Insular Decision-making in the Board Room: Why Boards Retain and Hire Sub-Standard CEOs

Meg Sato
Additional contact information
Meg Sato: Australia-Japan Research Centre

Microeconomics Working Papers from East Asian Bureau of Economic Research

Abstract: It is widely believed that corporate boards are overly reluctant to fire their CEOs. The conventional explanation for retaining a CEO regardless of his/her talent is that a CEO chooses the board members and has the power to fire them. However, very few studies have investigated how a new CEO is chosen. This paper explores an unexamined cause of board reluctance in removing a CEO : the incentive to minimize the leakage from the decision-makers future surplus. I argue that this same logic provides the theoretical explanation for how a new CEO is chosen for both voluntary and forced CEO replacements. I show that this incentive of the incumbent board and CEO often departs from the shareholders interest. In short, if the net surplus of the incumbent board and CEO is expected to be larger under an incumbent sub-standard CEO, or under an internal candidate rather than an external candidate, then they retain the incumbent sub-standard CEO or promote an internal CEO candidate, even though the expected corporate profit generated by appointing an external candidate is likely to have been greater.

Keywords: CEO Succession Policy; Board Composition (search for similar items in EconPapers)
JEL-codes: D79 G30 K22 L22 L29 (search for similar items in EconPapers)
Date: 2009-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.eaber.org/node/22884 (application/pdf)
Our link check indicates that this URL is bad, the error code is: 301 [REDIRECT LOOP] Moved Permanently (http://www.eaber.org/node/22884 [301 Moved Permanently]--> https://www.eaber.org/node/22884 [301 Moved Permanently]--> https://www.eaber.org/node/22884 [301 Moved Permanently]--> https://www.eaber.org/node/22884 [301 Moved Permanently]--> https://www.eaber.org/node/22884 [301 Moved Permanently]--> https://www.eaber.org/node/22884 [301 Moved Permanently]--> https://www.eaber.org/node/22884 [301 Moved Permanently]--> https://www.eaber.org/node/22884)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eab:microe:22884

Access Statistics for this paper

More papers in Microeconomics Working Papers from East Asian Bureau of Economic Research Contact information at EDIRC.
Bibliographic data for series maintained by Shiro Armstrong ().