CEO turnover in public and private organizations: analysis of the relevance of different performance horizons

Esteban Lafuente,Miguel Á García-Cestona

doi:10.1108/jefas-05-2021-0075

Abstract

PurposeThis paper investigates how past performance changes, prior CEO replacements and changes in the chairperson impact CEO turnover in public and large private businesses.Design/methodology/approachWe analyze 1,679 CEO replacements documented in a sample of 1,493 Spanish public and private firms during 1998–2004 by computing dynamic binary choice models that control for endogeneity in CEO turnovers.FindingsThe results reveal that different performance horizons (short- and long-term) explain the dissimilar rate of CEO turnover between public and private firms. Private firms exercise monitoring patience and path dependency characterizes the evaluation of CEOs, while public companies' short-termism leads to higher CEO turnover rates as a reaction to poor short-term economic results, and alternative controls—ownership and changes in the chairperson—improve the monitoring of management.Originality/valueOur results show the importance of controlling for path dependency to examine more accurately top executives' performance. The findings confirm that exposure to market controls affects the functioning of internal controls in evaluating CEOs and shows a short-term performance horizon that could be behind the recent moves of public firms going private or restraining shareholders' power.

Highlights

Organizations have always faced the challenge of managing the process of replacing the chief executive officer (CEO)
Can we expect a different CEO turnover-poor performance pattern in private vis-a-vis public businesses? In our approach to CEO turnover, we argue that discrepancies in the performance horizon between public and private firms may condition the directors’ responsiveness to poor performance results
Connected with the previous point, public and private businesses pursue different goals and we suggest that discrepancies in CEO turnover rates between public and private firms may result from differences in performance horizons

Summary

Introduction

Organizations have always faced the challenge of managing the process of replacing the chief executive officer (CEO). In a scenario dominated by large owners, the analysis of how short- and long-term performance changes impact CEO turnovers gains relevance to evaluate the effectiveness of governance systems in public and comparable private businesses.

Results

Conclusion