Study examines board turnover
after CEO departures

Andrew Ward, assistant professor for organization and management in the Goizueta Business School, recently completed a study that may have some company board directors thinking twice before ousting their ineffective CEOs.

Ward and Karen Bishop of the University of Alabama looked at companies in the Business Week 1,000-the thousand largest publicly traded companies in the United States-between 1988 and 1992 to examine "changes in the composition of boards for the two years following a CEO succession," Ward said.

During that time, board turnover varied considerably in proportion to the reasoning for the CEO change in the 456 cases studied. In the two years following routine and voluntary CEO changes, Ward and Bishop found that board turnover averaged 22 percent. In the 60 cases where the CEO was fired, the turnover rate was 33 percent. The rate of turnover went as high as 40 percent when the CEO's firing reflected underperformance on the part of the corporation.

Said Business Week of the study's results, "Board members who oust a CEO after allowing him to do a bad job are increasingly likely to find themselves out in the cold as well."

Ward and Bishop's methodology for the study included examining factors that might impact rates of change in board composition, such as forced versus routine CEO exits, choice of insider and outsider successors and the types of forced exits experienced. A group of similar companies with no change in CEO was examined and used as the baseline for expected recurring rates of change in board composition.

Implications for this type of information in the business world could be useful, think Ward and Bishop. "New outsider CEOs following a negative forced exit of a predecessor experience significant pressures of expectations for change and are aware of the failure in the past governance of the organization," the researchers said. "That new CEO must have a clear vision of how the balance can be maintained between the need to have a supportive, resourceful board and the need to have a board capable of carrying out its monitoring and advising responsibilities on behalf of the shareholders."

This study indicates to board members that they pay a high price for the failure to perform their duties adequately to monitor, advise and discipline the CEO and management, Ward and Bishop noted. "The board cannot sit back and passively acquiesce to every whim of management." Company shareholders "should be concerned that boards are indeed effective in their representation of shareholders . . . the high level of board turnover that we find following forced CEO succession indicates that in many instances boards are failing in this duty," they said

As far as overall governance, Ward and Bishop believe that boards need to reassess the effectiveness of their selection methods. "Processes are needed to mitigate the conflicting pressures present following failures by the CEO and board." They suggest term limits, exit practices and a more independent board member selection process may be key in easing these pains.

Building on this study, Ward and Bishop would like to study the subsequent positions of directors who leave company boards. "We're going to examine whether committee membership-particularly on auditing committees-makes a difference in this realm . . . [and] we'll be more specific in looking at who leaves the company."

The study was presented at the annual meeting of the Academy of Management in Cincinnati in August, where it was well-received, according to Ward. He added that the study has not been published academically yet, but will be in the near future.

-Danielle Service

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