Just like single people looking for the perfect date for a party, companies need to find an executive who is the right match at the right time. But what drives the quest for a new executive partner, and why do some CEOs get sacked while others hold on to their jobs? In the past, CEO turnover has been studied by a number of researchers—but examinations tended to conclude that companies mostly dumped the worst performers in their industry. In short, as long as a CEO was not at the bottom of the heap, he or she would stay in the position.

There was one puzzling element from the prior research, though. Data showed that if the overall industry was doing well, CEOs at underperforming firms were fired at a rate that was understandably higher than those at well-performing firms. But when the industry suffered a setback, CEOs of bottom performers were even more likely to be let go relative to CEOs of top-tier companies. It is common for boards to compare CEOs with their peers within the same industry. But their performance should not be evaluated independent of industry conditions, according to Camelia Kuhnen, an associate professor of finance at the Kellogg School of Management, and Andrea Eisfeldt, an associate professor at the University of California, Los Angeles. Industry conditions matter both when evaluating CEOs and when looking to replace a poor performer.

“We don’t think that it’s surprising that industry conditions matter,” Eisfeldt says, “because these conditions impact the outside options of CEOs and firms.” She notes that if regulations have changed, or if international competition has stepped up, then there could be a mismatch between the talents of a CEO and the appropriate strategy going forward. Taking the leap to fire a manager is a big decision—after all, there are fixed costs to firing an executive. In addition to severance, there is a loss of productivity while the board searches for a replacement. Plus, there are fees to replace the outgoing executive and often a salary bump for the person coming into the job.

Industry conditions matter both when evaluating CEOs and when looking to replace a poor performer.

Kuhnen and Eisfeldt created a model that shows that firms seem to understand this need for having the right CEO in place. As industry conditions change, there is a reshuffling of top executives across firms, and only the CEOs with the highest amount of skills that only relate to their type of business are kept in place; the rest are replaced, most likely from within the industry, but when the industry is down a firm is more likely to pull in someone from the outside. It all has to do with having the right skill set at the right time.

Management Style Matters
Ideally, a CEO would possess several skill sets, but an executive typically falls into one of two categories. Either an executive is sharp at growing the business by doing things like getting more clients, raising capital, or building up a strong team, or she is good at improving efficiency by implementing cost-cutting measures, firing people, or selling divisions that are not pulling their weight. “Our paper shows that managers do have fixed abilities—you could call it a style,” Eisfeldt says.

“CEOs usually have a competitive advantage in one dimension,” Kuhnen adds, explaining that that advantage has to do with both prior experience and personal inclination.

In building a model of which managers were fired and which were hired, Kuhnen and Eisfeldt relied on empirical data to compare with their theoretical framework. They used ExecuComp for the names and compensation of the CEOs of 2,779 publicly traded companies between 1992–2006, CRSP/Compustat for stock returns and accounting data, and Factiva for news stories published in a three-year window around CEO departures. The Factiva data contains clues about the reason why a CEO left and where the replacement CEO came from. Either the executive chooses to leave, or she is forced to go—and most of the time it seems to be a combination of both situations, say Kuhnen and Eisfeldt. Their theoretical predictions about who would be retained and who would be fired matched the data quite well.

Kuhnen says that reality is full of examples of finding the right person for the right job—examples like Robert Nardelli, who used to be one of the top executives at General Electric. When he was not chosen to be Jack Welch’s successor, he left and immediately was hired as the CEO at Home Depot. At Home Depot, Nardelli was a model of the efficiency-seeking manager.

“Nardelli came in and decided that he was going to make Home Depot stores run more efficiently by firing people on the floor who knew how to advise consumers, and taking away cashiers who also had a lot of knowledge and replaced them with automatic checkout machines,” Kuhnen says. “The biggest problem was that Home Depot did not need a cost-cutter; they needed to grow differently, go forward differently.” Nardelli departed in 2006, after many shareholders voiced their concerns, and became the CEO of Chrysler, where cost-cutting was a skill that was needed.

The Replacements
When an industry is shaken up by deregulation or international competition, profits often take a nosedive. Kuhnen and Eisfeldt’s theory says that at those times, the need for strategic change is the biggest. Firms often look outside their industry to people with high levels of the newly desirable general skill—and people who demand a high price.

When the need for new blood is the greatest, so is the need to fit the correct person to the position. “Someone with the right skills gets paid a lot, and someone with the wrong skills won’t get paid as much,” Kuhnen notes.

Eisfeldt adds that bringing in an outsider can speak volumes about the state of the industry. “It’s a huge action, which speaks to the fact that firm really needs something different. It tells you that whatever strategy they were doing before really isn’t best.”

The real world also entered the research of the Kellogg professors. The authors were writing a revision of the paper at the time of the bailouts for Bank of America and General Motors. “It was interesting that many of the auto firms terminated their managers, but the finance firms didn’t,” Eisfeldt says. “Maybe there are more firm-specific skills and industry knowledge needed to run these financial firms whereas in the automotive industry, general skills dominate the managerial contribution.”

Outside conditions are not the only factors that matter—firms that are not performing well are still more likely to force their executives out. In the past, researchers thought that boards are trying to learn whether their CEOs are smart compared to their peers, Kuhnen says. “It could very well be that in those firms, it’s particularly important to bring in someone who has the right skills. No matter how high the incentives, the wrong person won’t push your firm forward.”

And about those other researchers, who found a puzzle in the fact that managers got fired when the industry was doing badly? “Our paper has opened up a new part of the debate,” Eisfeldt points out. “We argue that the fact that industry conditions matter does not mean that boards act differently in booms versus recessions. They are always looking for the best match, but more matches deteriorate as industry conditions change.”


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