ANZAM'13: CEO replacement decisions

The replacement of a poor performing CEO is an important but challenging task of boards. Young Kim's (University of New South Wales) summarised recent research into factors which contribute to the speed with which boards make CEO dismissal decisions. Her quantitative study, using data from 348 publicly-listed US firms, explored the relationship between external signals of declining performance (analyst downgrades), the board's interpretation of any signalled decline, and the time to any subsequent dismissal of the CEO. The results revealed that three factors seem to be significant to the speed with which the board makes any CEO dismissal decision. According to Kim, boards made dismissal decisions more quickly when:

• The magnitude of performance drops were high/strong (gross failure to achieve performance targets)
• The performance drop represented a large variation from a previously consistent pattern of performance
• The performance drop was more extreme than prevailing industry patterns

These results were encouraging. They confirmed my intuition that most boards tend to react only when large changes or variations from forecast occur, and that the response they turn to first is to dismiss the CEO. In so doing, the larger problem—of boards operating as the "ambulance at the base of the cliff"—is brought into stark relief. The continuing failure of boards to understand the operational context within which the company operates, and to monitor performance against strategy adequately, amazes me. Kim's study provides a useful launch pad for further research, perhaps using qualitative methodology, to understand the motivations of boards, and the changes needed to move boards into the role of the top of the cliff. I intend to chat with Kim about this, because I suspect there are synergies between her work and mine.