Resisting pulling the plug: the role of CEO regulatory focus and board independence in store closure activity

Abstract

PurposeAlthough being fired up about changes such as firm expansion, chief executive officers (CEOs) have a hard time with changes that involve divesting businesses or downsizing operations. This study aims to examine how a particular psychological process – regulatory focus – serves as a managerial exit barrier in the context of store closings in the US retail industry. This study also examines how a particular corporate governance mechanism, the board of directors, moderates the relationship between CEO regulatory focus and divestment activity.Design/methodology/approachThis study content-analyzed letters to shareholders to measure the regulatory focus of retail CEOs and used negative binomial regression to test the effect of the CEO’s regulatory focus and board independence on store closure activity.FindingsThe two motivation orientations – promotion and prevention – focuses have distinct effects on store closure decisions. As predicted, promotion-focused CEOs, who value attainment and growth, resist “pulling the plug.” Conversely, prevention-focused CEOs, who are more sensitive to losses, are more inclined to close stores. Independent boards decrease the CEOs’ resistance to “pull the plug” only when necessary, which is the case when CEOs have less vigilant tendencies.Research limitations/implicationsThis study contributes to the strategy and marketing literature. It examines an individual-level antecedent of store closure decisions and responds to the call for research on the effect of regulatory focus on divestment decisions.Practical implicationsLeaders themselves can be a source of resistance to change. The findings suggest the importance of boards hiring CEOs psychologically aligned with the firms’ strategic priorities. Promotion-focused CEOs may be a better fit for companies engaged in growth and acquisition. By contrast, prevention-focused CEOs may be a better fit for firms involved in retrenchment and restructuring. Independent boards still have the power to influence CEO decisions in the case of a misfit, as the findings suggest.Originality/valueThis study examines divestment decisions during the “retail apocalypse” and provides empirical evidence for the existence of managerial exit barriers, first introduced by Michael Porter.