| Corporations are the most important business form in the modern economy accounting for the vast preponderance of value added. Consequently, how well they function substantially determines how well the economy functions. Corporations are governed both by formal legal rules and by market pressures coming from product, labor, and capital markets, including the market for corporate control. In both legal and economic theory, shareholder interests should be foremost in corporate governance, meaning that the directors and managers of a corporation should always act in the shareholders' best interests. Economists justify this paramount consideration of shareholders' interests by citing the shareholders' status as the residual claimants to the corporation's profits. Economic theory and research also tell us that shareholders will be interested in very little other than stock returns. Thus, we would expect that, if directors of corporations make their decisions to retain or replace the corporation's CEO according to the best interests of shareholders, the performance of the corporation should be a critical factor and little else should matter.;Using a sample that is larger (nearly 10,000 observations) and more recent (1999-2006) than in previously published work, I study board decisions to retain or replace CEOs ("CEO turnover"). I find such decisions are based on both accounting and stock return results and depend critically upon how the directors and the CEO respectively control company stock. Greater CEO control discourages turnover while greater control among directors other than the CEO relates directly to turnover. In addition, among poorly-performing firms in general and among poorly-performing firms with CEOs below normal retirement age, the presence on the board of employees other than the CEO, the CEO serving as chairman, and large board size all appear to entrench the CEO vis-a-vis the board. Classified boards (i.e.--those with staggered election terms among directors), board independence, independence of the nominating committee, and the presence of outside blockholders do not matter to turnover. All of these results apply even among the subset of CEOs who are below normal retirement age. |
