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Feb 23
2011

Why so few CEOs are fired every year

Posted by annearf in your careerRiskCEOboard of directors

annearf

If you're a CEO, or would like to become one, looks like your best shot at longevity comes down to this: Be nice to the board.

That's one implication of a study done by a Wharton School of Business assistant professor.

The professor, Lucian Taylor, studied CEO firings from 1971 to 2006 to pinpoint exactly why so few CEOs at major companies are let go every year. On average, only 2 percent are dismissed. 

On the face of it, says Taylor in his report, Why are CEOs Rarely Fired, it would seem the reason is the cozy relationship between boards and the CEO. "This rate seems low, and it is tempting to conclude that CEOs are entrenched and boards of directors are not acting in shareholders' interests," he writes. But he continues, "The literature provides little guidance for making such judgments." He defines CEOs as being entrenched if "the board retains some CEOs whom shareholders would rather see fired, ex post."

To establish the validity of that conclusion--entrenchment leads to a low number of firings--Taylor spent four years building a model with which he could study the performance of almost 1,000 CEOs. And after going through all that analysis, he came up with the following finding:  If it weren't for such factors as board members' personal or professional ties to the CEO, the risk that the directors might have a hard time being nominated to other boards, the time and effort involved, or concern about heightened media and shareholder attention, many more top guns would be fired--13 percent, in fact. 

The research also found that shareholder value would rise 3 percent if the number of CEOs who deserved to be fired were dismissed.

On a hopeful note, a Wall Street Journal article also cited Taylor as saying that companies with more outside directors did a better job when it came to firing their CEOs--and there were more dismissals based on merit from 1990 to 2006 vs. 1971 to 1989.

Still judging from this study, there's a whole heck of a lot of entrenchment going on. Not so good for shareholders, not so bad for CEOs looking to hang onto their jobs.

 

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