Article | Management Science | February 2014

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

by Ray Fisman, Rakesh Khurana, Matthew Rhodes-Kropf and Soojin Yim

Abstract

We study how corporate governance affects firm value through the decision of whether to fire or retain the CEO. We present a model in which weak governance—which prevents shareholders from controlling the board—protects inferior CEOs from dismissal, while at the same time insulates the board from pressures by biased or uninformed shareholders. Whether stronger governance improves retain/replace decisions depends on which of these effects dominates. We use our theoretical framework to assess the effect of governance on the quality of firing and hiring decisions using data on the CEO dismissals of large U.S. corporations during 1994–2007. Our findings are most consistent with a beneficent effect of weak governance on CEO dismissal decisions, suggesting that insulation from shareholder pressure may allow for better long-term decision making.

Keywords: Governing and Advisory Boards; Value; Retention; Resignation and Termination; Corporate Governance; Management Teams; Business and Shareholder Relations;

Citation:

Fisman, Ray, Rakesh Khurana, Matthew Rhodes-Kropf, and Soojin Yim. "Governance and CEO Turnover: Do Something or Do the Right Thing?" Management Science 60, no. 2 (February 2014): 319–337.