CEO Transition Research Articles

From Outsider to Insider: Navigating the CEO Transition Through Strategic Role Management

From Outsider to Insider: Navigating the CEO Transition Through Strategic Role Management

Communication Within Firms: Evidence from CEO Turnovers

This paper uses novel, firm-level communication measures derived from communications metadata several months before and after a CEO transition for 102 firms to study whether and how this organizational event is reflected in employees’ communication flows. We find that CEO turnover is associated with an initial decrease in intrafirm communication (−20% relative to the pre-CEO transition period), followed by a significant increase approximately five months after the CEO turnover (+20% relative to the pre-CEO transition period). The increase in communication is driven primarily by interdepartmental (i.e., communication involving employees of different functional departments) and vertical (i.e., communication among managers and employees) communication flows. This study suggests that communications metadata are a useful tool to examine how organizational change and related uncertainty impact information flows within firms. This paper was accepted by Alfonso Gambardella, business strategy. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2022.02719 .

Interim CEO Successions: CEO Transition Disruption versus Improved Candidate Selection

Interim CEO Successions: CEO Transition Disruption versus Improved Candidate Selection

Attunement theory, CEO's cyclical influence on corporate social responsibility and firm value

PurposeThis paper aims to further contribute to the growing stream of literature on the CEO's impact on corporate social responsibility (CSR). The authors shed light on the implications of attunement theory on which relatively less research has been done. Furthermore, this paper strives to reconcile contradictory findings of the effect of CEO tenure on CSR and use the immediate changes of CSR enacted by the new CEO upon firm value.Design/methodology/approachThe empirical strategy of the paper is centered around CEO transition. Applying first difference model, the authors identify a tenure-varying pattern of CEO influence on CSR. Moreover, the authors base the analyses of CSR value relevance on the sudden change of CSR during CEO transition, and use a within-industry matching approach as the inferential strategy. Manual data collection is conducted extensively for robustness checks.FindingsThe authors find that CSR activities change drastically at the beginning of the new CEO's ascendancy. One exception to this general pattern of CSR policy change is when the new CEO is brought from outside the organization, a result supporting the attunement theory. The authors find that firm value increases (decreases) when the new CEO increases (decreases) the CSR investment above (below) the industry norm.Originality/valueThis paper is among the first ones in the extant literature that directly examines the analytical implications of attunement theory concerning the CEO's impact on the firm's CSR policies. Furthermore, the positive association between CSR and firm value corroborates the arguments of instrumental stakeholder theory.

CEO turnover, stakeholder management, and dynamics between corporate social responsibility and firm performance

AbstractFocusing on the CEO transition period, this paper documents that the variation of CSR is highly associated with the fluctuation of firm performance. Moreover, it is found that the strong association is undermined for the CEO transition period during which ample variations of value relevant firm policies take place. Furthermore, the empirical evidence suggests that CEOs whose predecessors relinquish power involuntarily are more likely to adjust CSR activities for the purpose of optimal stakeholder management. The paper presents a heuristic and parsimonious model to guide the empirical investigation and conducts a system of simultaneous equations to ameliorate the endogenous nexus of firm performance, CEO turnover and CSR adjustment. The results are also robust to a battery of additional checks.

Communication within Firms: Evidence from CEO Turnovers

This paper uses novel, firm-level measures derived from communications metadata before and after a CEO transition in 102 firms to study if CEO turnover impacts employees’ communication flows. We find that CEO turnover leads to an initial decrease in intra-firm communication, followed by a significant increase approximately five months after the CEO change. The increase is driven primarily by vertical (i.e. manager to employee) communication. Greater increases in communication after CEO change are associated with greater increases in firm market returns.

The Multichannel Challenge at Natura in Beauty and Personal Care

Faced with declining market share and sales, Natura, Brazil's second-largest brand in the cosmetics, fragrances, and toiletries market, expanded its customer reach by moving from a direct-sales company to a multichannel company. In 2014, Natura added online catalogs, physical stores, and drugstores to its well-established direct-selling model, but the results were disappointing. Between 2014 and 2016, three different Natura CEOs attempted to lead the company in the strategic transition to focus less on the direct sales consultants and more on reaching the end consumers directly with multiple channels and touchpoints. In October 2016, the company's board appointed its former commercial vice president, Joao Paulo Ferreira, as the most recent CEO. Ferreira's challenge was to find the right balance between the direct-selling and other channel formats to market Natura, thus enabling it to thrive in the face of intense competition in the beauty and personal care market in Brazil. Excerpt UVA-M-0943 Rev. Feb. 25, 2020 The Multichannel Challenge at Natura in Beauty and Personal Care Natura is headed for a big shake-up. We are sure that in 3 to 5 years our business is going to change significantly. —Alessandro Carlucci, Natura's former CEO, January 2014 The business of Natura, Brazil's largest direct-selling company with roughly 1.5 million independent door-to-door sales consultants (ISCs), had started to change in recent years. On August 19, 2014, the company had announced that board member Roberto Lima would replace Alessandro Carlucci as CEO. Carlucci had worked at Natura for 25 years and had held the role of CEO since 2005. This CEO transition occurred when Natura's position in the cosmetics, fragrance, and toiletries (CF&T) market was being challenged by other, nondirect-selling companies. . . .

Does CEO Gender Matter at Financial Institutions? An Event-Study Analysis of Credit Union Data

Previous studies of risk management and overconfidence at firms and financial institutions suggest that female CEOs engage in more conservative risk management practices relative to male CEOs, and less aggressive growth and acquisition behavior. However, these studies are limited by a lack of variation in CEO gender, as only 5% of commercial bank CEOs and 6% of Fortune 500 company CEOs are female. We examine gender differences in risk management and overconfidence in the distinct context of nonprofit financial cooperatives (“credit unions”), in which a majority (52%) of CEOs are female. Do observed gender differences in risk preferences and overconfidence hold under such circumstances? We utilize a unique dataset with 23 years of credit union quarterly data and CEO gender to employ two-way quarter and institution fixed effects and event study frameworks to focus on variation within credit unions that experience a CEO transition with a corresponding change in the gender of the CEO. The event study methodology allows us to thoroughly explore pre-CEO transition trends and parallel trends to account for potential selection bias. While gender differences in indicators of risk management are in the expected direction, few are statistically significant, and none are economically meaningful. The results suggest that practical differences in observable risk management are negligible among credit union CEOs. However, we do find statistically significant and large gender differences in credit union growth: male-led credit unions grow 2.9% larger in terms of memberships and 5.9% larger in terms of loans. They also expand their fields of membership to have 8.2% more potential members, execute 2.8% more merger-acquisitions, and increase their marketing expense by 7.5% relative to female-led credit unions. Nonetheless, there are no significant gender differences in credit union earnings. We argue that the results are consistent with gender differences in overconfidence but not risk aversion. The findings highlight the importance of context when evaluating gender differences in risk management and performance.

Are Firms with Female CEOs More Environmentally Friendly?

In this paper, we document a previously unknown benefit of women’s role in firm management: the enhancement of environmental protection. Through a panel data analysis, we find that firms with female CEOs produce less air and water pollution and greenhouse gas emissions, and receive fewer environmental penalties, compared to firms with male CEOs. Our difference-in-differences analysis shows that firms also reduce air and water toxic releases, greenhouse gas emissions, and receive fewer environmental penalties after experiencing a male-to-female CEO transition. Moreover, firms demonstrate higher awareness of environmental protection, reflected in their 10-K filings, when being led by female CEOs.

Are interim CEOs just caretakers?

Interim CEOs are often viewed as caretakers during CEO transition periods. However, the caretaker function does not fully explain the increasing trend in the use of interim CEO appointments. Recent studies suggest that firms also use the interim position to test potential CEO candidates. This paper empirically examines this argument using a hand-collected dataset of 1936 CEO successions between 1994 and 2014. We find evidence that firms consider interim positions as a testing ground for CEO candidates. Specifically, we find that candidates with uncertain managerial abilities are more likely to be initially named as interim CEOs rather than permanent CEOs. We also find that interim CEOs are more likely to be promoted to the permanent CEO position when they have better interim-period performance attributable to managerial skills. Consistent with the testing-ground option hypothesis, we find interim CEOs promoted to the permanent position result in superior long-run performance, suggesting better CEO-firm matches.

“Passing the Baton”: The effects of CEO succession planning on firm performance and volatility

AbstractManuscript TypeEmpiricalResearch Question/IssueThis paper seeks to understand the way in which CEO succession planning affects firm performance and volatility during CEO turnover. Specifically, the paper examines a succession type referred to as relay succession, in which the incoming CEO has been groomed as an heir apparent before the turnover.Research Findings/InsightsHeirs apparent are identified by comparing all of a firm's non‐CEO top executives' promotion likelihood estimated based on a set of characteristics. Applying this heir apparent measure to a large sample of CEO turnovers from ExecuComp, the paper delivers robust evidence that firms with relay successions achieve higher post‐turnover accounting performance, higher long‐term stock returns, and lower volatility. Further, the positive effect of relay succession on performance is stronger for firms with higher human capital requirements.Theoretical/Academic ImplicationsThe paper provides comprehensive evidence of the important role of relay succession in smoothing CEO transitions. It also sheds new light on previous research on outside successions by showing that the difference between inside and outside successions is explained largely by the length of relay.Practitioner/Policy ImplicationsThe paper suggests that firms should consider using relay succession to improve performance and reduce volatility during the CEO transition period. The paper's findings also support the US Securities and Exchange Commission's recent appeal for more firm disclosure on its succession planning.

Becoming the CEO: Identity Construction Process in CEO Transition (WITHDRAWN)

This article makes three contributions to the literature on CEO transition. First, it uncovers that new CEOs undergo a distinctive identity construction process in the beginning of their tenure that is influenced by three unique characteristics of the position: the lack of specificity of the CEO role, the challenges associated with being the ultimate decision maker and the perception of the CEO as embodiment of the organization. Second, it shows that these characteristics produce identity demands that dispose new CEOs towards expressing their individuality. Third, it indicates that new CEOs experience a reverse process of socialization wherein, as newcomers, they impart new values, attitudes and behaviors in the organization. This reverse process of socialization might explain how CEOs may shape the firm to reflect aspects of their identity. Implications of these findings for theory as well as for the ability of new CEOs to remain in post are discussed.

CEO gender and corporate board structures

The number of female executives has increased remarkably in recent years. We contribute to the investigation of the gender question by examining the relationship between the gender of the CEO and corporate board structures. We propose that gender-based behavioral differences between males and females may lead to differences in a firm’s board structure. We find evidence that female CEOs are associated with smaller boards that are more independent, more gender diversified, have a lower ratio of inside to outside directors, a broader director network, and younger directors. We also combine these individual board characteristics to capture the overall monitoring potential of the board. Our findings are consistent with the notion that boards of female CEOs are structured for more monitoring. The results are robust to using a propensity score matching sample, a sample of firms that experience a male-to-female or a male-to-male CEO transition, and to controlling for endogenous matching between firms and CEOs. Overall, our results suggest that differences in board structures between firms led by male versus female CEOs can at least be partially explained by gender-based behavioral differences.

CEO identity and labor contracts: Evidence from CEO transitions

This paper assesses how CEO transitions shape labor contracts within firms. We argue that family links between a new CEO and his predecessor act as a commitment device for upholding implicit contracts with the workforce. Consistent with this view, we find evidence of a wage insurance mechanism during a CEO transition. Dynastically-promoted CEOs relative to external CEOs are associated with up to 25% less job separations and 20% lower wage growth. Crucially, we show that differences, in terms of job separations, between dynastic and non-dynastic CEO successions are significantly greater when labor markets are more frictional.

Learning During the CEO Transition Period

Traditionally, CEO succession scholars have examined the impact of the origin of the new CEO, insider or outsider, on organizational performance. Many scholars have assumed insiders (aka heirs apparent) have an advantage over outsiders because they have the opportunity to learn from the outgoing CEO during the transition period. Despite this common assumption, little research has focused on whether or how learning actually takes place. Using a qualitative methodology this research studied 22 insider CEO successions. We explore the learning processes of incoming insider CEOs from when they were designated until they assumed the CEO position. Upon designation changes in executives’ identity and social context influenced how they interpreted cues from the environment. These executives felt compelled to adjust their behaviors and cognition accordingly. We identify the impact of three enactment relationships between incoming and outgoing CEOs affecting learning during the transition period. We also find that the most common proxy for identifying heirs apparent, the chief operating officer (COO) was inappropriate for this sample and its validity for this type of research needs to be re-examined.

Do Chinese CEOs Consume Abnormal Perks Before Leaving Their Firms?

We investigate whether Chinese CEOs consume abnormal or ‘excess’ perks prior to leaving their firms. Agency models predict that CEO incentives and behavior might change in the years leading up to CEO turnover (the ‘horizon effect’). We predict that CEOs might consume excess perks at the expense of owners’ interests. Using data on Chinese publicly traded firms between 2003 and 2011 we find that abnormal perk consumption is significantly higher in the last two years of CEOs’ tenure compared to previous years. We also find that abnormal perk consumption is lower when the board is more independent, when the firm is privately controlled, and when the external auditor is more reputable. We find that perk consumption in CEOs’ terminal years vary with the type of CEO transition. Voluntary CEO turnover is associated with excess perks, whereas forced CEO turnovers are not. We find no evidence that abnormal perk consumption is associated with lower level of executive compensation, dispelling the idea that cash compensation and perks are substitutes. Instead, we document that abnormal perk consumption has a significant negative effect on firm performance. Overall, our results indicate that abnormal perk consumption and poor institutional design are correlated with managerial excess in China and there exists a horizon problem for Chinese executives.

Earnings Management Around CEO Turnovers

We find evidence that new CEOs manipulate real business activities—but not accounting accruals—to manage earnings downward relative to established CEOs. This earnings “bath” occurs as early as the CEO transition quarter. Further, we find that the degree of real earnings management is positively correlated with new CEO “time at the helm” in the transition quarter. Real earnings management is significant following both routine and non-routine CEO turnovers; this stands in contrast with earlier findings that accruals earnings management is more pronounced for non-routine CEO turnovers. JEL classifications: C23, G30, M41

CEO Succession: A Help or Hindrance to Corporate Reputation?

While there are over 50 years of study on how CEO turnover influences corporate outcomes, there is a paucity of research on the impact of leadership changes on reputation. This study uses signaling theory to investigate the relationship between chief executive transitions and corporate reputation, as assessed by 2007 and 2008 Fortune ratings of 241 companies. On average, CEO successions improved reputations; however, companies with higher initial reputations were more likely to experience a decline in their subsequent reputations. These significant effects occurred over the short term and were not significant over the long term. The implications of these findings address how companies should manage CEO transition announcements and succession planning.

The Reporting Strategy of Earnings before Family CEO Succession

Family firms are deeply associated with a family¡¦s specific connections with stakeholders. A critical issue for family businesses is how a family firm can successfully transit these specific assets to later generations in order to perpetuate a family dynasty. Although the CEO transition process plays a key role in determining the prospects of a family firm, stakeholders may doubt the family successors at the time of transition. It is important for the family to preserve the entirety of these unique assets upon succession, as failure to do so may result in detrimental effects for the firm. To sustain the prospects of a family business, a firm may intend to manage its image by increasing earnings in order to sustain relationships with its stakeholders. This study is an attempt to contribute to the study of family succession and earnings management by analyzing whether a family heir affects the behavior of a family firm in regard to reporting earnings before succession. This study found that firms with family succession CEOs experience significantly positive earnings management before succession. Moreover, firms with younger family succession CEOs are more likely to manage earnings prior to succession. In addition, voluntary turnover CEO¡¦s have a positive moderating effect on the relationship between family succession and prior-succession earnings management. Only in firms where the succeeding CEOs are family heirs and have founders who still serve on the board is there higher incentive to inflate earnings before CEO turnover. Finally, for firms with a higher percentage of family ownership as well as a family succession CEO, higher prior-turnover earnings management is also evident.

Boardroom Roadblock: Former CEO Directors, Managerial Discretion, and the Role of Information

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.