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“Motivated to preserve their job, we argue that when a CEO is fired, competitor CEOs will refrain from risk taking to focus on ensuring their job safety rather than seek possible long-term performance gains via risky endeavors.””
Dismissal of a CEO can change the strategic decision-making of CEOs at competing firms. Seeing a CEO get fired causes other CEOs in the industry to experience job insecurity and motivates them to dial back on strategic risk taking. That according to a new study published in the Strategic Management Journal (SMJ).
Harbert College’s Brian Connelly, Professor and Luck Eminent Scholar in Management, and Kang Lee, EBSCO Associate Professor, teamed with Qiang Li of Hong Kong University of Science and Technology, and Wei Shi of the University of Miami, to study CEO dismissals among large, publicly traded companies over more than a decade.
“The position of CEO is more volatile today than ever,” write the researchers. “When it comes to pulling the trigger on CEO dismissal, companies have increasingly twitchy fingers. Therefore, it seems important to ask: when a company fires their CEO, what happens at all the other companies in the industry?”
“Our main argument,” Connelly observes, “is that when a CEO gets fired, all the other CEOs in the industry begin to think – 'Oh no! This could happen to me!' This is important because CEOs have a good gig, and they do not want to lose it. So, they turn to what they can control: the company’s risk-taking. They dial back on things like R&D, acquisitions, and capital expenditures.
"CEOs are especially concerned about job security. Unlike most of us, though, CEOs don’t compare themselves to other people within the company because they are at the apex of the firm. Instead, they compare themselves to other CEOs.
“CEOs of large companies tend to identify socially with each other as fellow corporate leaders. As they lead their companies, making strategic decisions and serving as figureheads, they categorize one another as being among a common group of corporate elites. CEOs of competitive firms pay special attention to each other because competitor CEOs are often used as reference points for social comparison. These reference points are important benchmarks for setting compensation, interpreting success metrics, and evaluating the CEO.”
Most people, including analysts, shareholders, and directors, will generally attribute a company’s performance outcomes to the CEO. But even a modest level of performance should be adequate for CEOs to preserve their highly valued job. Because CEOs are acutely aware of their competitors, when a company dismisses their CEO it generates consequences that ripple throughout the entire industry.
“We suggest the CEOs at those rival companies will start worrying about their job,” write the authors. “This fear affects their strategic decision-making.
“The CEO has reached the pinnacle of the organization, and job preservation is of paramount concern … Motivated to preserve their job, we argue that when a CEO is fired, competitor CEOs will refrain from risk taking to focus on ensuring their job safety rather than seek possible long-term performance gains via risky endeavors.”
The authors also find there are some scenarios that exacerbate this reaction of competitor CEOs. One of these is constitutional constraints on shareholder power, which are governance provisions like supermajority voting requirements and staggered elections for directors. “When these are present,” Connelly notes, “they isolate the CEO from shareholder influence and protect the CEO’s job. This is not great for shareholders, but CEOs like it because they are less worried about getting fired, and thus are less affected when a competitor gets fired.”
Similarity between a company and its competitor is another dampening influence. Connelly comments that he and his team, “Look at product similarity. When there is a high degree of overlap between the two companies, then a CEO sees their counterpart at the highly similar company being dismissed and they transfer that to themselves.” When product similarity is low, though, then dismissal of a competitor CEO is less worrisome.
The SMJ is published by the Strategic Management Society (SMS), which is comprised of 3,000 academics, business practitioners, and consultants from 80 countries and focuses on the development and dissemination of insights on the strategic management process, as well as on fostering contacts and interchanges around the world.