Forum for Science, Industry and Business

Sponsored by:     3M 
Search our Site:

 

Study shows why more than 25 percent of new CEOs last less than three years

05.06.2008
An increasing number of CEOs are exiting their positions prematurely, according to a study by Yan Zhang at Rice University’s Jones Graduate School of Management. Of the 204 company leaders Zhang studied from 1993 to 1998, 55 (27 percent) left their job within three years.

Zhang’s study, “Information Asymmetry and the Dismissal of Newly Appointed CEOs: An Empirical Investigation,” finds that these dismissals may be due to the effects of information asymmetry -- a situation where one party knows less inside information than the other. In the instance of CEO selection, the board of directors of the hiring firm knows less than the CEO candidates regarding the candidates’ true competencies. As a result, it is possible that the board makes a faulty hire and then dismisses the CEO shortly after the succession.

Unbalanced information can negatively impact the selection of a new chief executive in three ways. The first concerns the origin of the new CEO — whether he or she was an internal or external candidate. The second is the context of the preceding CEO’s departure — whether it was a voluntary departure or a dismissal. And the third is the composition of the board of directors’ nominating committee — whether they are primarily in-house or independent directors and whether they serve on a number of other boards.

The origin of the new CEO is important because inside candidates are typically already chief financial officers, chief operating officers or executive vice presidents with the company, said Zhang, associate professor of management at Rice.

“They would have had numerous opportunities to interact with the board members,” Zhang said. “The board has a great opportunity to know inside candidates, thus reducing information asymmetry between the board and inside candidates.”

Meanwhile, the board is less likely to know outside candidates and more likely to make a poor hiring decision in outside successions.

The conditions of the preceding CEO’s departure also play a tremendous role in the success of the next chief executive, Zhang said. Because many companies institute mandatory retirement ages, planned succession can help ease a seamless transition, as a company can groom an heir apparent before the CEO departs. Also, if the company doesn’t have a good pipeline of talent, the board can search in advance of the retirement -- making it more likely that a comprehensive internal and external search will turn up higher-quality candidates. However, if the preceding CEO is dismissed, then inadequate preparation means higher information asymmetry and a higher likelihood that the board will make a poor hiring decision.

The composition of the board’s nominating committee may have an influential effect on early CEO dismissals. Nominating committees that are primarily independent (not consisting of company executives) are better than those with internal directors, because the latter may perceive themselves as contenders for the position.

“They’re not going to bring objective evaluations to the CEO selection process,” Zhang said. “However, if a company has outside directors on the board and those outside directors are too busy — having too many other directorships — then the nominating committee is not as effective.”

David Ruth | EurekAlert!
Further information:
http://www.rice.edu/nationalmedia/multimedia/2008-06-03-ceo
http://www.rice.edu

More articles from Studies and Analyses:

nachricht Do microplastics harbour additional risks by colonization with harmful bacteria?
05.04.2018 | Leibniz-Institut für Ostseeforschung Warnemünde

nachricht Rutgers-led innovation could spur faster, cheaper, nano-based manufacturing
14.02.2018 | Rutgers University

All articles from Studies and Analyses >>>

The most recent press releases about innovation >>>

Die letzten 5 Focus-News des innovations-reports im Überblick:

Im Focus: Spider silk key to new bone-fixing composite

University of Connecticut researchers have created a biodegradable composite made of silk fibers that can be used to repair broken load-bearing bones without the complications sometimes presented by other materials.

Repairing major load-bearing bones such as those in the leg can be a long and uncomfortable process.

Im Focus: Writing and deleting magnets with lasers

Study published in the journal ACS Applied Materials & Interfaces is the outcome of an international effort that included teams from Dresden and Berlin in Germany, and the US.

Scientists at the Helmholtz-Zentrum Dresden-Rossendorf (HZDR) together with colleagues from the Helmholtz-Zentrum Berlin (HZB) and the University of Virginia...

Im Focus: Gamma-ray flashes from plasma filaments

Novel highly efficient and brilliant gamma-ray source: Based on model calculations, physicists of the Max PIanck Institute for Nuclear Physics in Heidelberg propose a novel method for an efficient high-brilliance gamma-ray source. A giant collimated gamma-ray pulse is generated from the interaction of a dense ultra-relativistic electron beam with a thin solid conductor. Energetic gamma-rays are copiously produced as the electron beam splits into filaments while propagating across the conductor. The resulting gamma-ray energy and flux enable novel experiments in nuclear and fundamental physics.

The typical wavelength of light interacting with an object of the microcosm scales with the size of this object. For atoms, this ranges from visible light to...

Im Focus: Basel researchers succeed in cultivating cartilage from stem cells

Stable joint cartilage can be produced from adult stem cells originating from bone marrow. This is made possible by inducing specific molecular processes occurring during embryonic cartilage formation, as researchers from the University and University Hospital of Basel report in the scientific journal PNAS.

Certain mesenchymal stem/stromal cells from the bone marrow of adults are considered extremely promising for skeletal tissue regeneration. These adult stem...

Im Focus: Like a wedge in a hinge

Researchers lay groundwork to tailor drugs for new targets in cancer therapy

In the fight against cancer, scientists are developing new drugs to hit tumor cells at so far unused weak points. Such a “sore spot” is the protein complex...

All Focus news of the innovation-report >>>

Anzeige

Anzeige

VideoLinks
Industry & Economy
Event News

Invitation to the upcoming "Current Topics in Bioinformatics: Big Data in Genomics and Medicine"

13.04.2018 | Event News

Unique scope of UV LED technologies and applications presented in Berlin: ICULTA-2018

12.04.2018 | Event News

IWOLIA: A conference bringing together German Industrie 4.0 and French Industrie du Futur

09.04.2018 | Event News

 
Latest News

Magnetic nano-imaging on a table top

20.04.2018 | Physics and Astronomy

Start of work for the world's largest electric truck

20.04.2018 | Interdisciplinary Research

Atoms may hum a tune from grand cosmic symphony

20.04.2018 | Physics and Astronomy

VideoLinks
Science & Research
Overview of more VideoLinks >>>