Skip to main content

Does Firing a CEO Pay Off?

The chief executive officer (CEO) and the top management team are typically viewed as critical to the success or failure of companies. As it is not uncommon for top executives to make value-destroying decisions, the role of internal control mechanisms, such as oversight by a board of directors (BoD), is to safeguard the interests of shareholders by replacing poorly performing incumbent CEOs with new ones.

Columbia Article small

But does it pay to fire underperforming CEOs? Doing so can cost shareholders a bundle in severance packages and golden parachute payments. When CEOs at Hewlett-Packard, Bank of New York Mellon, Yahoo!, Kellogg’s, and United Airlines were asked to step down, they walked away with severance packages of tens of millions of dollars. In the S&P 500, CEOs are entitled to receive an average of $22 million in the event they are fired.

The corporate investment decisions of CEO successors offer fundamental insights into the corporate performance-resuscitating role of CEO replacements and whether they improve corporate decision making. Recent research has highlighted the importance of corporate investment decisions in CEO careers, with poor investment results a key reason for forced CEO exits. This is not surprising in view of the paramount importance of corporate investment for the operating and stock performance of a listed company as well as for the whole economy (in 2017, U.S. companies invested more than $4 trillion in growth). To address this question, research has focused on Mergers and Acquisitions (M&A) – the most important form of corporate investment with clearly measurable outcomes – and has documented that poorly performing bidders (those that undertake value destroying M&A) are more likely to be fired.

Yet, two important questions remain: Do new CEOs beat their predecessors’ record of firm performance through superior M&A and other investments? And can monitoring mechanisms linked to the firm’s corporate governance and ownership structure improve the firm’s investment performance through superior CEO hiring decisions?

Read the full story on the Columbia Law School Blue Sky Blog

Published 20 July 2018

You might also like

Keith Checkley awarded for contributions to financial services sector

25 November 2015
ICMA Centre’s Executive Education programme director and trainer Keith Checkley has been designated an Honorary Fellow of the Bahamas Institute of Financial Services in recognition of his significant contribution to the financial services sector.

Infrastructure Funding, Finance and Institutional Investment - a new guide by Professor Brian Scott-Quinn

28 August 2015
Infrastructure is the new buzzword in finance these days even though infrastructure has been important at least since the days when the Romans built their roads across Britain and Europe. The difference today is that increasingly the government says it cannot finance such infrastructure - roads, railways, power generation, telecoms, airports etc. The telecoms industry is already completely privately owned in most countries as are an increasing number of airports across the world. But governments everywhere are now looking ever more to public private partnerships (PPPs) to provide the annual funding (the annual revenues required to service bank loan and bond interest payments and capital repayments and equity dividends) as well as the actual financing (the arranging of bank loans, bond issues and equity share issues) to provide the cash up-front.
Research news

BBC South today broadcast live from the ICMA Centre

6 December 2013
Professor Adrian Bell, Head of the ICMA Centre, was interviewed by BBC South on Thursday 05 December 2013. The BBC broadcasted live from one of the ICMA Centre's dealing rooms which was filled with students engaging in a trading simulation. The interview was reflecting on the Chancellor’s Autumn Statement.