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Review of Managerial Science

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01.07.2013 | Original Paper

The influence of top management corporate networks on CEO succession

verfasst von: Benjamin Balsmeier, Achim Buchwald, Stefan Zimmermann

Erschienen in: Review of Managerial Science | Ausgabe 3/2013

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Abstract

We analyze empirically how supervisory board members with multiple directorships affect the decision to hire an inside or outside CEO successor. While a growing number of both theoretical and empirical studies analyze the influence of corporate performance and size or the ownership structure on this decision, the role of multiple board memberships within the CEO recruitment process has been widely neglected so far. The present study is based on panel data of the largest German companies covering the period from 1996 to 2008. Applying competing risk estimations we find a weak and positive association between the number of external directorships of the supervisory board members and internal CEO replacements. Distinguishing between different groups of external board positions, we find that external executives on the supervisory board increase the likelihood of external CEO replacements. In line with empirical findings for the US we argue that external executives improve the assessment of potential CEO successors leading to more outside CEO replacements. In contrast, we find evidence that external supervisory board mandates of the supervisory board members cause more internal CEO replacements. This finding indicates a substitution of external expertise of the executives by multiple supervisory board mandates but could also reflect a reduction of the monitoring intensity of the supervisory board.

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In another string of literature based on agency theory it is analyzed how the type of succession influences the candidates’ incentives to effort (Chan 1996).

For a comprehensive overview on the cooperation between management and supervisory board see the German Corporate Governance Code, amended on May 26th 2010 and Ringleb et al. (2010).

A respective recommendation, that the departing CEO should not directly become chair of the supervisory board, is included in the German Corporate Governance Code since 2005 (article 5.4.4), but in rather mild phrasing.

Alternatively, we tested the effect of return on equity as a measure of performance that yielded similar results. Therefore we do not report them. For the influence of firm performance on CEO turnover see e.g. Fich and Shivdasani (2006) or Jenter and Kanaan (2008).

Consequently, we neglected external supervisory board positions of union representatives. Further, we identified no multiple directorships of employee representatives who are salaried employees of the respective company. Estimations accounting for all external supervisory board positions yielded similar results. A variable controlling for the influence of external supervisory board positions of the employee representatives yielded insignificant coefficients.

In alternative specifications we also included the number of external managers on the supervisory board who represent voting blocks to analyze their influence on CEO turnover. Since the covariates remained insignificant for both risk types and since the expected exercise of influence of these supervisory board members on the succession decision is likely to follow different underlying incentives, we do not report the respective estimation results. Alternatively, we further tested for the effect of outside supervisory board memberships of the CEO and his colleagues on the management board, but did not find any significant effect. Thus, we do not report these results either.

In the case of abrupt turnover events like forced departures or replacements following disease or headhunting, the replacement process may follow a different proceeding (see for example Gregory-Smith et al. (2009) who show that baseline hazard rates vary depending on the specific failure types).

See also Ringleb et al. (2010) and the explanations in Sect. 3.1.

See German Corporate Governance Code, amended on May 26th 2010, article 5.2.

The German Corporate Governance Codex, updated May 26th 2010, article 5.3.3 recommends that the nomination committee should be exclusively composed by shareholder representatives.

The correlation coefficient of 0.73 in Table 3 indicates that the cumulative number and the fraction of external supervisory positions are different network measures. However, the correlation between the total number of external management positions and the fraction of external managers on the on the supervisory board is almost one since the members of the supervisory board in the sample hold at most one external management position.

Indeed, also the Codex refers to current legal changes, notably since critical recommendations have not been implemented by companies.

In alternative tests, we used the periods 2002 resp. 2004 to 2008 as well as the inclusion of year dummies that yielded similar results.

Following this approach, we disregard alternative reasons for failure like disease or headhunting.

Parrino (1997) and Parrino et al. (2003) also use an age limit of 60 years within their approach to identify forced turnovers. Alternatively we re-estimated the models using the mean retirement age (59 years) and an age limit of 61 years that both yielded similar results.

Tian et al. (2011) do not differentiate between external ties to active managers (or CEOs) or to outside directors when they analyze shareholders’ reaction to CEO appointments.

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Titel: The influence of top management corporate networks on CEO succession
verfasst von: Benjamin Balsmeier
Achim Buchwald
Stefan Zimmermann
Publikationsdatum: 01.07.2013
Verlag: Springer-Verlag
Erschienen in: Review of Managerial Science / Ausgabe 3/2013
Print ISSN: 1863-6683
Elektronische ISSN: 1863-6691
DOI: https://doi.org/10.1007/s11846-011-0073-6

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