Changing words: How temporal consistency in a CEO's use of language toward shareholders and stakeholders affects CEO dismissal

• Date: 01 January 2020
• DOI: http://doi.org/10.1111/corg.12302
• Published date: 01 January 2020

ORIGINAL ARTICLE

Changing words: How temporal consistency in a CEO's use of

language toward shareholders and stakeholders affects CEO

dismissal

Taekjin Shin

1

|Jihae You

2

1

Department of Management, Fowler College

of Business, San Diego State University, San

Diego, CA, USA

2

Rucks Department of Management, E. J.

Ourso College of Business, Louisiana State

University, Baton Rouge, LA, USA

Correspondence

Taekjin Shin, Department of Management,

Fowler College of Business, San Diego State

University, 5500 Campanile Drive, San Diego,

CA 92182‐8238, USA.

Email: tshin@sdsu.edu

ABSTRACT

Research Question/Issue: The present study examines how temporal consistency

in the CEO's use of language in public documents affects the board's decision to dis-

miss the CEO.

Research Findings/Insights: Using CEOs' letters to shareholders from 304 large

firms in the United States in 1998–2007, we found that CEO dismissal risk is lower

when the CEO consistently uses language that signals conformity to a prevailing insti-

tutional logic: shareholder‐value orientation. In contrast, dismissal risk is greater when

the CEO consistently displays language that signals stakeholder orientation, an alter-

native institutional logic.

Theoretical/Academic Implications: The present study contributes to signaling

theory by incorporating a temporal dimension into the existing literature. Our findings

highlight the importance of strategic actions taken by corporate leaders, suggesting

that a CEO's desire to circumvent dismissal by courting shareholders helped institu-

tionalize the shareholder‐value logic. The findings shed light on stakeholder manage-

ment research by demonstrating that a one‐time gesture is not sufficient to gain

support from stakeholders who value long‐run consistency in message. Finally, the

present study extends CEO dismissal research by highlighting the importance of sig-

naling and cognitive processes in the board's decision regarding CEO dismissal.

Practitioner/Policy Implications: The present study provides insights to corporate

executives who communicate with various stakeholders and to board members

who make decisions about CEO retention and dismissal. The findings may also be

useful for policy makers who design regulations about corporate communications

and disclosures.

KEYWORDS

Corporate governance, CEO dismissal, shareholder value, signaling stakeholders

1|INTRODUCTION

Firms operate in a complex institutional environment in which vari-

ous constituencies have heterogeneous and often competing

demands (Greenwood, Raynard, Kodeih, Micelotta, & Lounsbury,

2011). Managing the firm's relationship with key constituencies in

the environment is an important part of a top manager's job. To

achieve this, top managers often signal information about the firm

Received: 19 June 2018 Revised: 23 July 2019 Accepted: 1 August 2019

DOI: 10.1111/corg.12302

Corp Govern Int Rev. 2020;28:47–68. © 2019 John Wiley & Sons Ltdwileyonlinelibrary.com/journal/corg

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to create an appearance of legitimacy and gain support from stake-

holders (Gao, Yu, & Cannella, 2016; Hambrick & Lovelace, 2018;

Lockwood, Giorgi, & Glynn, 2019; Salancik & Meindl, 1984). CEOs

of publicly traded companies, for example, spend a considerable

amount of time and energy communicating with investors,

making public announcements, and providing interviews with the

media.

The research about signaling shows that top managers' signaling

often leads to important outcomes for firms and managers (Certo,

2003; Connelly, Certo, Ireland, & Reutzel, 2011). However, little is

known about how temporal consistency or inconsistency in signaling

over time affects outcomes. This is an important gap in current

knowledge because, for many firms, key audiences (e.g., shareholders

and non‐shareholding stakeholders

1

) are increasingly committed to

monitoring companies continuously over time. For example, activist

investors, consumer advocates, employee rights organizations, and

environmental activists follow the same firms and scrutinize them

over time. Therefore, over time, it is possible that changes in the

CEO's message may affect the audience's interpretation of the sig-

nal. The present study examines how temporal consistency in the

CEO's signaling affects the audience's assessment of the CEO. Lan-

guage, which is a system of symbols that are useful in effectively

signaling complex information, plays a key role in top managers' sig-

naling efforts. Through announcements, speeches, and interviews,

CEOs often use language strategically in public to manage their

firms' relationship with the environment. Audiences including share-

holders and stakeholders often react to a CEO's use of public lan-

guage by shifting perceptions about the CEO or adjusting

stakeholder support (Crilly, Hansen, & Zollo, 2016; Fanelli, Misangyi,

& Tosi, 2009; Gao et al., 2016). The outcome we study here is CEO

dismissal, which is defined as “a situation in which the CEO's depar-

ture is ad hoc (e.g., not part of a mandatory retirement policy) and

against his or her will”(Fredrickson, Hambrick, & Baumrin, 1988, p.

255) or, namely, involuntary CEO turnover (Shen & Cho, 2005).

CEO dismissal is a direct outcome of the board of directors' assess-

ment of the CEO, unlike other outcomes such as firm performance,

which is affected by various external factors.

Drawing on signaling theory and the cognitive perspective about

corporate governance, we argue that the CEO's use of language

influences the board of directors' assessment of the CEO, thereby

affecting the directors' decisions about CEO dismissal. However, a

one‐time use of language is hardly effective on such a critical deci-

sion as the decision to fire a CEO. Thus, we argue that a consistent

use of language over time can affect CEO dismissal. It is important

to note that we examine temporal consistency over time—or persis-

tence—rather than consistency across different messages at a given

time or consistency between language and substance (e.g., Crilly,

Zollo, & Hansen, 2012; Westphal & Zajac, 2001; Zajac & Westphal,

1995).

Furthermore, we argue that the effect of temporally consistent

language varies by the contents of the message, particularly as to

whether the message signals conformity to a prevailing institutional

logic. Institutional logics are defined as “the socially constructed,

historical patterns of material practices, assumptions, values, beliefs,

and rules by which individuals produce and reproduce their material

subsistence, organize time and space, and provide meaning to their

social reality.”(Thornton & Ocasio, 2008, p. 101) When the CEO's

language conveys conformity to a prevailing institutional logic, tem-

poral consistency in the message is perceived more favorably by

the directors and is therefore associated with a lower risk of CEO

dismissal. In contrast, directors perceive a CEO's persistent use of

language that espouses an alternative logic as an unfavorable sign

that the CEO is not fully committed to a prevailing institutional logic.

In this case, temporal consistency in the message is likely to

amplify the negative perception and further increase CEO dismissal

risk.

Using CEOs' letters to shareholders from large firms in the United

States, we test whether temporal consistency in CEOs' use of lan-

guage is related to CEO dismissal risk. We show that persistence in

the message reduces CEO dismissal risks when the CEO signals com-

pliance with a prevailing institutional logic, namely, shareholder‐value

orientation (Fligstein & Shin, 2007; Zajac & Westphal, 2004), which

posits that a publicly traded corporation's primary duty is to maximize

shareholders' wealth. In contrast, persistence in signaling can be risky

for the CEO who repeatedly signals an alternative institutional logic—

namely, stakeholder orientation (Freeman, 1984; Mitchell, Agle, &

Wood, 1997)—which is perceived unfavorably by outside directors in

the era of shareholder primacy.

The present study contributes to the research about signaling,

shareholder value, stakeholder management, and CEO dismissal.

We contribute to the existing body of work on signaling theory by

demonstrating that the temporal dimension matters. Whereas previ-

ous studies have focused on signals delivered at a given time, we

show that consistency in message over time can significantly alter

its effects. The present study also contributes to the shareholder‐

value movement literature. Our findings imply that a CEO's desire

for job security played an important role in his or her continuous

espousal of shareholder‐value principle in many U.S. firms. Addition-

ally, we contribute to the stakeholder management literature by

highlighting the importance of managing long‐term relationships with

stakeholders. Our results suggest that a CEO's one‐time use of sym-

bolic language is less effective than a consistent use of the same

message for a long term. Finally, the present study contributes to

the growing literature about the role of cognitive factors in CEO dis-

missal. Unlike existing studies that examine signals created by

other corporate constituents such as the media or stock

analysts, we directly analyze CEOs' use of language in public

documents.

2|A COGNITIVE PROCESS IN CEO

DISMISSAL

Selecting a CEO and, if necessary, firing a CEO are among a board's

most important responsibilities. Recent studies have recognized the

importance of cognitive processes in CEO dismissal (Graffin, Boivie,

SHIN AND YOU

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