Age and Outside Directors: A Hazard Analysis

This paper examines the relationship between CEO tenure, CEO age, the firm's industry group, the proportion of directors from outside the firm, and the cost of firing the CEO. A Cox proportional hazard model of CEO survival is used to study the length of the CEO's stay at the firm. We find that, contrary to previous studies, a greater proportion of outsiders has a positive effect on CEO tenure. The significance of this result is however sensitive to the inclusion of age and performance variables. We test for the effects of heterogeneity of industry, and find that firms in homogeneous industries exhibit lower durations. As the cost of firing the CEO rises, tenure also rises.     

Earthquake or glacier? How CEO charisma manifests in firm strategy over time

Numerous studies have focused on CEO charisma as an antecedent to firm performance, but this literature has largely overlooked the possibility that charisma manifests in more proximal strategic initiatives that (unlike performance) are largely under the CEO's control. In this study, we integrate perspectives from the upper echelons and charismatic leadership literatures to argue that CEO charisma influences year‐over‐year strategic change, the degree to which strategies deviate from industry central tendencies, and the degree of emphasis on corporate social responsibility. We also theorize that, depending on the outcome in question, the effects of charisma can become both amplified and diminished as CEO tenure advances. Employing a novel data collection approach for a sample of 113 S&P 500 CEOs, we find broad support for our theory. Copyright © 2014 John Wiley & Sons, Ltd.     

The use of an interim CEO during succession episodes and firm performance

Our study investigates an unexplored succession process—interim CEO successions. We define an interim CEO succession as a case where the title of chief executive officer is vacated by the incumbent and the board of directors has not announced a permanent successor, but instead designates a particular individual as ‘interim CEO,’ or ‘acting CEO,’ or ‘CEO until a permanent successor is named.’ Theory predicts that interim CEO successions will lead to the type of disruption that can harm firm performance, even after a permanent successor is appointed. Our data show that interim CEO succession processes are widely employed by publicly‐traded U.S. firms, and that they are associated with lower performance during the period in which the interim serves. However, whether the interim CEO also simultaneously serves as chairman moderates the impact of this type of succession on firm performance, as well as on long‐term firm survival. Copyright © 2009 John Wiley & Sons, Ltd.     

Firm‐specific knowledge assets and employment arrangements: Evidence from CEO compensation design and CEO dismissal

Research summary : We argue that firms with greater specificity in knowledge structure need to both encourage their CEOs to stay so that they make investments with a long‐term perspective, and provide job securities to the CEOs so that they are less concerned about the risk of being dismissed. Accordingly, we found empirical evidence that specificity in firm knowledge assets is positively associated with the use of restricted stocks in CEO compensation design (indicating the effort of CEO retention) and negatively associated with CEO dismissal (indicating the job securities the firm committed to CEOs). Furthermore, firm diversification was found to mitigate the effect of firm‐specific knowledge on both CEO compensation design and CEO dismissal, as CEOs are more removed from the deployment of knowledge resources in diversified firms. Managerial summary : A firm's knowledge structure, that is, the extent to which its knowledge assets are firm‐specific versus general, has implications for both CEO compensation design and CEO dismissal. In particular, we find that a firm with a high level of firm‐specific knowledge has the incentive to retain its CEO through the use of restricted stocks in CEO compensation. Such a firm is also likely to provide job security for its CEO, leading to a lower likelihood of CEO dismissal. These arguments, however, are less likely to hold in diversified corporations as CEOs in such corporations are more removed from the deployment of knowledge assets. A key managerial implication is that CEO compensation and job security design should be made according to the nature of firm knowledge assets. Copyright © 2016 John Wiley & Sons, Ltd.     

Executive succession: The importance of social capital in CEO appointments

Research Summary: Firm performance and corporate governance have been shown to influence CEO selection, but our understanding of the role of social capital is more limited. In this study, we seek to provide further insight into the role of social capital by examining the influence of both “bonding” and “bridging” forms of social capital on CEO appointments. We find that candidates who have relational social capital, in terms of overlap with the CEO in organizational tenure, board tenure, and CEO tenure are more likely to be appointed as CEO. We also find that candidates who have external linkages to the CEO in the form of geographic, prestigious university, and prior employment affiliations are more likely to be appointed CEO. Managerial Summary: The appointment of a new CEO has significant and widespread implications for the firm’s future strategic direction and performance, the relationship between the board and CEO, and perceptions by investors, employees, and other key stakeholders. Our study finds that candidates who have shared connections and experiences with the CEO in terms of geographic, prestigious university, or prior employment affiliations as well as overlap in terms of organizational tenure, board tenure, and CEO tenure are more likely to be appointed CEO. Given the enormous impact that executive appointments have on the strategic direction and performance of the company, it is important to recognize that social factors such as shared experiences and connections influence how candidates are perceived, and thus, may affect appointment decisions.     

Has the “CEO effect” increased in recent decades? A new explanation for the great rise in America's attention to corporate leaders

We introduce a new explanation for one of the most pronounced phenomena on the American business landscape in recent decades: a dramatic increase in attributions of CEO significance. Specifically, we test the possibility that America's CEOs became seen as increasingly significant because they were, in fact, increasingly significant. Employing variance partitioning methodologies on data spanning 60 years and more than 18,000 firm‐years, we find that the proportion of variance in performance explained by individual CEOs, or “the CEO effect,” increased substantially over the decades of study. We discuss the theoretical and practical implications of this finding. Copyright © 2014 John Wiley & Sons, Ltd.     

The impact of CEO core self‐evaluation on the firm's entrepreneurial orientation

Although much has been attributed to a CEO's personality, one particularly intriguing, and as yet unexplored, investigation is its impact on the firm's entrepreneurial orientation. Additionally, despite calls from the upper‐echelon literature, CEO personality research has been hobbled by the absence of a unifying construct that captures core dimensions of personality, and by the difficulty in obtaining such intimate assessments from executives. Building on recent advances in personality research, in particular the identification and validation of the core self‐evaluation construct that captures the core facets of an executive's sense of self‐potency, we develop and test a model of the impact of CEO core self‐evaluation on entrepreneurial orientation. Then, consistent with upper echelons and personality theory, we specify the contingent role of environmental dynamism. Using multisource data from a sample of CEOs and their top management teams from 129 firms, including a time‐lagged assessment of the firm's entrepreneurial orientation, we find evidence to suggest that CEOs whose personalities reflect higher core self‐evaluations have a stronger positive influence on their firms' entrepreneurial orientation. In addition, we find that this influence is particularly strong in firms facing dynamic environments, but negligible in stable environments. Copyright © 2009 John Wiley & Sons, Ltd.     

What's all that (strategic) noise? anticipatory impression management in CEO succession

We develop and test a novel theory about strategic noise with regard to CEO appointments. Strategic noise is an anticipatory and preemptive form of impression management. At the time it announces a new CEO, a board of directors seeks to manage stakeholder impressions by simultaneously releasing confounding information about other significant events. Several CEO and firm characteristics affect the likelihood that this will happen. Strategic noise is most likely when long‐term CEOs have a wide pay gap between other top managers at high stock price performance firms, and when a new CEO does not have previous CEO experience or comes from a less well‐regarded firm. Results showing that CEO succession announcements are noisier than they would be by chance have some interesting implications for impression management theory, traditional event study methodology, and managerial and public policy. Interviews with public firm directors on CEO succession provide additional validity for the strategic noise construct and help us to articulate key elements of the theory. Copyright © 2011 John Wiley & Sons, Ltd.