The Consequences of Forced CEO Succession on Directors
Posted: 10 Mar 1997
Date Written: December 6, 1996
Abstract
This paper investigates the rewards (or penalties) offered to outside directors that signal their decision making expertise to shareholders and labor markets by removing a poorly performing CEO. Using a sample of directors drawn from 40 firms experiencing forced CEO departures between 1982 and 1989, we compare the characteristics of directors that remove poorly performing CEOs to the characteristics of directors in a matched sample that do not remove their CEO. Just prior to turnover, we do not find any significant differences between equity ownership, committee seats held, other directorships held, or director compensation for the two samples of directors. In the five year period following turnover, outside directors that force CEO turnover are more likely to leave the firm than outside directors that do not force CEO turnover, especially if the firm performs poorly after turnover. Outside directors that do not leave the firm after forcing CEO turnover hold fewer committee seats five years after turnover than their matched firm counterparts. However, after controlling for differences in committee assignments and firm performance, directors that remove poorly performing CEOs experience larger increases in their compensation than their matched firm counterparts. For both groups, we find a positive and significant relation between firm performance and increases in director fees.
JEL Classification: G39
Suggested Citation: Suggested Citation