Board characteristics & peer peformance in CEO turnover decisions : the effect of board characteristics on the impact of peerinduced returns in cases of forced CEO turnover

Abstract

We show that certain characteristics of the board of directors make it more prone to consider industry or peer-induced returns when making decisions to fire or retain the CEO. The board may hold the CEO responsible for exogenous, industry-related factors when evaluating CEO performance. We show that higher percentage of independent directors, smaller board sizes and, to a lesser extent, lower duration of the board, can reduce the sensitivity of forced CEO turnover probability to peer-induced returns. This may make it less probable that the board punishes or rewards a CEO for factors outside her control. We quantify the change in turnover probability due to changes in the above-mentioned board characteristics and show that the change in probability is greater for firms with poor returns than for firms with higher returns. Our contribution to the exiting literature is to show that the sensitivity of forced CEO turnover to peer-induced performance is affected by certain board characteristics, and its impact is more pronounced for firms with low returns.