CEO turnover: Cross‐country effects

• Published date: 01 November 2023
• Author: Natasha Burns,Kristina Minnick,Laura Starks
• Date: 01 November 2023
• DOI: http://doi.org/10.1111/corg.12506

EDITOR'S PICK

CEO turnover: Cross-country effects

Natasha Burns

1

|Kristina Minnick

2

|Laura Starks

3

1

The University of Texas at San Antonio, San

Antonio, Texas, USA

2

Bentley University, Waltham, Massachusetts,

USA

3

University of Texas at Austin, Austin, Texas,

USA

Correspondence

Natasha Burns, The University of Texas at San

Antonio, San Antonio, TX, USA.

Email: natasha.burns@utsa.edu

Funding information

No funders are available.

Abstract

Research Question/Issue: We examine how countries' cultural and legal environ-

ment, in addition to firm-level governance mechanisms, affects firms' retention and

termination decision of the CEO.

Research Findings/Insights: Previous research focuses primarily on the effects of

governance structures and incentives on turnover. In this paper, we focus on two

additional institutions—cultural and legal. We find that in cultures characterized by

higher individualism, competition, and stronger views that hard work leads to suc-

cess, boards are more likely to replace CEOs in response to poor shareholder perfor-

mance. Conversely, we find that in more corrupt cultures and cultures more

protective of employees, there is lower turnover–performance sensitivity.

Theoretical/Academic Implications: Williamson (2000) provided a framework con-

sisting of four levels of institutional influences on economic activity: (1) cultural

norms, (2) the legal system, (3) governance structures, and (4) resource allocation and

employment. Previous research focuses primarily on the two highest levels; we focus

on the two more basic levels, cultural and legal, while controlling for firm-level

governance.

Practitioner/Policy Implications: Cultural values and legal conditions combine with

the firm's governance structure to affect CEO turnover and its sensitivity to firm

shareholder performance.

KEYWORDS

corporate governance, CEO turnover, culture

1|INTRODUCTION

Chief executive officers (CEOs) are considered critically important to

the functioning of a corporation, providing the key leadership role for

the company's operations. Just as important is the corporate board

that determines whether to keep or dismiss the CEO. Boards rely on

their learning about the CEO's ability, how that ability matches with

the firm's current needs, and the labor market for replacement CEOs.

In fact, the board's CEO recruitment, retention, and termination deci-

sions are among the most important decisions that they make.

1

Previ-

ous research has shown that the board's learning process and

subsequent actions around the turnover decision depend on a number

of factors.

2

Important aspects of the board's contracting and

monitoring process that have not been extensively studied are the

country environments in which the boards and their management

teams operate. Consequently, in this paper, we seek to understand

the channels through which culture may affect governance, particu-

larly the CEO turnover decision.

We utilize Williamson's (2000) framework for institutional influ-

ences on economic activity to understand the roles of culture and

governance mechanisms in the performance sensitivity of the CEO

dismissal decision. The framework consists of four levels of institu-

tional influences on economic activity, with each level influencing the

next. At the base level lie the social norms and cultural influences,

which he terms embeddedness: informal institutions, customs, tradi-

tions, norms, and religion. The other three levels include the legal

Received: 6 April 2022Revised: 11 November 2022Accepted: 17 November 2022

DOI: 10.1111/corg.12506

820 © 2023 John Wiley & Sons Ltd.Corp Govern Int Rev. 2023;31:820–844.wileyonlinelibrary.com/journal/corg

system, which defines and enforces the formal rules of contracts, the

governance structures, and finally, resource allocation and employ-

ment (prices and quantities; incentive alignment). Considering the role

of the corporate board within Williamson's more general framework

suggests that CEO recruitment, retention, and termination decisions

should be outcomes of the environment in which the firm exists. In

particular, the cultural values, regulatory and legal conditions that sur-

round the firm, and the firm's own governance structures would be

expected to affect the decisions. Previous research has focused pri-

marily on the two highest levels, that is, governance structures and

incentives, and there has been less attention paid to the two more

basic levels, cultural and legal. Based on Williamson's framework, we

consider how a country's cultural values, intertwined with the legal

and regulatory regimes in which a company operates, provide the

structure, restrictions, and influences on how board decisions are

made.

3

Employing a cross-country sample, we focus on the board's CEO

contracting and monitoring process and whether it is influenced by

the cultural, legal, and regulatory environments in which the company

operates. Based on Welzel's (2013) novel approach to measuring cul-

ture, we use responses in the World Values Survey (WVS) to create

multidimensional proxies of a country's cultural attitudes toward indi-

vidualism, hard work, competition, corruption, and union protection.

Institutional measures include the legal environment using Spamann's

(2010) shareholder protection index and the regulatory environment

using labor protection proxies derived from World Bank data. Some

countries' regulatory systems provide more protection of employees

from dismissal. In such countries, CEOs could also receive this protec-

tion through an explicit contract (e.g., Gillan et al., 2009) or through

labor market restrictions (e.g., Edmans et al., 2020) that permeate the

social norms, even if there are no explicit regulations that cover cor-

porate executives. This system of beliefs for shareholder protection

versus stakeholder protections may influence the CEO turnover deci-

sion. We test for the effects of these institutional influences on the

board's CEO turnover decisions while controlling for firm-specific

characteristics such as CEO tenure, age, firm governance characteris-

tics, and a direct measure of hierarchy within the organization

(as Urban, 2019, showed that hierarchical cultures are related to the

turnover decision), institutional ownership, director industry experi-

ence, and state and family firm status.

Our empirical tests provide strong support for the hypothesis that

all of the “levels”in Williamson's framework—culture, law, regulatory,

and governance—are related to the CEO turnover decision, even after

controlling for organizational hierarchy. CEO turnover is systematically

associated with a country's cultural values. Specifically, we find that in

cultures characterized by higher individualism, competition, and stron-

ger views of hard work as important to success, CEO turnover is more

sensitive to poor performance. Conversely, we find that in more cor-

rupt cultures and cultures that are supportive of union protection,

CEO turnover is less sensitive to performance. In addition, we find

that CEO turnover occurs less often in countries with strong labor

protection laws while countries with strong shareholder rights, that is,

greater shareholder protection, exhibit a higher rate of CEO turnover.

We conduct a factor analysis of the cultural and regulatory vari-

ables, which are highly correlated, to consider whether and how their

common elements are associated with CEO turnover. The factor anal-

ysis groups the variables into two factors: Factor 1 (F1) includes indi-

vidualism, competition, and hard work, while Factor 2 (F2) includes

corruption and union protections. We find that in cultures character-

ized by higher individualism, competition, and stronger views of work

(F1), CEO turnover is more sensitive to performance. Specifically,

boards are more likely to replace CEOs in response to poor idiosyn-

cratic performance based on CEO skill in countries with higher F1.

Conversely, we find that in more corrupt cultures and cultures that

are supportive of union protection, there is lower CEO turnover–

performance sensitivity. Moreover, a separate analysis of countries

scoring high (low) on F1 and F2 shows a statistically significant differ-

ence in the turnover relationships by cultures. The result suggests that

country's cultural values influence the effect of other institutions and

firm-specific governance on the board's turnover decision. This is con-

sistent with Williamson's framework.

Williamson (2000) stated that research in institutional economics

has primarily focused on levels two and three of the model of institu-

tional influences on economic activity, while level one is under-

researched. Our paper contributes to the literature by first showing

that board monitoring of CEOs varies across countries in systematic

ways that are associated with the countries' cultural, legal, and regula-

tory structures. Throughout our analysis, we control for Williamson's

two upper levels (firm-level governance structures and incentives) and

their association with board decisions on CEO turnover. To do so, we

incorporate the internal governance structure of the firm (board inde-

pendence, CEO power [i.e., CEO–Chair duality], and director soft

information [through industry experience]), external governance struc-

ture (institutional investor ownership, family ownership, and state

ownership), and managerial hierarchical power (CEO tournament

structure). Previous research has shown the importance of each of

these components individually.

4

We find that regardless of our con-

trols, country culture is an important influence on boards' CEO turn-

over decisions. Thus, we incorporate the under-researched level one

with the other levels.

Similarly, we also contribute to the growing literature on how

societal and cultural norms are associated with economic outcomes.

Our empirical analysis supports the hypothesis that cultural values

influence the effectiveness of legal, regulatory, and governance mech-

anisms on a board's contracting with its CEO, which is consistent with

previous work on the effects of culture on economic outcomes

(e.g., Ahern et al., 2015; Burns et al., 2017; Frijns et al., 2013; and

Guiso et al., 2009).

5

We also contribute to the extensive literature on CEO turnover.

Most of the research has examined US CEOs with a few exceptions.

Using much earlier data, Kaplan (1994), Franks and Mayer (2001), and

Kang and Shivdasani (1995) examined CEO turnover within a single

country (the first two articles examined turnover for German compa-

nies, while the third examined turnover for Japanese corporations).

Among the few papers to examine CEO turnover across countries,

Defond and Hung (2004) examined the relation between investor

BURNS ET AL.821