When Chief Executives get fired, it attracts the attention of a diverse group of stakeholders. The level of press coverage when a CEO gets fired depends on the size and significance of an organization. CEO dismissal can be defined as a situation where a CEO is asked or forced to leave the organization when they are not ready or did not anticipate it. The board of an organization often initiates such departure. Below I share some facts from scientific research on CEO dismissals and some facts from professional oganizations and reputable consulting firms around the globe.
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- Poor performance- One reason for dismissing CEOs supported by empirical evidence is poor performance. Surprisingly some research shows that the organization's performance explains less than 50% of the variance in CEO turnover.
- Some CEOs get fired because the board miscalculated the reason for the organization's poor performance. There are several examples where a CEO is fired for poor performance only for the company to decline further when measured through earnings or stock price.
- Fredrickson 1988 suggests that social and political factors are key in CEO dismissals.
- As crucial third parties, Investment analysts play a key role in influencing decisions on the level of competency and performance of a CEO and, eventually, their dismissal. The board tends to respond to investment analysts because their stock recommendations influence investors they want to appease. Using panel data on the SP, negative analyst recommendations had a weaker impact on CEO dismissal post-litigation period.
- According to research conducted, the likelihood of a male CEO being fired is lower when firm performance is high (in comparison to when it is low), whereas the likelihood of a female CEO being fired is consistent regardless of the performance of the firm.
- A research study of Chinese listed firms from 2009 to 2019 found that total CSR is positively associated with CEO dismissals. Further analysis showed that average CSR is negatively linked with CEO dismissals, indicating that CEOs mitigate career concerns by maintaining an optimal range of CSR investment.
- One research indicates that a controlling shareholder's pledging of shares can increase the likelihood of an abnormal departure by the CEO; however, this effect is not readily apparent for state-owned companies and CEOs who are appointed by controlling shareholders. The effect may be mitigated through improved corporate governance.
- This study examines how American influences on European firms impact the dismissal risk for CEOs. It found a significant increase in the dismissal sensitivity of poorly performing companies with American board members. This suggests that the internationalization of boards should not be banned or restricted, as it gives owners more options to influence the firm's corporate governance.
- The removal of a CEO can affect how other CEOs at competing companies make strategic decisions. According to these findings, removing a CEO can increase job insecurity and cause current CEOs to worry about their positions, which impacts their strategic decisions.
- Using a longitudinal sample of French firms, one research found that employee stock ownership strengthens the negative relationship between firm performance and CEO dismissal likelihood. The same research shows that the higher the employee ownership, the more likely an outsider will replace the underperforming CEO.
- Using a sample of Chinese listed firms between 2002 and 2011, this study found that overpaid CEOs have a higher chance of being fired in the event of poor firm performance than their underpaid counterparts. In addition, when executive compensation disclosure is required, CEO overpayment has a greater influence on the turnover-performance relationship.
- Using panel data on Belgian public companies from 2006 to 2014, the negative relationship between firm performance and the likelihood of firing the CEO is much weaker when boards have social category fault lines. More research into board situations shows that social category fault lines have a stronger effect on the relationship between CEO performance and firing when the board doesn't do board evaluations or has more board committees. Social category fault lines divide the board into subgroups based on identity, which makes it less likely that directors will identify with the board as a whole. This makes it more difficult for the board to get rid of a CEO who isn't doing a good job.
- More and more CEOs are being replaced, especially within three years. CEO changes are bad for business and waste opportunities (Khurana, 2001). (Wiersema, 2002), But data shows that companies are more likely to fire newly appointed CEOs than those who have been in their jobs longer (Shen & Cannella, 2002). Three decades ago, a new CEO was less likely to be fired (Wiersema & Zhang, 2011). As the difference in performance between the old and new CEOs gets bigger, the pressure on the new CEO to do well rises, making it more likely that they will be fired.
- Even when poor performance is evident, the board is unlikely to fire the CEO if few candidates are available to take over the role. Companies that have a larger number of outside directors are more likely to fire underperforming CEOs. Family members and CEOs with larger stakes are less likely to be fired.
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High CEO turnover can disrupt a company's strategy and impact its financial performance, which can influence board decisions on compensation. For a closer look at CEO dismissal trends and how they might relate to pay, check out our CEO Dismissal Tracker
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This article sheds light on why CEO get fired and under what circumstances. Company performance is not the major predictor of CEO dismissal.
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Memory Nguwi is an Occupational Psychologist, Data Scientist, Speaker, & Managing Consultant- Industrial Psychology Consultants (Pvt) Ltd, a management and human resources consulting firm.
Email:mnguwi@ipcconsultants.com or visit our websites https://www.thehumancapitalhub.com/ and www.ipcconsultants.com
