CEO Replacement in Turnaround Situations: Executive (Mis)Fit and Its Performance Implications

Countering the widely held view that chief executive officer (CEO) succession is generally beneficial in turnaround situations, we adopt an executive fit/refit logic, proposing that the implications of CEO replacement depend integrally on the incumbent's degree of misfit and the successor's degree of fit to the contextual conditions at hand. Drawing from prior turnaround research, we identify several prominent forms of CEO fit/misfit that are especially germane to troubled firms. In testing our hypotheses, we find substantial support for the fit/refit theory: troubled companies have substantially better performance to the extent that they replace incumbents who are poorly suited to the conditions at hand and when they appoint new CEOs who are well matched to those conditions. Further reaffirming the fit/refit model, we find that CEO replacement per se has no general effect on the improvement of troubled firms.

[1]  B. Schneider THE PEOPLE MAKE THE PLACE , 1987 .

[2]  J. Pearce,et al.  Retrenchment remains the foundation of business turnaround , 1994 .

[3]  Jerold B. Warner,et al.  Stock prices and top management changes , 1988 .

[4]  Edgar H. Schein,et al.  Attitude Change During Management Education , 1967 .

[5]  M. Wiersema,et al.  Top Management Team Demography and Corporate Strategic Change , 1992 .

[6]  David J. Miller,et al.  Stale in the Saddle: CEO Tenure and the Match Between Organization and Environment , 1991 .

[7]  D. Hambrick,et al.  The external ties of top executives: Implications for strategic choice and performance. , 1997 .

[8]  D. Hambrick,et al.  CEO elitist association: Toward a new understanding of an executive behavioral pattern , 2009 .

[9]  H. Simon,et al.  Selective perception: A note on the departmental identifications of executives. , 1958 .

[10]  Sendhil Mullainathan,et al.  Are CEOs Rewarded for Luck? The Ones Without Principals Are , 2001 .

[11]  J. Heckman Sample selection bias as a specification error , 1979 .

[12]  Michael L. Tushman,et al.  Executive Succession, Strategic Reorientation and Performance Growth: A Longitudinal Study in the U.S. Cement Industry in Stable Environments , 1996 .

[13]  S. C. Myers,et al.  Principles of Corporate Finance - 4/E , 2002 .

[14]  S. Lieberson,et al.  Leadership and organizational performance: a study of large corporations. , 1972, American sociological review.

[15]  N. Nohria,et al.  The Performance Consequences of CEO Turnover , 2000 .

[16]  Robert H. Guest,et al.  Managerial Succession in Complex Organizations , 1962, American Journal of Sociology.

[17]  Roger Pooley,et al.  Industry Recipes: The Nature and Sources of Managerial Judgement , 1989 .

[18]  N. Rajagopalan,et al.  WHEN THE KNOWN DEVIL IS BETTER THAN AN UNKNOWN GOD: AN EMPIRICAL STUDY OF THE ANTECEDENTS AND CONSEQUENCES OF RELAY CEO SUCCESSIONS , 2004 .

[19]  Richard A. D'Aveni The Aftermath Of Organizational Decline: A Longitudinal Study Of The Strategic And Managerial Characteristics Of Declining Firms , 1989 .

[20]  Constance E. Helfat,et al.  Managerial Resources and Rents , 1991 .

[21]  Albert A. Cannella,et al.  Strategic Leadership: Theory and Research on Executives, Top Management Teams, and Boards , 2008 .

[22]  Donald B. Bibeault Corporate Turnaround: How Managers Turn Losers Into Winners! , 1981 .

[23]  Vincent L. Barker,et al.  STRATEGIC CHANGE IN THE TURNAROUND PROCESS: THEORY AND EMPIRICAL EVIDENCE , 1997 .

[24]  B. Loasby The External Control of Organizations. A Resource Dependence Perspective , 1979 .

[25]  W. Boeker Power and Managerial Dismissal: Scapegoating at the Top. , 1992 .

[26]  Gary A. Ballinger,et al.  Using Generalized Estimating Equations for Longitudinal Data Analysis , 2004 .

[27]  H. Volberda Building the Flexible Firm , 1999 .

[28]  Mason A. Carpenter,et al.  Bundling Human Capital with Organizational Context: The Impact of International Assignment Experience on Multinational Firm Performance and CEO Pay , 2001 .

[29]  Heather A. Haveman Ghosts of Managers Past: Managerial Succession and Organizational Mortality , 1993 .

[30]  Rakesh Khurana Searching for a Corporate Savior: The Irrational Quest for Charismatic CEOs , 2002 .

[31]  Vincent L. Barker,et al.  CEO Characteristics and Firm R&D Spending , 2002, Manag. Sci..

[32]  D. Schendel,et al.  Corporate Turnaround Strategies: A Study of Profit Decline and Recovery , 1976 .

[33]  G. Stewart The Quest for Value: A Guide for Senior Managers , 1991 .

[34]  Jeffrey C. Kohles,et al.  Romance of Leadership , 2009 .

[35]  Atulya Sarin,et al.  Ownership structure and top executive turnover , 1997 .

[36]  John A. Pearce,et al.  Toward Improved Theory and Research on Business Turnaround , 1993 .

[37]  Ayşe Karaevli Performance consequences of new CEO ‘Outsiderness’: Moderating effects of pre‐ and post‐succession contexts , 2007 .

[38]  Neil Fligstein,et al.  FROM THE TRANSFORMATION OF CORPORATE CONTROL , 2021, The New Economic Sociology.

[39]  D. Hambrick,et al.  Upper Echelons: The Organization as a Reflection of Its Top Managers , 1984 .

[40]  Matthew Semadeni,et al.  Fight or Flight: Managing Stigma in Executive Careers , 2008 .

[41]  G. Castrogiovanni,et al.  Curing sick businesses: changing CEOS in turnaround efforts , 1992 .

[42]  James D. Westphal,et al.  Who Shall Succeed? How CEO/Board Preferences and Power Affect the Choice of New CEOs , 1996 .

[43]  John A. Pearce,et al.  Turnaround: Retrenchment and recovery , 1992 .

[44]  D. Hambrick,et al.  The seasons of a CEO's tenure. , 1991, Academy of management review. Academy of Management.

[45]  Olubunmi Faleye,et al.  Classified Boards, Firm Value, and Managerial Entrenchment , 2007 .

[46]  Todd T. Milbourn,et al.  Asymmetric benchmarking in compensation: Executives are rewarded for good luck but not penalized for bad , 2006 .

[47]  Michael Patrick Allen,et al.  Managerial Succession and Organizational Performance: A Recalcitrant Problem Revisited. , 1979 .

[48]  J. Pearce,et al.  Entrepreneurial retrenchment among small manufacturing firms , 1993 .

[49]  G. Bruton,et al.  Turnaround in East Asian firms: evidence from ethnic Overseas Chinese communities , 2003 .

[50]  Glenn R. Carroll,et al.  Dynamics of Publisher Succession in Newspaper Organizations , 1984 .

[51]  D. Trow,et al.  Executive Succession in Small Companies , 1961 .

[52]  Henk W. Volberda,et al.  Building the Flexible Firm: How to Remain Competitive , 1998 .

[53]  Sanford B. Ehrlich,et al.  Small Groups: Key Readings , 2006 .

[54]  Vincent L. Barker,et al.  Organizational Causes and Strategic Consequences of the Extent of Top Management Team Replacement During Turnaround Attempts , 2001 .

[55]  Michael D. Pfarrer,et al.  A Tale of Two Assets: The Effects of Firm Reputation and Celebrity on Earnings Surprises and Investors' Reactions , 2010 .

[56]  Vincent L. Barker,et al.  Firm Turnarounds: an Integrative Two‐Stage Model , 1995 .

[57]  D. Hambrick,et al.  Top-management-team tenure and organizational outcomes: The moderating role of managerial discretion. , 1990 .

[58]  Y. Zhang Information asymmetry and the dismissal of newly appointed CEOs: an empirical investigation , 2008 .

[59]  D. Hambrick,et al.  TOP EXECUTIVE COMMITMENT TO THE STATUS QUO: SOME TESTS OF ITS DETERMINANTS , 1993 .

[60]  Zeki Simsek,et al.  Modeling the Multilevel Determinants of Top Management Team Behavioral Integration , 2005 .

[61]  Jamal Shamsie,et al.  Learning across the life cycle: Experimentation and performance among the hollywood studio heads , 2001 .

[62]  Andrew Ward,et al.  Embeddedness, Social Identity and Mobility: Why Firms Leave the NASDAQ and Join the New York Stock Exchange , 2000 .

[63]  M. C. Brown,et al.  Administrative Succession and Organizational Performance: The Succession Effect. , 1982 .

[64]  Mason A. Carpenter,et al.  Upper Echelons Research Revisited: Antecedents, Elements, and Consequences of Top Management Team Composition , 2004 .

[65]  David J. Miller,et al.  How quickly do CEOs become obsolete? Industry dynamism, CEO tenure, and company performance , 2006 .

[66]  James D. Westphal,et al.  Getting by with the Advice of Their Friends: CEOs' Advice Networks and Firms' Strategic Responses to Poor Performance , 2003 .

[67]  Anil K. Gupta,et al.  Business Unit Strategy, Managerial Characteristics, and Business Unit Effectiveness at Strategy Implementation , 1984 .

[68]  Rakesh Khurana,et al.  Searching for a Corporate Savior: The Irrational Quest for Charismatic CEOs , 2002 .

[69]  Bruce Buchanan,et al.  Turnaround strategies. , 2010, Trustee : the journal for hospital governing boards.

[70]  Heather A. Haveman,et al.  Survival beyond succession? The contingent impact of founder succession on organizational failure , 2004 .

[71]  Deepak K. Datta,et al.  CEO Characteristics: Does Industry Matter? , 1996 .

[72]  M. Weisbach Outside directors and CEO turnover , 1988 .

[73]  Timothy G. Pollock,et al.  Puttin' on the Ritz: Pre-Ipo Enlistment of Prestigious Affiliates as Deadline-Induced Remediation , 2008 .

[74]  B. Boyd,et al.  How Much Does the CEO Matter? The Role of Managerial Discretion in the Setting of CEO Compensation , 1998 .

[75]  J. Hausman Specification tests in econometrics , 1978 .

[76]  Trond Petersen,et al.  RECENT ADVANCES IN LONGITUDINAL METHODOLOGY , 1993 .

[77]  Andrés Hatum Adaptation or Expiration in Family Firms: Organizational Flexibility in Emerging Economies , 2007 .

[78]  Albert A. Cannella,et al.  Succession as A Sociopolitical Process: Internal Impediments to Outsider Selection , 1993 .

[79]  R. Kanter Leadership and the psychology of turnarounds. , 2003, Harvard business review.

[80]  J. Benders Building the Flexible Firm: How to Remain Competitive , 1999 .

[81]  M. Tushman,et al.  Executive Succession and Organization Outcomes in Turbulent Environments: An Organization Learning Approach , 1992 .

[82]  D. Hambrick,et al.  Turnaround Strategies for Mature Industrial-Product Business Units , 1983 .

[83]  Albert A. Cannella,et al.  Revisiting the Performance Consequences of CEO Succession : The Impacts of Successor Type , Postsuccession Senior Executive Turnover , and Departing CEO Tenure , 2007 .

[84]  Mark A. Mone,et al.  Retrenchment: Cause of turnaround or consequence of decline? , 1994 .