The Role of Board of Directors in CEO Succession: Theory and Evidence

Abstract

In this paper, I develop a search-matching model which predicts that new CEOs who are better matches to the firms will stay longer, perform better, and require less initial compensation. Using comprehensive EXECUCOMP dataset merged with unique data on CEO succession plans, I find significant benefits to firms that adopt a CEO succession plan: insider successors in such firms have 1) 30% lower hazard rate of early turnover, 2) 10% higher productivity of effort, and 3) $1,000,000 less initial compensation. I also find that more independent boards (measured by the percentage of outside directors) and boards with larger social networks (measured by the average outside directorships of each director) pick CEOs with higher match qualities. All the findings suggest that the time boards spend on screening candidates and the size of boards’ social network play a role in CEO succession. My results also provide support and policy implications for a legal notice from SEC, dated October 27th 2009, which signaled increased concern about CEO succession planning among corporate boards and for the first time allows shareholders to request more disclosure from companies’ CEO succession plans.