Chief executives: beware of election time in the boardroom—and not just in your own boardroom. As corporate directors draw nearer to reelection for their various board seats, they become much more willing to fire poorly performing CEOs.
Vyacheslav Fos of Boston College, Kai Li of the University of British Columbia, and Margarita Tsoutsoura of Chicago Booth analyzed 30,867 directors nominated for election between 2001 and 2010, looking at about 4,000 firms that collectively experienced 878 CEO turnover events. The researchers created a variable they call “distance-from-election” by looking at all of a director’s seats on various boards and averaging the time remaining before reelection for each. They find that as a director’s distance-from-election shrinks, the more sensitive she becomes to CEO underperformance.
“In terms of economic significance,” the authors write, “a one-year change in distance-from-election is associated with a 23 percent change in CEO turnover–performance sensitivity.”
Board elections in the United States are typically held annually, with either one-third of a company’s board seats or all of them put up for election every year. Individual director data for the study came from BoardEx, which tracks directors across time and firms. The researchers compared their distance-from-election findings to CEO performance, which they measured by calculating changes in return on assets. Corporate data came largely from Compustat and the federal government’s EDGAR website.
The authors used several experiments to rule out alternative explanations. For example: boards that fired their CEOs may have done so after bringing in more-critical directors as performance deteriorated. But the rise in CEO turnover didn’t change even when the study was limited to directors with tenure of at least three years.
Furthermore, CEO turnover at one company may be related to the schedule of board elections elsewhere, since each director’s sensitivity to poor performance appears to be driven by the election calendars at all the businesses at which she holds board seats. For each company in their sample, the researchers repeated their calculation of distance-from-election for the relevant directors, but excluded the election schedule at the company in question. They find that the relationship between distance-from-election and CEO performance sensitivity remained largely the same.
“Overall,” the authors write, “the evidence suggests that CEO turnover events are associated with directors retaining more board seats . . . both on the event firm board and on other boards.”
Vyacheslav Fos, Kai Li, and Margarita Tsoutsoura, “Do Director Elections Matter?” Working paper, July 2015.