Governance and CEO Turnover: Do Something or Do the Right Thing?

42 Pages Posted: 28 Jan 2005

See all articles by Raymond J. Fisman

Raymond J. Fisman

National Bureau of Economic Research (NBER); Boston University

Rakesh Khurana

Harvard Business School

Matthew Rhodes-Kropf

Harvard Business School - Entrepreneurial Management Unit; National Bureau of Economic Research (NBER)

Date Written: January 2005

Abstract

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 'costly firing' 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 interests of shareholders or simply respond to their whims: Do they do just do something, or do they do the right thing?

Keywords: Corporate Governance, turnover, entrenchment, misattribution, board decisions

JEL Classification: G30

Suggested Citation

Fisman, Raymond and Khurana, Rakesh and Rhodes-Kropf, Matthew, Governance and CEO Turnover: Do Something or Do the Right Thing? (January 2005). EFA 2005 Moscow Meetings Paper. Available at SSRN: https://ssrn.com/abstract=656085 or http://dx.doi.org/10.2139/ssrn.656085

Raymond Fisman

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Boston University ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States

Rakesh Khurana

Harvard Business School ( email )

Soldiers Field
Boston, MA 02163
United States
617-495-4137 (Phone)
617-496-6554 (Fax)

Matthew Rhodes-Kropf (Contact Author)

Harvard Business School - Entrepreneurial Management Unit ( email )

Soldiers Field Road
Rock Center 312
Boston, MA 02163
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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