CEO Turnover and Retention Light: Retaining Former CEOs on the Board

Journal of Accounting Research, Vol. 48, Issue 5, December 2010

45 Pages Posted: 5 May 2010 Last revised: 22 Feb 2012

See all articles by John Evans

John Evans

University of Pittsburgh - Katz Graduate School of Business

Nandu J. Nagarajan

University of Texas at Arlington

Jason D. Schloetzer

Georgetown University - Department of Accounting and Business Law

Date Written: May 5, 2010

Abstract

Prior CEO turnover literature characterizes the board’s decision as a choice between retaining versus replacing the CEO. We focus instead on the CEO’s decision rights and introduce a third option in which the incumbent CEO is removed but retained on the board for an extended period, which we call Retention Light. Firms may benefit from Retention Light because former CEOs possess unique monitoring and advising abilities, but the former CEO could also exploit available decision rights for personal benefit. A Retention Light CEO’s decision rights generally exceed those of CEOs who exit the firm entirely but fall short of the rights of a retained CEO. We find that when prior firm performance is better, the former CEO is more likely to be retained on the board (Retention Light) than to exit the firm. However, this relation is weaker when the CEO reaches normal retirement age at which time CEO power becomes more important. We also provide evidence on how the nature of the CEO’s bargaining power varies with his personal attributes and board characteristics in its influence on the Retention Light decision. Retention Light firms are more likely than CEO-exit firms to select a successor CEO with relatively weaker bargaining power. Finally, Retention Light involving a non-founder CEO is negatively associated with the firm’s post-turnover financial performance. Overall, Retention Light is a distinct CEO turnover option that has important consequences for board decisions and firm performance.

Keywords: CEO Turnover, Decision Rights, CEO Succession, Board Composition, Board Oversight

JEL Classification: M41, G34, G30, M51, M54

Suggested Citation

Evans, John Harry and Nagarajan, Nandu J. and Schloetzer, Jason D., CEO Turnover and Retention Light: Retaining Former CEOs on the Board (May 5, 2010). Journal of Accounting Research, Vol. 48, Issue 5, December 2010, Available at SSRN: https://ssrn.com/abstract=1600799

John Harry Evans (Contact Author)

University of Pittsburgh - Katz Graduate School of Business ( email )

230 Mervis Hall
Pittsburgh, PA 15260
United States

Nandu J. Nagarajan

University of Texas at Arlington ( email )

415 S West St Apt no 205
Arlington, TX 76019
United States

Jason D. Schloetzer

Georgetown University - Department of Accounting and Business Law ( email )

McDonough School of Business
Washington, DC 20057
United States

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