The influence of incoming CEOs

• Published date: 01 September 2023
• Author: Anwar Boumosleh,Brandon N. Cline
• Date: 01 September 2023
• DOI: http://doi.org/10.1111/eufm.12393

DOI: 10.1111/eufm.12393

ORIGINAL ARTICLE

The influence of incoming CEOs

Anwar Boumosleh |Brandon N. Cline

Department of Finance and Economics,

Mississippi State University, Starkville,

Mississippi, USA

Correspondence

Brandon N. Cline, Department of

Finance and Economics, P.O. Box 9580,

Mississippi State University, Starkville,

MS 39762, USA.

Email: brandon.cline@msstate.edu

Abstract

We introduce a novel index capturing the power of an

incoming CEO and explore the association between the

appointment of a new CEO and turnover in the top

management team (TMT). We document a statistically

and economically significant relation between the level

of new CEO power and the departure of senior

executives. Specifically, we find that in addition to

CEO origin, new CEO power is positively related to

TMT turnover. We also find that in the post‐SOX

period, CEO power is more significant in affecting

TMT turnover and that directorship and ownership of

senior executives reduce departure.

KEYWORDS

agency problem, CEO power, firm performance, top

management turnover

JEL CLASSIFICATION

G30, G32, G34

1|INTRODUCTION

Empirical evidence suggests that newly hired CEOs enjoy powerful mandates to affect

corporate decisions and policies. Such mandates are granted so new CEOs can organize their

own teams and devise strategies to improve firm performance. Consequently, many CEOs

resort to divesting unprofitable divisions, while others sacrifice sound operating policies and

Eur Financ Manag. 2023;29:1263–1303. wileyonlinelibrary.com/journal/eufm © 2022 John Wiley & Sons Ltd.

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We are grateful to an anonymous referee and the editor, John Doukas. We are also grateful for comments from Shawn

Mobbs, Brian Blank and Junnatun Naym, conference and seminar participants at Mississippi State University,

Lebanese American University and annual meetings of the Financial Management Association and the Southern

Finance Association. All errors and omissions are our own.

productive elements of existing management to form their own teams to develop their own

strategies.

Early in their tenure, CEOs are under immense pressure to prove to the board and

shareholders that they deserve the position. They also face the risk of a lack of support from

incumbent executives. Typically, after completing their due diligence, new CEOs commence

building their own teams (Ma & Seidl, 2018) and executing their own strategies with the

anticipation that such changes will result in better firm performance. For instance, Yim (2013)

argues that newly hired CEOs pursue an acquisition strategy early in their career, whereas

Shen and Cannella (2002b) and Fee and Hadlock (2004) document high top management team

(TMT) turnover after the appointment of a new CEO.

1

Such changes are difficult to achieve

without meaningful CEO influence in the firm (Adams et al., 2005; Hermalin &

Weisbach, 1998).

Pressure to create a turnaround in firm performance may prompt new CEOs to make

changes in the top management team. Finkelstein et al. (2009) argue that the winner in a

tournament for the CEO position is likely to engage in retaliatory actions against other losing

executives, thereby leading to their dismissal. Additionally, senior executives in a firm that

recently appointed a CEO may decide to jump ship or retire early. Based on the evidence that

TMT turnover coincides with CEO turnover, we examine the dynamic relationship between the

incoming CEO and turnover in the TMT.

Both academic literature and the media tend to characterize CEO hires as either insider or

outsider.

2

This distinction seems fitting since the dynamics of bringing an unknown candidate

from the outside is clearly different from retaining a known employee from within. This

uncertainty is likely to be felt most by upper management. When Target hired Brian Cornell in

2014, three members of the top management team left in the same year and another left 1 year

after Cornell's appointment. On the contrary, when Boeing promoted James McNerney Jr. to

CEO in 2005, only one member of the TMT left during the first 3 years of his tenure.

3

We conjecture that there is more to a CEO's influence than their origin. CEO influence

depends primarily on the circumstances surrounding their appointment and on their

negotiating power before joining the firm. Malmendier and Tate (2009) suggest that superstar

CEOs extract more rent and that the effect is more pronounced when governance is weak.

Consequently, certain factors surrounding the appointment of the new CEO can be as

significant as CEO origin in affecting corporate decisions. For example, a newly hired CEO who

is the only insider on the board will enjoy greater power than a CEO serving among many

executives on the board (Mobbs, 2013). Similarly, if the predecessor CEO remains as a director,

the incoming CEO will have limited ability to make changes in the firm (Quigley & Hambrick,

2012). In 2004, Motorola Solutions hired Edward Zander from Silver Lake Partners as the

company's CEO. Zander took the position while Christopher Galvin, the predecessor and

member of the founding family, stayed as a director. During the first 3 years of his tenure only

two top executives left the firm. By comparison, in 2009, Walgreens named Gregory Wasson as

the new CEO after the forced departure of Jeffrey Rein. Wasson was the only executive on the

board. Three of the top executives departed in the first 2 years of Wasson's tenure.

1

We use TMT to refer to the top management team other than the CEO.

2

We use the terms insider and outsider CEO to refer to incumbent senior executives who are promoted to CEO and

CEOs hired from outside the firm, respectively.

3

Target and Boeing 8‐K filings.

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BOUMOSLEH AND CLINE

Hermalin and Weisbach (1998) consider CEO influence in the context of the power struggle

between the board and the entire management team, including the CEO. They illustrate that

the board's power is compromised as the CEO gains influence and appoints other members of

the top management team to the board.

4

We develop our measure of CEO power based on the

premise of Hermalin and Weisbach (1998); however, we differ from Hermalin and Weisbach

(1998) in our assumption of the power of a new CEO. The prior for their model is that a new

CEO has no power and accumulates power during her early years of tenure after showing

positive firm performance. In contrast, we rely on the literature assuming that prior experiences

determine CEO value to the firm (Custodio et al., 2013; Malmendier & Tate, 2009). Thus, power

at the time of appointment enables the CEO to negotiate with the board.

The study begins by developing a measure of power for the incoming CEO based on four

conditions: if the CEO pay falls in the upper quintile of CEO pay in the same industry (High

Pay); if the predecessor CEO left the firm unexpectedly (Forced); if the CEO is the only insider

on the board (Only Insider); and if the exiting CEO stays as a director (Stayed).

We highlight how our measure of CEO power fills important gaps in existing measures. In

particular, four aspects of our CEO power measure are emphasized. First, it is an accumulation

of negotiating terms that lead to more CEO influence in her early years of tenure. Second, our

proposed measure is by no means a comprehensive indicator of CEO power, as no measure can

incorporate all the relevant factors that contribute to power. Third, our measure differs from

existing measures in that it is applicable and relevant to new CEOs. Fourth, the measure is easy

to construct, making it practical for adoption in future research. We discuss each factor in turn.

L. Bebchuk and Grinstein (2005) argue that 40% of growth in CEO pay is explained by firm

and industry characteristics, while the remaining is achieved either through arm's length

bargaining with the board or managerial power over the board. Supporting this argument,

Custodio et al. (2013) find that generalist CEOs earn higher pay than specialist CEOs,

suggesting that a CEO's prior experience gets incorporated into pay. L. A. Bebchuk and Fried

(2003) discuss governance factors and private benefits of the CEO and outside directors that

sway the power towards CEOs in negotiating their pay. We contend that the level of pay of the

incoming CEO incorporates the CEO's talent and experience and indicates the importance of

the CEO's abilities to the firm. Thus, we posit that being paid more is a positive indication of

the new CEO's power.

Peters and Wagner (2014) show that firm characteristics and industry volatility explain

forced CEO turnover. They argue that CEOs attain higher premiums for the risk of losing their

jobs. On the contrary, Taylor (2010) highlights the sizable cost that firms incur in their pursuit

to hire a new CEO following a sudden dismissal. In this spirit, we argue that forced CEO

turnover raises the incoming CEO's concern about her job security while leaving the board

under pressure to find a replacement to the exiting CEO. This scenario increases the CEO's

negotiating power against the board of directors.

Pfeffer (1992) argues that a manager's power is dependent on his or her position in the

information and social network. Being the only insider on the board, the CEO can not only be a

focal point of the information and social network of the firm but also exclude other competing

executives and ultimately have greater influence. Mobbs (2013) hypothesizes that inside

directors represent ready substitutes for the CEO and their presence on the board increases

4

Coles et al. (2014) provide supporting evidence that the proportion of coopted directors, those appointed during the

CEO's tenure and assumed to be friendly to the CEO, is associated with lower turnover‐performance sensitivity and pay

increases.

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