Chief Executive Officer Dismissal: A Multidisciplinary Integration and Critical Analysis

Processes and Timing of CEO Dismissal

Central to CEO dismissal is the interaction between the board and CEO. Specifically, two opposing factors underlie the process and timing of CEO dismissal: (1) the board’s desire to change the leadership of the firm as boards are tasked with hiring and firing the CEO (Boeker, 1992) and (2) the CEO’s desire to retain leadership over the firm. Once hired, CEOs are tasked with setting strategy and guiding performance (Adams et al., 2018; Liu et al., 2018; Wowak et al., 2017) as well as maintaining organizational culture, values, and controls (Hambrick, 2007; Schnatterly, Gangloff, & Tuschke, 2018). As time passes, various stakeholders (e.g., the board, investors, and analysts) update their expectations and assessment of the CEO (Conger, Finegold, & Lawler, 1998; Wiersema & Zhang, 2011). When firms falter in one or more of these areas, such as poor firm performance (Dou, Sahgal, & Zhang, 2015; Engel, Hayes, & Wang, 2003), failed acquisitions (Alexandridis, Doukas, & Mavis, 2019; Lehn & Zhao, 2006), or fraud (Khanna, Kim, & Lu, 2015; Persons, 2006), the failure is often attributed to the CEO, who is viewed as not meeting expectations as leader of the firm (Calder, 1977; Vinkenburg, Jansen, Dries, & Pepermans, 2014; Weber & Wiersema, 2017).

The board’s assessment of the CEO is particularly important in the decision to dismiss a CEO since the board of directors is tasked with overseeing the CEO on behalf of stakeholders and taking corrective action (i.e., dismissing the CEO) if necessary (Boeker, 1992; Graffin, Boivie, & Carpenter, 2013). Once the CEO is hired, the board has the opportunity to directly observe CEO quality and fit with the firm (Jacobsen, 2014). He and Fang (2016, p. 25) explain that as “managerial talent is revealed over time, the board will update its prior knowledge on CEO quality and make dismissal or retention decisions accordingly.” Thus, the board’s desire to change the company’s leadership is contingent on its recognition of the needs of the firm under existing circumstances (including the nature of the reasons to consider dismissal) (Sebora & Kesner, 1996), informed by information available to boards (Cornelli, Kominek, & Ljungqvist, 2013).

The timing of CEO dismissal speaks to the question of when the process is enacted. On the one hand, frictions between the CEO and board may build up over time, with dismissal only occurring following lengthy discussion and debate by the board (Cornelli et al., 2013; Koskinen, 2018). Declining performance (Dou et al., 2015; Ertugrul & Krishnan, 2011), in particular, is often cited as the reason for a CEO gradually losing the confidence of the board. For example, Carly Fiorina was dismissed as CEO of Hewlett-Packard after a significant period of performance declines and protracted disagreements within the board about the direction of the company (Tam, 2005). On the other hand, when unforeseen major negative events or crises unexpectedly arise, the board may abruptly seek CEO change (Berns & Klarner, 2017; Ertugrul & Krishnan, 2011). Possible crisis situations examined in prior research include accounting restatements (Beneish, Marshall, & Yang, 2017), earnings manipulations (Hazarika, Karpoff, & Nahata, 2012), and personal indiscretions (Cline, Walking, & Yore, 2018). For example, Steve Easterbrook was abruptly dismissed as CEO of McDonald’s following revelations about an inappropriate romantic relationship with a subordinate in violation of the company’s personal conduct policy (Haddon & Vranica, 2019). Thus, the timing of CEO dismissal—after lengthy consideration or suddenly—reflects the board’s perceived urgency regarding the need for leadership change (Weber & Wiersema, 2017).

Complicating the dismissal decision and its timing is the board’s ability to enact their decision versus the CEO’s preference to remain in charge. Even if the board would like to dismiss the CEO, the CEO may have considerable power (by being the chair of the board or having a nontrivial ownership stake in the firm, for example). Under these circumstances, the board’s collective preference for dismissing the CEO might not prevail. Similarly, if the board has greater power than the CEO, the CEO’s position becomes somewhat more precarious. In such conditions, CEOs may want to remain at the helm, but boards will be able to dismiss them if and when they feel it is necessary.

Another complication with regard to the timing of CEO dismissal concerns the ramifications for the firm from dismissing the chief executive. CEO dismissal may leave the firm leaderless or with a temporary CEO for an extended period of time, leading to firm disruption (Wiersema, 2002) and instability (Intintoli, 2013). Furthermore, significant financial and time costs are associated with the search for a new CEO (Mooney, Semadeni, & Kesner, 2017; Taylor, 2010).

Bringing together these concerns about the timing of CEO dismissal highlights the question of whether the dismissal was “too late” (reactive dismissal) long after poor performance was obvious or “too soon” (proactive dismissal) before a CEO’s strategic changes have had time to yield benefits. Some scholars (e.g., Ertugrul & Krishnan, 2011; Martin & Combs, 2011) have recently discussed the possibility that CEO dismissals can be “too proactive” or “too reactive.” The ramifications of dismissal timing are significant as more proactive dismissals may not allow a CEO to rectify problems in the firm, while more reactive dismissals can exacerbate the negative consequences for the firm (Ertugul & Krishnan, 2011; Hazarika et al., 2012). Yet, determining whether the board acted too hastily or slowly in dismissing a CEO is difficult given the speculative nature of CEO dismissal. Thus, until we can accurately ascertain whether a board dismissed a CEO prematurely or only after it was well overdue, our understanding of the “ultimate effectiveness” of such an action will remain unclear (Cools & van Praag, 2007, p. 739).

Prevailing Theories and Constructs Explaining CEO Dismissal

Several theories offer explanatory power for understanding CEO dismissal. The most prominent theory in the literature on CEO dismissal, accounting for approximately 50% of CEO dismissal studies, is agency theory (Jensen & Meckling, 1976). Focused on the monitoring relationship between agents and principals, agency theory speaks to the power struggle that emerges between the board, who monitors the firm on behalf of shareholders, and the CEO when dismissal is considered. Several other theoretical lenses (e.g., signaling (Akerlof, 1970), network theory (Burt, 1984), and attribution theory (Calder, 1977)) are also used to understand CEO dismissal. We intersperse the theories used and constructs examined throughout our review of the literature.

Four key levels of analysis emerged from our review of extant CEO dismissal literature: CEO, board, firm, and external. Within each level, constructs can be antecedents, outcomes, or moderators of either antecedents or outcomes. Below, we explore these constructs at each level by discussing theories utilized and constructs examined. Figure 2 presents an organizing framework highlighting a sampling of the areas that have been explored at each level and areas where opportunities for future research remain. In Figure 2, areas that have already been examined in the literature appear in bolded font, while those yet to be explored appear in regular font. Our framework provides a structured visual synthesis of what we know as well as opportunities that exist for future researchers. Key gaps that we identified are elaborated in the section on future directions. Noticeably, for each level, previous work has largely focused on antecedents surrounding CEO dismissal, with much less attention paid to the outcomes. Among other contributions, we hope our analysis draws attention to this imbalance in the CEO dismissal literature.OPEN IN VIEWER

Antecedents of CEO Dismissal

Moderators of the Antecedents of CEO Dismissal

Outcomes of CEO Dismissal

Moderators of the Outcomes of CEO Dismissal

CEO

Microlevel theoretical lenses have been employed to understand how CEO attributes such as optimism (Campbell, Gallmeyer, Johnson, Rutherford, & Stanley, 2011) and role congruity (Gupta et al., 2020) are positively associated with CEO dismissal. Yet, similar research grounded in microlevel theory on personality characteristics facilitating CEO dismissal is limited, leaving ample opportunities for future scholars. Specifically, individuals with personality traits such as narcissism, Machiavellianism, and psychopathy (i.e., the dark triad) are associated with disagreeableness (Paulhus & Williams, 2002). While these traits are also associated with poor job performance and counterproductive work behavior, being in an authority position (e.g., CEO) may moderate these relationships (Forsyth, Banks, & McDaniel, 2012). Given the interesting dynamic between the dark triad and leadership, research is warranted to ascertain whether the dark triad is indeed facilitative of CEO dismissal and whether these characteristics impact the subsequent careers of dismissed CEOs.

Furthermore, our review did not uncover any studies that delved into the Big Five personality characteristics (Barrick & Mount, 1991; Goldberg, 1990) of CEOs and dismissal. This is surprising as the Big Five personality traits have been widely studied and seem particularly important in shaping how people lead (Judge & Bono, 2000; Judge, Heller, & Mount, 2002). On the one hand, high levels of certain Big Five personality characteristics, such as openness to experience and conscientiousness, would seem to be beneficial for CEOs facing calls for dismissal. On the other hand, high levels of other Big Five personality characteristics, such as neuroticism, would seem to be detrimental to the CEO and hasten CEO dismissal. Thus, future research should unpack if and how the Big Five personality dimensions facilitate or insulate CEOs from dismissal and how these traits impact how dismissed CEOs deal with dismissal.

Given the ongoing “affective revolution” in organizational literature (Ashkanasy & Dorris, 2017; Grandey, 2008), it is surprising that the emotional consequences of CEO dismissal have gone largely unnoticed in the literature. While the dismissal of the CEO is certainly disruptive for the firm (Friedman & Saul, 1991; Tao & Zhao, 2019), the effects on the CEO have received little attention. To date, we have only found a handful of studies that examine CEO outcomes, all of which focus on subsequent career opportunities (e.g., Ertugrul & Krishnan, 2011; Fee et al., 2018; Humphery-Jenner, 2012; Ward et al., 1995). Yet, this career focus ignores the potential mental toll that dismissal has on the CEO. Thus, scholars need to examine the effects of dismissal on emotions (e.g., shame or grief), perspectives (e.g., fairness), and behavior (e.g., resiliency). Many dismissed CEOs probably want to helm another firm, so factors affecting their future leadership ability and potential seem worthy of future study.

Board

Details of how boards dismiss CEOs are often difficult to ascertain (Leblanc & Schwartz, 2007). Thus, opportunities remain in disentangling board discussions preceding dismissal, specifically, the emotional tone of these discussions. The emotional tone, or the degree to which conversations elicit positive or negative affect (Ashkanasy, Humphrey, & Huy, 2017; Kelly & Barsade, 2001), offers information on the emotional state and changes in the direction of discussion as emotions change (see emotional contagion; Barsade, 2002). The emotional state in which the board finds itself when discussing the fate of the CEO, and if and how it changes, is of importance to understanding their ultimate decision. Yet, we found no studies exploring the emotional dynamics within the boardroom preceding CEO dismissal. This omission is surprising given the extent of the literature on emotions within groups and considering the pressure that exists as the board tries to make a decision as significant as dismissing a CEO.

Several studies identify board power as a key facilitator of CEO dismissal (e.g., Alam et al., 2014; Boeker, 1992; Conyon & He, 2011; Ertugrul & Krishnan, 2011), but we did not find any research that examined the concentration of that power within the board. One way the power can be concentrated within the board is by a few select directors dominating committee appointments, since much of the work of the board takes place in committees (Bilimoria & Piderit, 1994; Jiraporn, Singh, & Lee, 2009; Kesner, 1988). If power is concentrated among a few corporate elite (or in-group) directors, the CEO may be insulated from dismissal. Social identity theory suggests that dominant in-group members will exert control over out-group members (Tajfel, Billig, Bundy, & Flament, 1971; Tajfel & Turner, 1986). Thus, future researchers need to assess whether concentrated power among in-group board members impacts CEO dismissal.

Finally, opportunities remain to examine the subsequent career impact of the board’s decision to dismiss the CEO on the individual directors. Notably, Florou (2005) found that the chair of the board as well as other board members are likely to leave the board following CEO dismissal, which is consistent with Fee and Hadlock (2004)’s finding that other TMT members leave following CEO dismissal, subsequently detrimentally impacting their careers. However, opportunities remain to study the subsequent career impact on directors associated with dismissed CEOs. One would expect that board members, who are tasked with monitoring the CEO, particularly the members of the nominating committee, may be substantively impacted following CEO dismissal. Given that the dismissal of a CEO may be seen as an acknowledgment of failure to adequately oversee the CEO, calling into question their ability to effectively monitor, the board members involved may suffer similar career setbacks (e.g., fewer and less prestigious directorships), which seem a fertile area for future inquiry.

Firm

Our review revealed little about the relationship between dismissal and the dynamics of the TMT—a key firm-level factor. ³ This absence is surprising as, next to the CEO, the TMT is critical to organizational functioning. Indeed, group dynamics between the TMT and the CEO are integral to firm performance (Peterson, Smith, Martorana, & Owens, 2003). For example, faultlines—attribute-based group divisions (Lau & Murnighan, 1998)—within the TMT could create dysfunction within the leadership of the firm. While faultlines within the board have been found to reduce effectiveness and decrease the likelihood of CEO dismissal (Van Peteghem et al., 2018), the relationship between CEO dismissal and faultlines within the TMT has yet to be examined. Indeed, faultlines among the TMT would seem to have the opposite effect: facilitating dismissal by increasing dysfunction within the upper echelons of the firm. Given the growing attention to TMT faultlines in the broader literature (Bunderson & Van der Vegt, 2018), attending to this area within the CEO dismissal literature seems warranted.

Another key characteristic of firms is the functional diversity of the TMT. While prior literature has found that CEOs with diverse functional expertise relevant to the firm are less likely to be dismissed as they have made themselves integral to the firm (Oehmichen et al., 2017), opportunities remain in exploring the relationship between TMT functional diversity and CEO dismissal. The relationship between the CEO and TMT is integral to firm functioning (Peterson et al., 2003). Collaborative, well-functioning TMTs with diverse functional backgrounds improve firm performance (Boone & Hendriks, 2009; Cannella, Park, & Lee, 2008), but this improvement is contingent on the relationship with the CEO (Buyl, Boone, Hendriks, & Matthyssens, 2011). Therefore, if CEOs are surrounded by suitable or appropriate TMTs, they are better positioned for success. We encourage future scholars to explore whether CEOs who have collaborative, functionally diverse, and adept TMTs better weather calls for dismissal.

CEO dismissal causes significant upheaval within firms (Friedman & Saul, 1991; Tao & Zhao, 2019). Indeed, restructuring (Hornstein, 2013) and downsizing (Fee et al., 2013) have been observed following CEO dismissal. Consequently, CEO dismissal has been observed to diminish employee morale arising from the sudden instability employees face (Friedman & Saul, 1991), and low morale motivates employee turnover (Staw, 1980). While previous research has noted that TMT turnover follows CEO dismissal (Fee & Hadlock, 2004), whether the broader workforce of the firm turns over disproportionately following CEO dismissal remains to be seen. This question is vital as employees form the backbone of any organization (Liu, Combs, Ketchen, & Ireland, 2007), and employee turnover would further exacerbate disruption within the organization (Shaw, 2011).

External

While several key external stakeholders, such as institutional owners (Helwege et al., 2012; Wu, 2004), analysts (Wiersema & Zhang, 2011), and the media (Bednar, 2012), have been examined in the CEO dismissal literature, exploring other key stakeholders presents an opportunity for future scholars. For example, alliance partners form key relationships for firms, allowing for resource complementarity and performance benefits (Lunnan & Haugland, 2008; Robson, Katsikeas, Schlegelmilch, & Pramböck, 2019). Our review revealed an opportunity for researchers to explore how relationships with alliance partners impact CEO dismissal. Since alliance partners are key stakeholders, we encourage future researchers to examine whether the presence of alliance partners, particularly powerful ones, can facilitate CEO dismissal when they voice concerns about the CEO (similar to shareholders, analysts, and the media).

Academic understanding of CEO dismissal is derived largely from Anglo-Saxon systems of corporate governance (Hilger et al., 2013). However, in non–Anglo-Saxon contexts, banks and governments (rather than shareholders) are often prominent stakeholders, which concentrate ownership and lend greater emphasis to long-term performance (Weimer & Pape, 1999). In examining a non–Anglo-Saxon setting (namely, China), Shen and Lin (2009) found the performance-dismissal relationship to be less sensitive than in Anglo-Saxon contexts, suggesting a fundamentally different view from most research in the area. Thus, the institutional environment in which the firm operates may insulate the CEO from dismissal pressure, but future research needs to further flesh out how specific differences (e.g., state vs. bank vs. family vs. employee-dominated stakeholder systems) impact CEO dismissal.

Finally, opportunities remain in examining the external implications of CEO dismissal. Morgeson, Mitchell, and Liu (2015) proposed event system theory to understand the spillover (and potentially interactive) effects of critical episodes at different levels (environment, organization, team, and individual) of the firm. Dismissing the CEO would certainly constitute an impactful event capable of having such spillover effects. In this vein, Connelly et al. (2020) recently found that CEO dismissal at one firm induces heightened fears of job insecurity among CEOs at competing firms. Yet, whether the dismissal of a CEO at one firm actually leads to a wave of dismissals at other firms remains to be investigated. If this scenario is indeed the case, the competitive landscape of industries could drastically change with the dismissal of just one CEO, creating a possible domino effect. Thus, future research needs to continue to examine how the dismissal of one CEO impacts the broader environment and the stakeholders therein.