Adapt or Perish: Evidence of CEO Adaptability to Strategic Industry Shocks

Abstract

Prior turnover literature documents various signals of poor performance that lead a board of directors to terminate the CEO, but does not explore the underlying causes of the CEO’s poor performance. Recognizing that terminated CEOs have often been successful earlier in their tenure, we conjecture that strategic shocks to a firm’s business environment can cause the board to decide that the existing CEO’s skills do not fit with the firm’s current leadership needs. Moreover, prior research on manager ability engenders the question of whether managers are specialists or are instead capable of adapting their “style” to the changing economic conditions. We examine industry-level changes in the firm’s operating environment and their effects on CEO turnover. Our results suggest that CEOs struggle to adapt to a change in industry globalization, competition, growth and investment, and that the well documented relation between firm performance and CEO turnover depends on these industry shocks. We also find that the relation between industry shocks and CEO turnover depends on various features of corporate governance and whether the CEO is identified as having “generalist” skills. Finally, we document that adaptable CEOs command a pay premium and that industry shocks affect turnover among other top-five executives.