Corporate performance and CEO dismissal: The role of social category faultlines

Abstract

Research Question/Issue This study investigates the moderating role of social category faultlines in the relationship between firm performance and CEO dismissal. We also examine how two board contingencies—the presence of board evaluation and the number of board committees—affect how social category faultlines moderate the performance–CEO dismissal relationship. Research Findings/Insights Using panel data on Belgian listed firms covering 2006 to 2014, we find that the negative relationship between firm performance and the likelihood of CEO dismissal is significantly weaker when boards experience social category faultlines. Further investigation of board contingencies demonstrates that social category faultlines have a stronger influence on the performance–CEO dismissal relationship when the board does not engage in board evaluation or has greater numbers of board committees. Theoretical/Academic Implications This study builds on the social identity perspective by providing empirical support for social category faultlines within the context of boards of directors. Social category faultlines lead to identity‐based subgroups within the board, which reduce directors' identification with the board as a whole, ultimately impacting the board's capability to dismiss a poorly performing CEO. Moreover, our study demonstrates how board contingencies can promote and/or weaken directors' identification with the board, which affects the salience of identity‐based subgroups. Practitioner/Policy Implications This study offers insights for practitioners interested in improving board effectiveness. Our evidence implies that decisions concerning the appointment of directors should be based on criteria that take faultlines and subgroups into account. Furthermore, our findings highlight the importance of strengthening the superordinate board identity by implementing initiatives such as board evaluation.

Board characteristics and CEO turnover–performance relationship: evidence from India

“…The present study has adopted industry-adjusted return on assets (IROA) as the FP measure following prior literature on CTURN (Visintin et al , 2017; Cheng et al , 2020; Vandebeek et al , 2021). This proxy will aid in investigating how well boards respond to poor FP relative to its industry, leading up to turnover (Kaplan and Minton, 2012; Cheng et al , 2020).…”

“…Further, this measure controls for the industry-wide shocks to FP, that is, those factors that are not within CEOs’ control (Morck et al , 1988). IROA is computed as the firm’s return on assets (ROA) less the median value of the corresponding measure for all the firms with the same two-digit NIC code in each FY (González et al , 2014), whereas ROA is measured as the ratio of earnings before interest and taxes to total assets at the end of FY (Durukan et al , 2012; Vandebeek et al , 2021).…”

“…Empirical studies have also shown that there exists a significant negative relationship between CEO turnover (CTURN) and firm performance (FP) (Hazarika et al , 2012; Visintin et al , 2017; Ahmed and Hellerslia, 2019; Jenter and Lewellen, 2021). However, despite the poor performance, sometimes CEOs are retained in the companies, which the direct relationship between CTURN and FP fails to explain (Vandebeek et al , 2021). It suggests that the turnover–performance relationship (TPR) is affected by other factors that are often overlooked (He and Fang, 2016).…”

Diversity and disobedience at the top, pay incentives, social norms, and board reforms: A kaleidoscope of corporate governance research

“…Building on the social identity perspective, Vandebeek et al (2021) examine how social category faultlines within the board moderate the relationship between firm performance and CEO dismissal. Social category faultlines rest on social category attributes (such as age or gender) that entail a certain social identity.…”

“…Building on the social identity perspective, Vandebeek et al (2021) examine how social category faultlines within the board moderate the relationship between firm performance and CEO dismissal.…”