Why are so Many COOs Promoted to CEO? Relative Firm Performance, Executive Rank, Tenure, and COO Promotion in CEO Selection

Abstract

This paper emphasizes the background of senior management in the search for new CEOs since such executive positions would be populated by individuals with accumulated information, work experience, and managerial ability that may affect firm performance and therefore the board’s decision in the CEO selection. Analyzing a sample of 1185 new CEO appointments, I investigate the distribution of their prior positions: internal COO, internal CFO, external CEO, external CFO, and external COO. I find that internal COOs are most likely to become their firms’ new CEOs. More than 75 percent of the new Chief Executive Officers (CEOs) are former Chief Operating Officers (COO) within their companies, whereas only about 10 percent of the new CEOs are former Chief Financial Officers (CFO) within their companies. Only about 10 percent of the new CEOs are recruited externally. I explore why internal COOs are the dominant candidates for the CEO and evaluate the key determinants of candidate promotions. Good past industry-adjusted operating performance and stock returns increase the likelihood of internal COO promotion. Further, the likelihood of COO promotion increases when the former CEO retires and decreases when the former CEO resigns, revealing that potential performance-induced CEO turnover would affect internal COO promotion. In general, internal COOs are perceived to be superior to external executives in cases of better relative operating and market performance, and superior to internal CFOs based on closer executive rank to their CEO and longer tenure that represents accumulated management ability and work experience. This study essentially reconciles both CEO turnover and internal promotion through the analysis of the new CEO selection from the perspective of managerial heterogeneity. COO promotion decisions are specific to each firm and industry performance and they impact internal government mechanisms such as promotions as managerial rewards and CEO replacement decisions.