Title: The Impact of CEO Turnover on Firm Performance around Interim Successions (Fee or subscription required)
Authors: Vincent J. Intintoli (Southern Illinois University, Carbondale), Andrew Zhang (University of Nevada, Las Vegas), and Wallace N. Davidson III (Southern Illinois University, Carbondale)
Publisher: Journal of Management and Governance
Date Published: December 2012 online; forthcoming in print
When a CEO steps down, most boards move quickly to hire a permanent replacement. But sometimes it makes more sense to name an interim successor, to give directors extra time to take stock of alternative candidates. It’s a risky move, though. Previous research has generally found that investors regard an interim appointment as a signal of failure by the board in its succession planning. Indeed, the few studies that have examined this scenario have suggested that firm performance is lower following an interim appointment than it is following a permanent hire.
However, it’s not quite as simple as that, according to this paper, which explores the reasons surrounding the predecessor’s decision to step down—specifically, whether it was a voluntary move, such as retirement, or whether the CEO was forced to depart as a result of board or shareholder pressure. Contrary to popular thought, the authors found that underperformance by interim CEOs was almost always restricted to cases involving a voluntary turnover—and that those cases were few in number.
In the study’s sample, nearly three out of four interim appointments came in the wake of forced CEO turnovers. In fact, interim successors were named in only 2.9 percent of the turnovers that involved a voluntary departure.
The authors based their findings on an analysis of turnovers from 1984 to 2007, using Forbes magazine’s annual compensation surveys of the largest 500 firms in the United States and information on S&P 1500 companies from the ExecuComp database. Consistent with prior research, the authors excluded turnovers related to mergers and acquisitions as well as interim successions that lasted less than 45 days. Overall, the sample consisted of 1,626 turnovers with 130 interim successions. Of the 1,626 turnovers, 1,275 were voluntary and 351 were forced; interim appointees were named in 37 voluntary cases and in 93 forced turnovers.
Accounts of departures were gleaned from database information and media reports. Voluntary turnovers were defined as those following a retirement or what the researchers called a surprise event—for example, when the CEO left to take another job, died, or stepped down for health reasons. Forced departures resulted from pressure applied by the board or founding family, or after the company was discovered to be involved in illegal activity or was embroiled in prolonged litigation.
After analyzing quarterly earnings reports, return on assets, and Tobin’s Q (the ratio of a company’s market value to the total value of its assets), the authors found almost no evidence of poor performance when boards hired interim CEOs following forced departures. What’s more, the poor performance of interim CEOs following voluntary departures was limited to operational metrics, and didn’t carry over to stock market returns.
Interim successions “do not necessarily signal a lack of strategic planning on the part of the board of directors and may represent an optimal response to the [departure] of the predecessor in cases of forced turnover,” the authors write.
Previous research has shown that forced departures are more likely to result in a power struggle among the top executives who remain at the firm, which can make it difficult for boards to identify and appoint a permanent successor immediately. An extended search process, therefore, could be beneficial in letting the executive suite settle down and in turning the firm around.
Interim CEOs’ reputation for presiding over declines in firm performance is undeserved. Companies fare worse only in the event that an interim replacement is named following a voluntary departure. However, the majority of interim appointments follow forced departures, and those CEOs appear to have a steady enough hand to afford the board time to find a suitable permanent replacement.