Governance and CEO turnover
Subtitle: do something or do the right thing?
By: Ray Fisman, Rakesh Khurana, Matthew Rhodes-Kropf
Contributors: Khurana, Rakesh, 1967-; Rhodes-Kropf, Matthew; Harvard Business School. Division of Research
Series: Working paper / Division of Research, Harvard Business School -- 05-066; Working paper (Harvard Business School. Division of Research) -- 05-066
Publisher: Division of Research, Harvard Business School
Published: 2005
Place of publication: Boston
Language: eng
Number of pages: 27
Description: Shareholder delegation of the power to fire the CEO to the board of directors is central to corporate governance. While the board ideally acts as desired by shareholders, board entrenchment may insulate a poorly performing manager from shareholders agitating for her removal. The conventional ₁costly firing₂ model of managerial entrenchment views this protection from shareholders as purely negative. Yet recent anecdotal evidence on managerial turnover suggests an alternative view of entrenchment: If shareholders misattribute poor performance to the CEO rather than to circumstance, then insulating management from the whims of shareholders may lead to better firing decisions. We propose that entrenchment has an inherent trade-off. We present a model that directly incorporates both sides of this trade-off, and generates a set of empirical predictions that we explore using recently collected data on governance statutes and on the dismissals of CEOs of large U.S. corporations. Our results demonstrate that governance is a very important mediating factor in the relationship between performance and firing. Furthermore, we find support for the 'misguided shareholder' view of entrenchment. Fundamentally this paper explores whether, in caving in to shareholder demands, boards act in the best interest of shareholders or simply respond to their whims: Do they do just do something, or do the right thing?
Notes: Includes bibliographical references.