Abstract
New chief executives often seek to make significant strategic changes in the company’s direction, but they need the discretionary power to make those decisions. The board of directors – the only authority to which the CEO is directly accountable—may constrain this discretion, especially when the most influential person on the board is a new CEO’s immediate predecessor. We examine the effect of a former CEO director on managerial discretion during a period of CEO transition, as well as looking into the mechanisms and processes behind the effect. Using a dataset of 804 CEO transitions in 51 industries between 1997 and 2008, we find that the presence of a former CEO on the board does indeed constrain a successor CEO’s discretion. We also find that the constraints appear to be largely driven by the former CEO director’s role as an information conduit—providing the board with better information about the firm’s operations and providing the successor CEO with information about the strategic preferences of the board.
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