When a CEO is dismissed, peer CEOs often turn fiscally conservative, dialing back on research and development, acquisitions and capital expenditures.
Firing a CEO can change the strategic decision-making of CEOs at competing firms. Two Harbert College researchers found that seeing peer CEOs get the boot causes other CEOs in the industry to experience job insecurity and motivates them to dial back on strategic risk taking.
In a co-authored study published in the Strategic Management Journal, Brian Connelly and Kang Lee found the position of a CEO is more volatile than ever.
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 the CEO, what happens at all the other companies in the industry?
“Our main argument,” said Connelly, Luck eminent scholar in Management, “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.”
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 the CEO, it generates consequences that ripple throughout the entire industry.
“We suggest the CEOs at those rival companies will start worrying about their job,” Connelly and Lee wrote. “This fear affects their strategic decision-making.
“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.”
Connelly and Lee, EBSCO associate professor, also found there are some scenarios that exacerbate this reaction. One is constitutional constraints on shareholder power, which are governance provisions like supermajority voting requirements and staggered elections for directors.
“When these are present,” Connelly noted, “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.”
