Skip to Main Content
HBS Home
  • About
  • Academic Programs
  • Alumni
  • Faculty & Research
  • Baker Library
  • Giving
  • Harvard Business Review
  • Initiatives
  • News
  • Recruit
  • Map / Directions
Working Knowledge
Business Research for Business Leaders
  • Browse All Articles
  • Popular Articles
  • Cold Call Podcast
  • Managing the Future of Work Podcast
  • About Us
  • Book
  • Leadership
  • Marketing
  • Finance
  • Management
  • Entrepreneurship
  • All Topics...
  • Topics
    • COVID-19
    • Entrepreneurship
    • Finance
    • Gender
    • Globalization
    • Leadership
    • Management
    • Negotiation
    • Social Enterprise
    • Strategy
  • Sections
    • Book
    • Podcasts
    • HBS Case
    • In Practice
    • Lessons from the Classroom
    • Op-Ed
    • Research & Ideas
    • Research Event
    • Sharpening Your Skills
    • What Do You Think?
    • Working Paper Summaries
  • Browse All
    Governance and CEO Turnover: Do Something or Do the Right Thing?
    05 Jul 2006Working Paper Summaries

    Governance and CEO Turnover: Do Something or Do the Right Thing?

    by Ray Fisman, Rakesh Khurana and Matthew Rhodes-Kropf
    CEOs who become "entrenched" by the board of directors can gain an extra buffer between themselves and angry shareholders. Entrenchment has potential costs (a poorly performing CEO hangs on to the job) but also benefits (the board can deflect shareholder cries for dismissal of a CEO who was merely unlucky). The authors hope to shift the emphasis of the debate on entrenchment to a consideration of these tradeoffs and to shift the focus of the entrenchment-performance discussion toward the decisions, such as CEO dismissal, that are directly tied to the actions of the board. Key concepts include:
    • By caving in to shareholder demands, boards may act against the long-time interests of the company and those same shareholders.
    • Governance is a very important mediating factor in the relationship between performance and firing.
    • At the time of founding a forward-looking investor may wish to put in place governance mechanisms that address these issues.
    LinkedIn
    Email

    Author Abstract

    Shareholder delegation of the power to fire the CEO to the board of directors is central to corporate governance. While the board ideally acts as desired by shareholders, board entrenchment may insulate a poorly performing manager from shareholders agitating for her removal. The conventional 'costly firing' model of managerial entrenchment views this protection from shareholders as purely negative. Yet recent anecdotal evidence on managerial turnover suggests an alternative view of entrenchment: If shareholders misattribute poor performance to the CEO rather than to circumstance, then insulating management from the whims of shareholders may lead to better firing decisions. We propose that entrenchment has an inherent trade-off. We present a model that directly incorporates both sides of this trade-off, and generates a set of empirical predictions that we explore using recently collected data on governance statutes and on the dismissals of CEOs of large U.S. corporations. Our results demonstrate that governance is a very important mediating factor in the relationship between performance and firing. Furthermore, we find support for the 'misguided shareholder' view of entrenchment. Fundamentally this paper explores whether, in caving in to shareholder demands, boards act in the best interest of shareholders or simply respond to their whims: Do they do just do something, or do the right thing?

    Paper Information

    • Full Working Paper Text
    • Working Paper Publication Date: April 2005
    • HBS Working Paper Number: 05-066
    • Faculty Unit(s): Organizational Behavior
      Trending
        • 31 Jan 2023
        • Op-Ed

        Can Insurance Technology Solve the Uninsured Driver Problem?

        • 28 Feb 2018
        • Sharpening Your Skills

        Master the Team Meeting

        • 17 Jan 2023
        • In Practice

        8 Trends to Watch in 2023

        • 27 Jan 2023
        • Op-Ed

        Have We Lost Sight of Integrity?

        • 25 Jan 2022
        • Research & Ideas

        More Proof That Money Can Buy Happiness (or a Life with Less Stress)

    Rakesh Khurana
    Rakesh Khurana
    Marvin Bower Professor of Leadership Development
    Contact
    Send an email
    → More Articles
    Find Related Articles
    • Governance
    • Power and Influence

    Sign up for our weekly newsletter

    Interested in improving your business? Learn about fresh research and ideas from Harvard Business School faculty.
    This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.
    ǁ
    Campus Map
    Harvard Business School Working Knowledge
    Baker Library | Bloomberg Center
    Soldiers Field
    Boston, MA 02163
    Email: Editor-in-Chief
    →Map & Directions
    →More Contact Information
    • Make a Gift
    • Site Map
    • Jobs
    • Harvard University
    • Trademarks
    • Policies
    • Accessibility
    • Digital Accessibility
    Copyright © President & Fellows of Harvard College