In a business environment where heads of companies are increasingly
held accountable for performance and boards are willing to use their
muscle to push them out, CEOs are being handed pink slips more frequently
than ever before. So what does that mean for the rest of the company's
top executives? Can they perform as successfully with a different
CEO? Does it mean the rest of top management will also turn over?
It may seem intuitive that top executives would pack their bags along
with the CEO, but whether the whole executive team leaves depends
on how long both the incoming CEO and the top executives have been
at the firm. So says Paul Oyer, an associate professor of economics
at the Stanford Graduate School of Business.
In general, "when one person leaves other people are likely to leave,"
says Oyer. But the probability of turnover soars when the new CEO
comes from another firm. "When an outsider takes over a firm, that
really has a big effect on the top management. When an insider moves
up, you don't see nearly as much overall cleaning of house. Relationships
within those groups mean something."
In a research paper by Oyer, Rachel M. Hayes, associate professor
of accounting at University of Chicago's Graduate School of Business,
and Scott Schaefer, an associate professor of management and strategy,
the researchers show
The probability that a top manager will leave if the CEO departs and
is replaced by another internal top manager is nearly 15 percent.
That number doubles to 30 percent if the new CEO is from outside
the firm.
The likelihood of senior management turnover also depends on how long
the CEO and the top executive have worked together. A top manager,
for example, who is relatively new to the firm is less likely to
depart when a CEO departs.
Relationships ? not corporate boards, strategy shifts, or losing out
on the promotion ? drive turnover.
While the connection between CEO and top-level management turnover
is not entirely new, this is the first time researchers analyzed
hard data on executive compensation and on Fortune 500 firms' layoff
announcements to explore theories of relationships among top managers.
What really matters when it comes to turnover, the researchers discovered,
is how much the CEO and a top-level executive have invested in their
relationship. Consider, for example, a senior executive who has been
working with the CEO for years. The two have developed a shared jargon
and an understanding of each other that makes overcoming crises and
decision-making easier and quicker. Because of the investment they've
made in their working relationship, they are more productive working
together than with others.
The researchers call this a "complimentarity" between a CEO and manager.
(Think of the old adage: "the whole is greater than the sum of the
parts.")
So if the CEO departs, where does that leave the manager? Less productive
? and less valuable to the firm. "Executive A is more productive
if executive B is there," says Oyer. "If executive A leaves the firm,
then executive B's value to the firm has gone down. He might leave
the firm because outside opportunities look more attractive or because
without executive A, the firm decides he's not worth what he used
to be."
The rate of turnover therefore is highly correlated to the length
of time both the top executive and incoming CEO have been with the
firm. If, for instance, the manager has been with the firm for a
long time and if the incoming CEO is either new or from another company,
the turnover rate increases significantly. In this case, the executive
who remains behind has lost much of her value to the firm since she
went from working extremely well with the old CEO to knowing very
little about how the incoming CEO operates.
On the other hand, if the remaining executive is relatively new to
the firm, he has little working relationship with either the old
CEO or the new CEO. When the CEO changes, he has neither lost nor
gained value and so is less likely to be affected.
To be sure, the researchers point out, relationships are not always
built over a long period. In some cases the probability of turnover
could simply be a question of whether the new CEO and top manager
click. The researchers call this idea "matching up front" ? or spending
time at the outset figuring out whether they can effectively work
together. It might not matter, for example, if a new outside CEO
doesn't have a relationship with a top manager. It may just be that
they have different operating styles and therefore the non-CEO is
forced to leave.
Either way, the driving factor in turnover remains interpersonal relationships,
the researchers stressed. Their research suggests, for example, that
changes in firms' strategies are not a primary cause of top management
turnover. "The way they do business is important, not necessarily
what kind of business they're going to do," says Oyer. The data also
suggest that, while boards might throw out a bunch of top managers
when a firm's performance lags, this is not a primary factor driving
the connection between CEO turnover and departures of other top managers.
Another theory set straight: top managers who don't get the CEO promotion
aren't always handed their walking papers. Yes, Jack Welch in his
book Jack: Straight from the Gut, chronicled how most of the top
management was forced out of GE after he hand-picked his successor.
But says Oyer, "the GE experience is the exception to the rule. Usually
there is more stability when an insider takes over." The reason?
The top managers who lost out on the promotion still have a valuable
relationship with the new CEO and the other competitors. Therefore,
they are more valuable at the original company than elsewhere.
by Sarah Robertson
FOR MORE INFORMATION:
Helen K. Chang, 650-723-3358, Fax: 650-725-6750
To order a paper in the GSB Research Paper Series (numbered papers
only), email research_papers
@gsb.stanford.edu
Co-Worker-Specific Investments and Stability of Top Management Teams
Rachel M. Hayes, Paul Oyer, and
Scott Schaefer
Stanford Research Paper No. 1846, 2004
CEO Succession 2002: Deliver or Depart
Chuck Lucier, Rob Schuyt, and Eric Spiegel
Booz Allen's Strategy and Business magazine, Summer, 2003
Passing the Baton: Managing the Process of CEO Succession
R.F. Vancil