Power Dynamics within Top Management and Their Impacts on CEO Dismissal Followed

by Inside Succession
Author(s): Wei Shen and Albert A. Cannella Jr.
Source: The Academy of Management Journal , Dec., 2002, Vol. 45, No. 6 (Dec., 2002), pp.
1195-1206
Published by: Academy of Management

Stable URL: https://www.jstor.org/stable/3069434

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I Academy of Management Journal
2002, Vol. 45, No. 6, 1195-1206.

POWER DYNAMICS WITHIN TOP MANAGEMENT AND THEIR IMPACTS

ON CEO DISMISSAL FOLLOWED BY INSIDE SUCCESSION

WEI SHEN
University of Florida

ALBERT A. CANNELLA, JR.

Texas A&M University

Following a power perspective, this study is a longitudinal examination of the ante-

cedents of CEO dismissal followed by inside succession. Our theory highlights interest
conflicts and competition within top management. We propose that CEO origin, CEO
tenure, non-CEO inside directors, and senior executive ownership are important an-
tecedents of CEO dismissal followed by inside succession. Evidence from a sample of
387 large U.S. corporations suggests that non-CEO senior executives frequently play an
important role in CEO dismissal.

The influence of power in CEO dismissal dynamics

and within top management and examined
succession decisions is a major focus in current
their impacts on CEO dismissal followed by inside
succession and governance research (Boeker,succession.
1992;
Boeker & Goodstein, 1993; Cannella & Lubatkin, It is important to demarcate the boundaries of our
1993; Cannella & Shen, 2001; Ocasio, 1994; Zajac & study. Most CEO successions involve an incum-
Westphal, 1996). Theories of organizational poli- bent's stepping down at an agreed-upon time, usu-
tics highlight interest conflicts and power struggles ally when he or she is around 60 to 65 years old
within organizations, especially among senior ex- (Cannella & Shen, 2001; Friedman & Singh, 1989).
ecutives (Lazear & Rosen, 1981; Pfeffer, 1981). For Often, a retiring CEO is replaced by an heir appar-
example, Fama (1980: 293-294) proposed that com- ent who has been identified well in advance and
petition among top managers plays an important groomed as president or chief operating officer by
role in the internal monitoring of firms. Ocasio the CEO before the final promotion (Vancil, 1987).
(1994), drawing on Pareto's (1968) circulation of More importantly, powerful retiring CEOs exert a
power theory, reported that the likelihood of CEO strong influence over successor selection and pre-
turnover among companies with low performance fer successors, especially insiders, who are similar
increased with the proportion of inside directors. to themselves (Zajac & Westphal, 1996). Our study
These scholars have noted that the presence of is not about these "ordinary" successions. Instead,
non-CEO inside directors on a board can facilitate it is about a subset of inside CEO successions re-
the functioning of a corporation's internal monitor- sulting from power contests within top manage-
ing system and reduce agency costs that stem fromment groups in which the CEOs are dismissed and
the separation of ownership and managerial con-have no influence over successor selection. The
trol. However, much governance and succession relationships and the underlying processes we ex-
research has questioned the effectiveness of inter- plored in this study thus differ importantly from
nal monitoring by non-CEO top managers and con- those that figure in the extant literature on CEO
cluded that a firm's senior executives are often succession in general.
allies of its CEO (Finkelstein & Hambrick, 1996;
Walsh & Seward, 1990; Weisbach, 1988). Further,
THEORY AND HYPOTHESES
little research has directly focused on power con-
tests within top management as an important cause Much of the governance literature emphasizes
of CEO dismissal. To advance understanding of the interest conflicts between a company's manage-
role that senior executives play in CEO succession ment (as a group) and its shareholders and places
decisions, in this study we explored the power the task of effective internal control of management
primarily upon outside directors (Walsh & Seward,
1990). In this line of argument, when firm perfor-
The authors thank Bob Hoskisson, Jing Zhou, Chao mance declines, often not only the capabilities of the
Chen, Fariborz Damanpour, and three anonymous re- CEO alone, but also those of the entire top manage-
viewers for their helpful comments and suggestions. ment group, are called into question (Boeker & Good-
1195

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1196 Academy of Management Journal December

stein, 1993). Further, this view implies that, because of these factors on the occurrence of CEO dismissal
of the fear of losing their jobs, the senior executives of followed by inside succession.
a firm have strong incentives to ally with its CEO and
defend their positions (Dalton & Kesner, 1985). Al-
though this managerial entrenchment argument has CEO Origin
received empirical support (Boeker & Goodstein, CEO origin refers to whether an incumbent CEO
1993; Weisbach, 1988), it neglects important interest was an employee of the firm he or she leads at the
conflicts and competition within top management time of appointment as CEO (Kesner & Sebora,
groups (Ocasio, 1994; Pfeffer, 1981). 1994). Origin has important implications for power
A primary cause of interest conflicts and compe- dynamics within top management groups. Building
tition among top executives lies in their desire for strong social networks and coalitions within a firm
power and career advancement. Senior executives is an essential task for those who aspire to be the
are ambitious individuals who have high needs for CEO (Jennings, 1971; Vancil, 1987). When they are
power and achievement (McClelland & Burnham, promoted to a firm's CEO position, inside succes-
1976). As they move up the corporate hierarchy, sors not only have the approval of outside direc-
their desire to become CEO and "run their own
tors, but also have support within the top manage-
show" becomes even stronger (Pfeffer, 1981; Van- ment group (though perhaps not complete support,
cil, 1987). The extraordinary prestige and material owing to internal competition). In contrast, when
benefits associated with the CEO title provide fur-outside CEOs take office, they lack the internal
ther incentives for senior executives to challenge social networks and coalitions of inside CEOs. Ac-
the CEO of their company and to participate incentuating
a this problem is the fact that senior ex-
power tournament in the firm's internal labor mar-ecutives from a firm's prior regime often have a
ket (Lazear, 1989; Lazear & Rosen, 1981). In addi-
hostile attitude toward outside CEOs because of the
tion, the external labor market generally evaluateschanges these outsiders may initiate (Boeker &
executives' talent on the basis of the performance of
Goodstein, 1993; Dalton & Kesner, 1985; Gouldner,
their employing firms. When firm performance suf- 1954). In addition, because outside successors are
fers, so does each senior executive's reputation andoften appointed in periods of poor performance
value in the external labor market (Fama, 1980). and are expected to turn their firms around
Senior executives thus, even if not direct power (Gabarro, 1987; Zajac, 1990), they are under pres-
contenders themselves, have incentives to monitor sure to take quick action in restructuring top man-
the CEO's leadership and join others in taking ac- agement groups (Gouldner, 1954; Helmich &
tion against the CEO when they perceive him or her Brown, 1972). This intensifies interest conflicts be-
to be less than capable. tween outside CEOs and senior executives. Thus,
The interest conflicts and competition between a compared to inside succession, outside succession
CEO and other senior executives put the CEO at increases tension within a top management group
risk of power contests with senior executives and places the outside CEO at a higher risk of
(Lazear, 1989; Ocasio, 1994). Although such con- power contests with senior executives. The high
tests are not easily observable to outsiders, we ar- expectations the board and other stakeholders have
gue that the power dynamics within top manage- toward outside CEOs make them more vulnerable
ment will affect the occurrence of CEO dismissal as
when challenges from senior executives emerge
well as choices of successors. When senior execu-
(Puffer & Weintrop, 1991). All else being equal, we
tives successfully challenge a CEO and gain the expected a higher rate of CEO dismissal followed
support of outside directors, the CEO will be dis-by inside succession among outside CEOs.
missed, and one of the contending executives will
likely be promoted as the successor (Pfeffer, 1981; Hypothesis 1. CEO origin as an outsider in-
Sonnenfeld, 1988). This scenario is very different creases the likelihood of CEO dismissal fol-
from the one widely discussed in much of the gov- lowed by inside succession.
ernance literature, in which outside directors initi-
ate a power contest with a CEO or an entire topCEO Tenure
management group in the context of poor perfor-
mance and subsequently appoint an outsider as the New CEOs confront significant challenges upon
successor (Boeker & Goodstein, 1993; Cannella & taking office. Promotion to the CEO position typi-
Lubatkin, 1993; Weisbach, 1988). We believe that cally leads to significant changes in both an exec-
four factors particularly reflect the power dynamics utive's responsibility and task environment (Kotter,
that arise between CEOs and senior executives. Be- 1982). New CEOs must adjust to their new roles
low, we develop hypotheses regarding the impacts and quickly develop good working relationships

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2002 Shen and Cannella 1197

Non-CEO Inside Directors

with the other members of their top management
groups, boards of directors, and powerful outside Inside directors are directors who are also exec-
stakeholders (Vancil, 1987). The learning process is
utives of the firm on whose board they serve. Al-
stressful and time consuming (Kotter, 1982). At the
though the effectiveness of inside directors in gov-
same time, new CEOs are charged with specific
ernance has been widely questioned (Walsh &
strategic mandates (Hambrick & Fukutomi, 1991), a
Seward, 1990), theories emphasizing managerial
charge that further increases the difficulty of their
interest conflicts and competition suggest that the
tasks. Finally, and perhaps most crucial for new
presence of non-CEO inside directors has impor-
CEOs, is their need to establish their authority in a
tant implications for the power dynamics within
top position (Gabarro, 1987). top management. First, inside directors are the
Authority is legitimate power and is of two most likely and viable challengers of a CEO (Oca-
types-authorized power and endorsed power sio, 1994). A seat on the board gives an executive
(Scott, 1995: 305-308). Authorized power is exposure to outside directors and enables them to
granted by those superior to the power holder (We- build social networks and coalitions on the board
ber, 1946), and endorsed power is granted by those (Jennings, 1971; Vancil, 1987). This development
subordinate to the power holder (Barnard, 1938). narrows the power gap between them and the CEO
To establish their authority, new CEOs must be and lends them more confidence with which to
accepted by both their boards of directors and by challenge the CEO (Sonnenfeld, 1988). Second, for
subordinate executives. Although the official ap- senior executives to successfully challenge a CEO
pointment represents authorization by the board of and to advance their careers, they must be able to
directors, it does not necessarily confer endorse- voice their concerns about the CEO to the corpora-
ment from subordinates (Barnard, 1938; Selznick, tion's board (Lorsch & MacIver, 1989). Non-CEO
1957). Further, the authorization of a board is likely inside directors, if not challengers themselves, can
to be somewhat tentative and can be revoked function as conduits between senior executives and
quickly if directors develop significant concerns
outside directors, making outside directors better
about a new CEO's leadership capacity (Vancil,
informed about the concerns of these executives
1987). Indeed, because there is little proof of (Fama,
ac- 1980; Vancil, 1987). Finally, the presence of
countability in office, the leadership capacitynon-CEO
of inside directors limits a CEO's influence
new CEOs is under close scrutiny by outside direc-
over a board and increases the chance for senior
tors (Alderfer, 1986). Thus, until they can prove
executives to successfully challenge the CEO. In-
their competence and meet the expectations of bothside directors have valuable firm-specific informa-
their boards and subordinate executives, the au- tion about a firm's activities and market position
thority of new CEOs will be much weaker than that (Fama, 1980). Through non-CEO inside directors,
of established CEOs (Hambrick & Fukutomi, 1991; outside directors can reduce their reliance on the
Ocasio, 1994). CEO and are more able to gain accurate information
The challenges facing new CEOs leave them vul- about the CEO and the firm's operations (Baysinger
nerable to power contests with rival executives. & Hoskisson, 1990). Thus, a CEO is likely under
The fact that new CEOs need time to establish their close monitoring when there are other senior exec-
authority in the top position (Selznick, 1957) pro- utives on a board.
vides an opportunity for ambitious senior execu- To protect their own interests, incumbent CEOs
tives to challenge them early in their tenures. Once may try to use their positions to influence inside
incumbent CEOs have proven their leadership ca- directors (Weisbach, 1988). However, interest con-
pacity and established their authority in office, the flicts between CEOs and ambitious inside directors
chance for senior executives to successfully mount can be inevitable. Although inside directors may
a challenge is greatly reduced (Ocasio, 1994). Thus, have supported a CEO in the past, they may not
CEOs are likely to face a higher risk of power con- continue to do so when their own career advance-
tests with senior executives in the early years of ment is at stake. Prior research has indicated that
their tenures, and we expected to see a higher rate under conditions of clear information about prefer-
of CEO dismissal followed by inside succession ences and payoffs, coalition formation is often
during that period. issue-oriented and temporary (Stevenson, Pearce, &
Porter, 1985). Boeker (1992) found that even inside
Hypothesis 2. CEOs are at a higher risk of dis- directors appointed by a CEO did not reduce the
missal followed by inside succession in the CEO's risk of dismissal. All else being equal, we
early years of their tenures. expected to see a higher rate of CEO dismissal

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1198 Academy of Management Journal December

followed by inside succession among firms with
higher proportions of non-CEO inside directors.
Hypothesis 3. The proportion of non-CEO in-
side directors increases the likelihood of CEO
dismissal followed by inside succession.
Journal and News Wires databases. Data on execu-
tive and director ownership were collected from
proxy statements. Data on firm size and perfor-
mance were gathered from COMPUSTAT and
CRSP.

Measures
Non-CEO Executive Ownership
CEO dismissal followed by inside succession.
As an important source of power (Finkelstein,
Identifying CEO dismissals is a major challenge in
1992), stock ownership will affect both the incen-
succession and governance research because firms
tives senior executives have to challenge their CEO
seldom fully disclose the true reasons behind CEO
and their credibility in doing so. Stock ownership
resignations (Denis & Denis, 1995; Fredrickson,
by senior executives does not typically provide
Hambrick, & Baumrin, 1988; Weisbach, 1988).
enough voting power to remove a CEO, but it in-
Given their importance in our study, we took two
creases the credibility of these executives' concerns
approaches to identify CEO dismissals. Our first
about the CEO's leadership and helps them gain
approach relied on news reports (Parrino, 1997).
support from outside directors. Further, senior ex-
We searched Dow Jones databases to collect all
ecutives' stock ownership increases their influence
reports about each selected firm's CEO during a
in the selection of an inside successor following the
three-year period, from one year before to one year
dismissal (Boeker & Goodstein, 1993). In addition,
after the year of in which the CEO was succeeded.
stock ownership gives senior executives extra fi-
nancial incentives to monitor the CEO and thus There are 340 successions in our sample, and we
found news reports for 334 of these events. Of these
weakens the CEO's influence over them. Corporate
334, we first excluded successions that were con-
governance scholars have emphasized using stock
sequences of a CEO's death or of clear health issues
ownership to bond managerial actions to share-
holder interests (Walsh & Seward, 1990). Stock
(14 cases), of a CEO's acceptance of a similar posi-
tion at another firm (16 cases), or of a merger or
ownership by executives has been reported to re-
acquisition (3 cases). We also excluded from our
duce agency problems in corporate restructuring
analysis four CEOs who were reported as serving
(Johnson, Hoskisson, & Hitt, 1993). All else being on an interim basis.
equal, we expected a higher rate of CEO dismissal
Next, we analyzed the news reports and used the
followed by inside succession among firms with
following three criteria to identify CEO dismissals.
higher levels of non-CEO executive ownership.
First, a CEO was directly reported as having been
Hypothesis 4. Non-CEO executive ownership fired or forced out (11 cases). Second, a CEO was
increases the likelihood of CEO dismissal fol- reported as having resigned unexpectedly or imme-
lowed by inside succession. diately, owing to poor performance, undisclosed
personal reasons, or a desire "to pursue other inter-
METHODS ests" (35 cases). Lastly, we included each case in
which a CEO was reported as taking early retire-
ment and there was discussion of performance
The population for this study is large, publicly
traded U.S. corporations. We initially selected a
problems (18 cases) as a dismissal. Although a CEO
random sample of 512 publicly traded firms report-
may step down voluntarily when performance de-
clines,
ing at least $200 million in sales for 1988. After we our analysis of news reports suggests that
deleted firms with missing data, a total of 387 this
firmsis rare. Further, a CEO may not have any option
remained, comprising the final sample used in other
the than stepping down when performance pres-
sure is very high. Thus, we classified a CEO turn-
analysis. A t-test indicated no significant difference
in annual sales between the final sample andover
theas a dismissal if it met any one of the above
three criteria. We identified 64 dismissals in our
initial sample. Data were collected annually from
multiple sources for the years 1988 through 1997. A on the basis of the news report analysis.
sample
primary data source for CEO turnover, successor
In our second approach, we used both CEO age
selection, and board structure is the officer and
and continuity as a board member at the time of
director list provided in each firm's annual report
turnover to identify CEO dismissals. Because many
to shareholders. Additional descriptive data on firms have retirement policies, some previous re-
CEOs and their successors were collected from Dun search has relied on CEO age to separate dismissals
& Bradstreet's Reference Book of Corporate Man- from retirements (Ocasio, 1994; Puffer & Weintrop,
agement and Dow Jones Interactive's Wall Street 1991). The age of 64 is often used as a cutoff point

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2002 Shen and Cannella 1199

in making the decision: CEOs who leave office be- years of CEO tenure were also measured as a
fore the age of 64 are treated as dismissed, anddummy variable. In a qualitative study, Gabarro
those who depart later are treated as retired. An (1987) suggested that the process of CEOs' estab-
examination of our sample suggested that relying lishing authority in office generally takes from 30 to
on CEO age alone to classify a departure as a dis-48 months. Drawing on his study and our prelimi-
nary analysis, we selected five years of tenure as
missal or a retirement was too crude for our study.
Many CEOs in our sample relinquished the CEOthe cutoff in our coding. Early years of tenure was
title at the age of 62 or 63 but kept directorship orcoded 1 for the first five years of a CEO's tenure and
0 otherwise. Proportion of non-CEO inside direc-
the title of chairman of the board until the age of 64
or 65. These CEOs can hardly be treated as dis-tors was calculated as the number of directors who
missed because it is unreasonable to keep a dis-were current executives of a firm, excluding the
missed CEO on a board (Lorsch & MacIver, 1989). CEO, divided by the total number of directors (Dai-
Given this, we used continuity as a board member ly, Johnson, & Dalton, 1999). Non-CEO executive
as a second criterion, in addition to CEO age, to ownership was calculated as the proportion of a
identify dismissal. A CEO's departure from a cor- firm's outstanding shares held by all executives
poration was classified as a dismissal when the other than the CEO who were listed in the compa-
incumbent terminated his or her service as both ny's proxy statement.
CEO and board member before the age of 64 for Control variables. Firm performance impor-
reasons other than death or health, taking a similar
tantly influences the power dynamics at the top of
a firm in that poor performance weakens a CEO's
position at another firm, or a merger or acquisition.
We identified 75 dismissals using this approach.credibility and increases the likelihood of a power
contest waged against the CEO (Boeker & Good-
We compared the CEO dismissals identified un-
stein, 1993; Ocasio, 1994). However, because out-
der the above two approaches and found that the 75
dismissals identified with the second approach side directors rely more heavily on financial per-
(age and continuity observations) included all 64 formance to assess a CEO than do senior executives
dismissals identified with the first approach (news(Baysinger & Hoskisson, 1990), challenges to the
reports analysis). In other words, all 64 CEOs clas-CEO under conditions of poor performance may be
sified as dismissed on the basis of news reports left
initiated by outside directors rather than by senior
office before the age of 64 and simultaneously ter- executives. Given this concern, we did not develop
minated their directorships. This finding gave us hypotheses directly linking firm performance to
great confidence in the 64 dismissals identified viapower dynamics within top management and their
news reports. We then reexamined the news re- impact on CEO dismissal followed by inside suc-
ports on the 11 nonoverlapping cases. Eight of
cession. Instead, because firm performance is
these were reported as normal retirements in accor- widely believed to reflect a CEO's leadership abil-
dance with company policy; 2 were reported asity (Puffer & Weintrop, 1991; Weisbach, 1988), we
early retirements occurring after corporate restruc-included it as a control variable representing CEO
turing; and 1 was reported as an early retirement competence. We first chose an accounting measure
resulting from a need for restructuring. We elected of performance, return on assets (ROA), and calcu-
lated it as income before extraordinary items and
to add only the last case to the dismissals. Thus, we
identified a total of 65 CEO dismissals. We then discontinued operations divided by net assets. To
created a dummy variable-dismissal, insider-tocontrol for industry effects (Dess, Ireland, & Hitt,
measure CEO dismissal followed by inside succes- 1990), following Edwards's (1995) recommenda-
sion. It was coded 1 when a current executive of a tions, we included industry ROA in our analysis
firm became CEO after the predecessor's dismissaland measured it as the average ROA in the firms in
and 0 otherwise. There are 38 such events in our a focal company's primary two-digit SIC category.
sample. Of these, 36 involved successors whoWe also selected a market-based measure of perfor-
joined their firms before their dismissed predeces-mance, shareholder returns, and measured it by
sors had been appointed as CEO, and only 2 in-compounding the daily returns to shareholders re-
volved successors who had joined their firms dur-ported in the relevant CRSP tapes over each fiscal
ing their dismissed predecessors' tenures as CEO.year. To further distinguish the impact of power
Predictor variables. CEO origin as an outsiderfrom that of a CEO's human capital, we controlled
was also measured as a dummy variable. In linefor CEO's industry experience. Industry experience
with the discussion presented above, outsider CEOwas coded 1 when a CEO had more than five years
was coded 1 if a successor CEO was not an em- industry experience at the time of his or her ap-
ployee of the firm in which he or she took officepointment
at and 0 otherwise.
the time of succession, and 0 otherwise. The earlyThe corporate governance literature highlights

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1200 Academy of Management Journal December

the view that boards of directors, and particularly from the perspective of the CEO who is being suc-
their outside members, play an important role in ceeded (Boeker, 1992; Ocasio, 1994). CEO tenure
CEO succession decisions (Walsh & Seward, 1990). thus was the duration measure in our event history
Two variables, the proportion of outside directors analysis. To permit annual updating of the time-
and outside director stock ownership, have been varying covariates, we divided CEO tenure into
extensively studied in previous research (Boeker & fiscal years (Ocasio, 1994, 1999). In our sample,
Goodstein, 1993; Johnson et al., 1993; Lorsch & CEOs appointed before 1988 were subjected to left
MacIver, 1989; Ocasio, 1994; Weisbach, 1988). Be- truncation. To reduce the risk of an upward bias in
cause we included the proportion of non-CEO in- the estimates, we collected tenure information for
side directors as a predictor, we chose to include all the left-truncated CEOs and included all CEO-
only outside director stock ownership as a control. years, beginning in 1988, in our analysis (Tuma &
This measure was calculated as the proportion of a Hannan, 1984). This procedure also reduced loss of
firm's outstanding shares owned by directors who information and increased the statistical power of
were not current or past employees of the firm. the analysis.
To control for the impact of CEO power, we col- A critical decision in event history analysis is to
lected information about CEO duality (Finkelstein choosing an appropriate parametric model for the
& D'Aveni, 1994) and CEO stock ownership data (Yamaguchi, 1991). We started with the gen-
(Boeker, 1992). Duality was measured as a dummy eralized gamma model. The survival and density
variable with a value of 1 when a CEO also held the functions for the three-parameter generalized
title of chairman of the board and a value of 0 gamma model are
otherwise. CEO stock ownership was calculated as
the proportion of the firm's outstanding shares S(t) = 1 - I{k, k exp[z/(kl/2)]},
owned by the CEO. Finally, firm size may influence
the power dynamics within top management fAt)
be-= [Ik/F (k-2)] [k-2]l/k*kexp[k-2(kz - ekz)],
cause the CEO succession process at a large corpo- if k 0; or
ration may have become formalized or institution-
alized (Ocasio, 1999; Vancil, 1987). We measured f(t) = 1/[(2 r) 1/2] exp[ - 2/2z]if k = 0,
firm size as the natural logarithm of total sales and
included it as our last control variable. where I (k, a) is the incomplete gamma function
and z = [In (t) - A]/a. This model is implemented
by parameterizing Aj = Xjf and treating the k and cr
Analytical Methodology
as ancillary parameters to be estimated from the
In response to frequent calls for longitudinal data (Stata, 1999: 440). The hazard function of the
studies in succession research (e.g., Datta & Rajago- generalized gamma distribution is extremely flexi-
palan, 1998; Finkelstein & Hambrick, 1996), weble, allowing for a large number of possible shapes,
selected a continuous-time event history analysisincluding as special cases the Weibull distribution
to test our hypotheses. Event history analysis is an when k = 1, the exponential distribution when k =
established methodology for analyzing dynamic 1 and a = 1, and the "log-normal" distribution
process when the outcome of that process is a dis- when k = 0. We then estimated other functional
crete event (Tuma & Hannan, 1984). It was appro-forms, including Gompertz, Weibull, log-normal,
priate for our study of the effects of the powerexponential, and "log-logistic" models. Our analy-
dynamics within top management on CEO dis-sis suggested that the generalized gamma model
missal followed by inside succession because it provided the best fit and had the largest log-likeli-
takes into account the effect of time (that is, CEO hood with the smallest value on the Akaike infor-
tenure) in estimation. We conducted our analysis mation criterion (AIC; Akaike, 1974).
using the software package Stata, which provides Previous research has consistently demonstrated
maximum likelihood estimation of both monotonic that CEO dismissal is frequently the outcome of a
and nonmonotonic parametric models of duration power struggle between a CEO and outside direc-
dependence (Stata, 1999). Further, Stata allows es- tors (Boeker, 1992; Boeker & Goodstein, 1993; Can-
timation of survival-time models with time-varyingnella & Lubatkin, 1993). To test our theory and
covariates and takes "right censoring" of data (loss convincingly demonstrate that power dynamics
within top management groups simultaneously in-
of data on events occurring after the end of a study
period) into account by using the information pro-fluence CEO dismissal and subsequent inside suc-
vided by the cumulative survival time of censored cession, we conducted analyses not only on CEO
dismissal followed by inside succession, but also
subjects. Although succession is a repeatable event
from the perspective of a firm, it is nonrepeatable on CEO dismissal followed by outside succession

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2002 Shen and Cannella 1201

and CEO dismissal in general. The purpose was to itive impacts, and firm performance and CEO own-
examine the similarities as well as the differencesership both display negative impacts. Neither the
between the factors influencing CEO dismissal fol- proportion of non-CEO inside directors nor non-
lowed by inside succession and those influencing CEO executive ownership is significant.
CEO dismissal followed by outside succession. By
comparing the results, we hoped to be able to better
understand how the power dynamics within top DISCUSSION
management groups contribute to CEO dismissal,
and the limits to that influence. This study helps advance understanding of the
role of senior executives in CEO dismissal. Previ-

RESULTS ous governance and succession research has exam-

ined either CEO turnover (Boeker, 1992; Ocasio,
1994; Weisbach, 1988) or successor selection
Table 1 reports variable means, standard devia-
tions, and Pearson correlation coefficients for (Boeker
all & Goodstein, 1993; Dalton & Kesner, 1985;
Ocasio, 1999; Zajac & Westphal, 1996). Although
observations (all CEO-years). Table 2 reports results
from the event history analysis. Models 1 there and has
2 been little direct examination of how CEO
show results for CEO dismissal followed by inside dismissal influences successor selection, firm per-
succession; models 3 and 4, for CEO dismissal fol- formance has been consistently found to be nega-
lowed by outside succession; and models 5 and 6, tively associated with CEO dismissal and positively
for all CEO dismissals combined. Chi-squares for associated with inside succession (Finkelstein &
models 1 through 6 indicate strong model signifi- Hambrick, 1996; Kesner & Sebora, 1994). Given this
cance (p < .001). finding, we expected to see a negative relationship
We proposed that CEO origin as an outsider, between CEO dismissal and inside succession. Con-
early CEO tenure, the proportion of non-CEO inside trary to this logical inference, we found that 38 out of
directors, and non-CEO executive ownership the 65 dismissed CEOs (58%) in our study were suc-
would all increase the likelihood of CEO dismissal ceeded by insiders. Further, a comparison of the re-
followed by inside succession. In model 1, in sults reported above shows that the antecedents of
which ROA is the measure of performance, each of CEO dismissal followed by inside succession and
these four predictors displays a significant, positive
those of CEO dismissal followed by outside succes-
impact. In model 2, where shareholder return is thesion differ in important ways. Thus, to understand
measure of performance, three of the four predic-the role of senior executives in CEO dismissal, we
tors (except outsider CEO) display significant, pos- believe that it is important to examine dismissal and
itive impacts. These results support our hypotheses successor origin simultaneously because they often
and suggest that CEO origin as an outsider, earlyreflect the outcome of the same power dynamic pro-
CEO tenure, non-CEO inside directors, and non- cess (Pfeffer, 1981; Sonnenfeld, 1988).
CEO executive ownership all play important roles The view that interest conflicts and power con-
in heightening the likelihood of CEO dismissal fol- tests within top management groups are an impor-
lowed by inside succession. In contrast, in models tant cause of CEO dismissal has not been a focus in
3 and 4, where CEO dismissal followed by outside empirical studies of CEO succession. Instead, most
successor is examined, only early CEO tenure dis- extant research concludes that executives are allies
plays a positive impact. Outsider CEO, the propor- of their CEOs and that having several executives on
tion of non-CEO inside directors, and non-CEO ex- a board leads to managerial entrenchment (Walsh &
ecutive ownership all are insignificant. Seward, 1990; Weisbach, 1988). By examining CEO
Among the control variables, while firm ROA dismissal followed by inside succession and out-
and shareholder returns are negatively associated side succession separately, this study garnered in-
with both types of dismissal, outside director own- formative and revealing results. The two predictors
ership, CEO ownership, and firm size are only neg- capturing information about senior executives-the
atively associated with dismissal followed by in- proportion of non-CEO inside directors and non-
side succession. CEO duality shows a positive CEO executive ownership-both showed positive
association with dismissal followed by inside suc- impacts on CEO dismissal followed by inside suc-
cession in model 2, but it is negatively associated cession, but neither influenced the occurrence of
with dismissal followed by outside succession in CEO dismissal followed by outside succession.
models 3 and 4. Finally, in models 5 and 6, in Given that we controlled for the impact of firm
which both types of CEO dismissal are examined performance in our analysis, this finding suggests
together, only four variables are significant. Out- that having executives of a firm other than the CEO
sider CEO and early CEO tenure both display pos- on its board and giving executives stock ownership

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 TABLE 1
Variable Means, Standard Deviations, and Correlation Coefficients

Variable Mean s.d. 1 2 3 4 5 6 7 8 9 10 11 12 13 1

1. Dismissal 0.02 0.15
2. Dismissal, insider 0.01 0.11 .76
3. Dismissal, outsider 0.01 0.10 .64 -.01
4. CEO tenure 6.89 5.43 -.04 -.04 -.01
5. Outsider CEO 0.08 0.27 .03 .03 .01 -.22
6. Early years of tenure 0.52 0.50 .03 .03 .02 -.78 .23
7. Proportion of non-CEO 0.14 0.12 -.02 .00 -.03 .00 -.07 .01
inside directors
8. Non-CEO executive 0.04 0.08 -.01 .01 -.02 -.05 -.04 .04 .22
ownership
9. Firm ROA 0.05 0.06 -.05 -.02 -.05 .08 -.09 -.06 .05 .03
10. Industry ROA 0.03 0.02 .02 .02 .01 -.03 .02 .03 -.03 .02 .14
11. Shareholder returns 0.13 0.24 -.12 -.07 -.10 .04 -.01 -.03 .00 -.02 .19 -.02
12. Industry experience 0.99 0.11 -.003 .01 -.02 .07 -.39 -.08 .06 .02 -.02 -.02 .02
13. Outside director ownership 0.03 0.07 .03 .02 .03 -.01 .03 -.01 .04 .02 .10 .02 .01 .02
14. CEO ownership 0.03 0.07 -.03 -.04 -.01 .23 -.08 -.15 .15 .22 .02 .01 -.03 .03 .03
15. Duality 0.84 0.37 -.05 -.02 -.05 .15 .02 -.11 -.10 -.12 .05 -.04 .06 -.04 -.12
16. Firm size 7.25 1.45 -.02 -.01 -.02 -.08 -.07 .08 .02 -.15 .02 -.01 .08 .05 -.21

a Pooled data, with n = 2,965, are shown. Correlation coefficients greater than .04 or l

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 TABLE 2
Maximum Likelihood Estimates of Hazard Rate of CEO Dismissala

Dismissal Followed by Inside Succession Dismissal Followed by Outside Succession All Dismissals Co

Variables Model 1 Model 2 Model 3 Model 4 Model 5 Mod

Outsider CEO 0.42* (0.21) 0.04 ( 0.20) 0.15 (0.29) 0.21 (0.28) 0.68** (0.26) 0.63*
Early years of tenure 1.07*** (0.23) 0.82*** ( 0.21) 1.03*** (0.17) 1.03*** (0.16) 0.97*** (0.18) 0.99
Proportion of non-CEO inside directors 5.75*** (1.66) 4.46*** ( 1.35) -0.64 (0.78) -1.03 (0.77) 1.54 (0.99)
Non-CEO executive ownership 0.98* (0.63) 1.98** ( 0.74) -2.70 (2.34) -2.60 (2.26) 0.17 (0.94) 0
Firm ROA -1.78t (0.96) -4.22** (1.57) -2.21* (1.03)
Shareholder returns -1.56*** ( 0.45) ' -1.62*** (0.43) -1.78***
Industry ROA -0.15 (2.82) 0.83 (5.18) 5.68 (4.89)
Industry experience 1.98 (8.32) 1.80 ( 4.87) -0.47 (0.66) 0.21 (0.75) 0.74 (0.70) 0.8
Outside director ownership -4.33*** (1.11) -4.93*** ( 0.95) 0.45 (1.06) 0.38 (0.90) -1.02 (1.03) 0
CEO duality 0.11 (0.21) 0.41** (0.14) -0.44* (0.20) -0.35* (0.18) -0.16 (0.22) -0.2
CEO ownership -25.28** (9.22) -34.68** (13.40) -1.55 (1.63) -1.32 (1.51) -6.34** (2.26) -5.79
Firm size -0.20*** (0.03) -0.21*** ( 0.04) 0.01 (0.06) -0.01 (0.06) -0.08 (0.05) -0.0

Constant -0.86* (0.42) -3.68*** ( 0.74) -3.06*** (0.59) -3.18*** (0.49) -2.71*** (0.69) -3.32*
Log-likelihood -131.45 -128.29 -98.39 -91.82 -211.96 -200.
Model chi-square 60.85*** 65.97*** 36.00*** 48.39*** 54.16*** 78.72

a Standard errors are in parentheses; t-tests were one-tailed for hypothesized eff
p < .10

* p < .05
** p < .01
*** p < .001

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1204 Academy of Management Journal December

can limit the CEO's influence and increase execu- succession. This finding corroborates the proposi-
tives' incentives and ability to challenge the CEO. tion that CEOs are in weak positions and are at high
A competing explanation for our results is that risk of power contests in the early years of their
the positive impact of non-CEO inside directors on tenures (Ocasio, 1994).
dismissal followed by inside succession does not The two control variables for aspects of CEO
reflect the power dynamics occurring between a
power provide additional clues about the power
CEO and senior executives. Instead, outside direc- dynamics at the tops of firms. CEO ownership
tors may have taken the lead in dismissing the CEO shows a negative impact on dismissal followed by
and subsequently picked an inside successor be- inside succession, but it shows no impact on dis-
cause there were sufficient inside candidates avail- missal followed by outside succession. This result
able. This alternative explanation has some appeal. suggests that stock ownership increases a CEO's
However, if this scenario prevailed, we would ob- influence within top management. CEO duality
serve a significant, negative association between shows a negative impact on dismissal followed by
the proportion of non-CEO inside directors and outside succession and some positive impact on
dismissal followed by outside succession, rather dismissal followed by inside succession. This pat-
than the insignificant relationship found in this tern suggests that although being chairman of the
study. Similarly, without reference to power chal- board increases a CEO's influence over outside di-
lenges to a CEO by senior executives, it is difficult rectors, it may also increase the CEO's vulnerability
to explain the positive impact of non-CEO execu- to challenges from within the top management
tive ownership on dismissal followed by inside group, because duality makes it difficult for the
succession and its insignificant impact on dis-CEO to blame others for low performance (Harri-
missal followed by outside succession. We thus son, Torres, & Kukalis, 1988). Thus, we surmise
believe that the above results support our proposi- that stock ownership and duality play different
tion that senior executives are potential power con- roles in a CEO's dealing with senior executives and
tenders and play an important role in CEO dis- outside directors. Finally, the negative impact of
missal followed by inside succession. As to the firm size suggests that power contests within top
insignificant impact of senior executives on dis- management are more frequent in smaller firms.
missal followed by outside succession, our expla-
nation is twofold. First, because their careers and
Limitations and Directions for Future Research
personal wealth are at stake, senior executives may
not resist outside succession if it is the best choice This study advances understanding of the role of
for their firm. Second, and more likely, senior ex-senior executives in CEO dismissal, but it has lim-
ecutives may simply not have much influence itations. First, like most researchers taking a power
when outside directors take the lead in CEO dis- perspective, we did not directly observe the power
missal and successor selection. dynamics leading to CEO dismissal discussed in
Our results about the impact of outsider CEO andour theory. Instead, we examined the antecedents
early CEO tenure are also informative. The positiveand outcomes of that process. Although the results
impact of outsider CEO on dismissal followed by support our power-based arguments, it would be
inside succession disappears when shareholder re- desirable to have field research to corroborate the
turns replace ROA as the performance measure. findings of this study. Second, our identification of
This result and the significant, negative impact ofCEO dismissals was not based on firsthand infor-
shareholder returns in model 4 together suggest mation and may include some errors despite our
that the higher risk of CEO dismissal followed by efforts to avoid them. Third, given the focus of our
inside succession faced by outsider CEOs is primar-study and constraints on the availability of finan-
ily a consequence of their firms' low performance cial information, we divided CEO tenure into fiscal
in the financial market. However, when all CEO years. Fiscal year may be a relatively coarse mea-
dismissals are examined together, we still find a sure, despite its frequent use as a metric in organi-
higher risk of dismissal among outsider CEOs even zational research. A finer measure of CEO tenure
after controlling for firm accounting and market may be needed to facilitate closer examination of
performance and CEO industry experience. We the power dynamics within top management dur-
speculate that this higher risk of dismissal for out- ing the early years of a CEO's tenure. Such a finer
sider CEOs is a result of their lacking social net- measure would be especially useful to test for the
works and power bases within their new firms. existence of the "honeymoon" between a new CEO
Early CEO tenure shows a consistently strong and and a board that is often discussed in the business
positive impact on both dismissal followed by in- press.
side succession and dismissal followed by outside The internal monitoring argument of corporate

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2002 Shen and Cannella 1205

governance suggests that inside directors challengeDaily, C. M., Johnson, J. L., & Dalton, D. R. 1999. On the
a CEO when firm performance declines and the measurements of board composition: Poor consis-
CEO's capability is questioned (Fama, 1980; Oca- tency and a serious mismatch of theory and opera-
sio, 1994). In contrast, our results show that CEO tionalization. Decision Science, 30: 83-106.
dismissal followed by inside succession does not Dalton, D. R., & Kesner, I. F. 1985. Organizational perfor-
always derive from a CEO's lack of capability in mance as an antecedent of inside/outside chief ex-
that our power-related predictors displayed signif- ecutive succession: An empirical assessment. Acad-
icant main effects after we controlled for firm per- emy of Management Journal, 28: 749-762.
formance and CEO industry experience in analyses.Datta, D. K., & Rajagopalan, N. 1998. Industry structure
This finding suggests that outside directors need to and CEO characteristics: An empirical study of suc-
closely monitor the power dynamics within top cession events. Strategic Management Journal, 19:
management and make sure that the competition is 833-852.
under control and contributes to firm operations. Denis, D. J., & Denis, D. K. 1995. Performance changes
For management researchers, it will be important to following top management dismissals. Journal of
examine the interaction between CEO capability Finance, 50: 1029-1057.
and senior executive power in future research to
Dess, G. G., Ireland, R. D., & Hitt, M. A. 1990. Industry
fully identify the causal mechanisms underlying
effects and strategic management research. Journal
CEO dismissals. In addition, by demonstrating the
of Management, 16: 7-27.
effects of power dynamics within top management
Edwards, J. R. 1995. Alternatives to difference scores as
on CEO dismissal, our study suggests that there are
important differences among inside CEOs. To bet- dependent variables in the study of congruence in
ter understand the performance consequences of organizational research. Organizational Behavior
and Human Decision Processes, 64: 307-324.
inside succession, it is necessary to separate inside
CEOs appointed following their predecessors' dis- Fama, E. F. 1980. Agency problems and the theory of the
missal from those appointed following their prede- firm. Journal of Political Economy, 88: 288-307.
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2002). This implication may be equally applicable Dimensions, measurement, and validation. Acad-
to the study of the performance impact of outside emy of Management Journal, 35: 505-538.
CEO succession.
Finkelstein, S., & D'Aveni, R. A. 1994. CEO duality as a
double-edged sword: How boards of directors bal-
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