Founder-CEOs, External Board Appointments, and the Likelihood of Corporate Turnaround in Declining Firms

Abstract

This study explored the role of strategic leadership in declining firms by empirically examining CEOs’ founder status and extensiveness of external board of director appointments as predictors of the likelihood of successful turnaround. The authors used the resource dependence and board interlock literatures to develop their hypotheses. Their analysis of data collected from a matched pair of 82 turnaround and bankrupt U.S. firms indicate that the extensiveness of CEOs’ external board appointments significantly increase the likelihood of turnaround. Contrary to the authors’ prediction, there was no significant relationship between founder status and likelihood of turnaround. Implications for research and practice are discussed.

A Temporal Approach to Retrenchment and Successful Turnaround in Declining Firms

“…The first dependent variable was the likelihood of turnaround success , binary coded ‘1’ for successful turnaround and ‘0’ otherwise as in previous turnaround research (e.g., Abebe et al, ; Hambrick and D'Aveni, ; Mueller and Barker, ; Ndofor et al, ). The other dependent variables were three specific outcomes – changes in firm operating conditions , internal firm performance , and external capital market support – that directly followed early and late retrenchment actions, thus allowing finer‐grained longitudinal analyses.…”

Does Founder CEO Status Affect Firm Risk Taking?

“…One important CEO characteristic is whether he or she is hired as an agent by shareholders or is in fact a founder of the firm (Abebe et al, 2012;Jayaraman et al, 2000). Indeed, many firms are managed by founder CEOs who maintain significant ownership in the firms (Fahlenbrach, 2009).…”

“…The strategic leadership literature has documented that the characteristics of CEOs have important implications for firm decision making and performance (Hambrick & Mason, 1984). One important CEO characteristic is whether he or she is hired as an agent by shareholders or is in fact a founder of the firm (Abebe et al, 2012; Jayaraman et al, 2000). Indeed, many firms are managed by founder CEOs who maintain significant ownership in the firms (Fahlenbrach, 2009).…”

“…Many of today’s most prominent firms (such as Google, Facebook, and Amazon) were or are still being run by founder CEOs. Both researchers and practitioners have sought to understand how founder CEOs affect firm-level outcomes such as financial performance (Fahlenbrach, 2009; He, 2008; Jayaraman, Khorana, Nelling, & Covin, 2000), corporate turnaround strategy (Abebe, Angriawan, & Ruth, 2012), governance structures (Nelson, 2003), and investment decisions (Fahlenbrach, 2009; Souder, Simsek, & Johnson, 2012). One of the most intriguing findings has been that founder CEOs tend to be more risk tolerant than agent CEOs (Amihud & Lev, 1981, 1999; Eisenmann, 2002).…”

Corporate governance and turnaround: Evidence from Australia

“…In an investigation of declining manufacturing firms, Abebe (2009) detects a positive association between CEOs with output-related functional background and turnaround performance in declining firms. For US firms, Abebe et al (2012) report a positive association between a CEO’s external board appointments and the likelihood of turnaround. However, they find there is no association between CEO founder status and probability of turnaround.…”