Study examines board turnover
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
after CEO departures
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,"
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
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
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.
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