Of Scapegoats and Signals

Abstract

If an organization’s management is caught in the act of misconduct, it may call for a changing of the guard. Surprisingly, though, there is little empirical evidence examining the presumed benefits of executive turnover in the aftermath of wrongdoing. In this study, we explore investor reactions to CEO turnover following financial misrepresentation. We theorize and find that firms can be successful at managing investor reactions to organizational misconduct by either scapegoating or signaling change, but middle-ground approaches that do not commit to one or the other are less successful. We test our ideas in a firm-level event study of market reactions to CEO successions following a material financial statement restatement. We discuss the results, which generally support our predictions, and their implications for development of the scapegoating and signaling literatures and research on both executive succession and restoring corrupt organizations.

Tipping Point

“…Turnover can also occur if the CEO is dismissed for having committed acts unbecoming of the position in the view of the board, ranging from fraud to abuse of power, to manipulation of financial earnings (e.g., Brian Dunn, CEO of Best Buy, who resigned under pressure from the board investigating him for potential personal misconduct). In these instances, the CEO may even not be culpable but is used as a scapegoat to signal to the market that the firm is taking remedial actions following a publicized wrongdoing (Gangloff, Connelly, & Shook, 2015 ). Each of these two explanations is more prevalent for greedy CEOs who are more likely to leave in pursuit of greater material wealth and, as previously discussed, more likely to take questionable actions in order to realize financial gains.…”

Integrative Approach to Internal and External Crisis Communications Management. Part 2

“…Возможность интеграции внутренних и внешних перспектив в посткризисный период может обеспечить также тщательное изучение полученных материальных результатов. Например, большинство исследований в области управления имеет внешнюю ориентацию и касается вопроса о том, как факт отстранения руководства от управления компанией влияет на стейкхолдеров, если он преподносится им как признание организацией своей вины [39,[80][81][82][83][84][85]. С точки зрения инкорпорации внутренней перспективы интересно было бы также рассмотреть, как замена руководства организацией скажется на извлечении ею уроков из кризиса и формировании общественного мнения.…”

External Corporate Governance and Strategic Investment Behaviors of Target CEOs

“…1 Conversely, retaining an "underperforming" target CEO creates a puzzling governance context that sends mixed signals to stakeholders (cf. Gangloff et al, 2014). On the one hand, in the governance context where a target CEO is retained in the aftermath of a failed takeover, a firm cannot simply disregard the fact that the market visibly thinks its CEO is not meeting the aspiration levels of critical external constituents-and thus the need for some form of adaptive change.…”

“…The implications of retaining the CEO after a failed bid is not only an unexplored event, but retaining the CEO is also a strategically crucial decision for signaling the firm’s direction and future prospects to external constituents (Pfeffer & Salancik, 1977; Salancik & Pfeffer, 1980). By signaling a concrete reaction to the failed bid, CEO replacement may appease stakeholders by attributing fault to the ousted CEO (Gamson & Scotch, 1964; Gangloff, Connelly, & Shook, 2014). On the other hand, retaining the CEO after the market signals its dissatisfaction may be perceived by stakeholders as an indication of inertia, indifference, or even indecisiveness in a context that begs for action.…”