Evidence of CEO Adaptability to Industry Shocks

The Harvard Law School Forum on Corporate Governance and Financial Regulation 2013-07-08

Summary:

Editor's Note: The following post comes to us from Wayne Guay, Daniel Taylor, and Jason Xiao, all of the Department of Accounting at the University of Pennsylvania.

Prior turnover literature documents various signals of poor performance, such as stock returns and earnings, that lead a board of directors to terminate the CEO, but does not explore the underlying causes of the CEO’s poor performance. In many cases, terminated CEOs have been successful earlier in their tenure as CEO. At some point, however, the board decides that the existing CEO’s skills do not fit with the current leadership needs of the firm, and so switches to a new CEO. The question of why these previously successful CEOs are released (apart from retirements or voluntary departures) remains largely unanswered.

In our paper, Adapt or Perish: Evidence of CEO Adaptability to Strategic Industry Shocks, which was recently made publicly available on SSRN, we conjecture that a previously successful CEO may not be able to adapt when the firms within her industry change their business strategy, or more precisely, that strategic shocks within the industry increase the probability that the CEO will suffer from an adaptability problem. If strategic industry shocks alter a firm’s leadership needs, and the board perceives the CEO cannot adapt their skills to fit those needs, then the CEO is more likely to be terminated. For example, assume a CEO has a set of skills that leads them to prefer to conduct manufacturing activities domestically. When faced with competitive forces that dictate a different strategy, some CEOs may be able to adapt successfully to manage foreign manufacturing operations. Other CEOs, however, may have difficulty adjusting their skills to fit the current strategic needs of the firm. If this is the case, the latter type of CEO will face a higher probability of being terminated when the firm’s industry competitors change their strategies. We note that it is certainly the case that all CEOs can adapt to some degree to changing business conditions. The interesting question then, is whether one can identify the types of shocks, if any, that cause CEO adaptability problems.

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Link:

http://blogs.law.harvard.edu/corpgov/2013/07/08/evidence-of-ceo-adaptability-to-industry-shocks/

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Blogs.law Aggregation Hub » The Harvard Law School Forum on Corporate Governance and Financial Regulation

Tags:

academic research boards of directors executive turnover management shocks executive performance entrenchment daniel taylor jason xiao termination wayne guay

Authors:

R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation,

Date tagged:

07/08/2013, 10:40

Date published:

07/08/2013, 09:30