Who Shall Leave? How CEO Preference and Power Affect Executive Turnover in Chinese Listed Companies

• Author: Qun Wang,Wen Ji,Jinli Tao,Long Zhang
• DOI: http://doi.org/10.1111/j.1467-8683.2011.00855.x
• Date: 01 November 2011
• Published date: 01 November 2011

Who Shall Leave? How CEO Preference and

Power Affect Executive Turnover in Chinese

Listed Companies

Long Zhang*, Wen Ji, Jinli Tao, and Qun Wang

ABSTRACT

Manuscript Type: Empirical

Research Question/Issue: This study investigates the effect of CEO preference proxied by CEO-executive demographic

dissimilarity on non-CEO executive turnover, and how such effect is moderated by CEO power-related variables (the CEO’s

founder status and CEO ownership) and f‌irm performance in a sample of Chinese listed companies.

Research Findings/Results: The results show that when CEO-executive demographic dissimilarity is inconsistent with

social norms (e.g., the non-CEO executive is older and has longer team tenure than the CEO), the non-CEO executive is

more likely to exit from the TMT. This association is strengthened by the CEO’s founder status and low f‌irm performance,

whereas it is weakened by CEO ownership.

Theoretical/Academic Implications: The theory of organizational politics proposes that competition among top managers

plays an importantrole in the internal monitoring of f‌irms. In contrast with most literature centering on the role of non-CEO

executives in CEO turnover and succession, this study focuses on what kind of non-CEO executives CEOs are likely to

dismiss and demonstrates how this process is inf‌luenced by CEO power and low f‌irm performance.

Practitioner/Policy Implications: Given a CEO’s intention to dismiss a non-CEO executive when CEO-executive demo-

graphic dissimilarity is inconsistent with social norms, particularlywhen the CEO is powerful and f‌irm performance is low,

the board of directors should keep an eye on any conf‌lict of interests or power struggle between the CEO and the non-CEO

executive. The CEO should also be prudent in making executive turnover decisions, because the implications of dismissing

such a non-CEO executive for reasons relating to f‌irm performance are largely unknown.

Keywords: Corporate Governance, CEOs, Internal Control Systems, Financial Performance, China

INTRODUCTION

The inf‌luence of competition among top managers with

regard to executive turnover and succession is a major

focus in current governance literature (e.g., Boeker, 1992;

Shen & Cannella, 2002a; Zhang, 2006). Given the high poten-

tial for conf‌licts of interest and power struggles within a

top management team (TMT) (Pfeffer, 1981), competition

among senior executives plays an importantrole in the inter-

nal monitoring of f‌irms (Fama, 1980). For example, Zhang

(2006), from a contingent perspective, found that the pres-

ence of a separate COO/president increases the likelihood

of CEO dismissal under conditions of low f‌irm performance,

but it has no impact on the likelihood of CEO dismissal

under conditions of high f‌irm performance. Shen and Can-

nella (2002a), drawing on the perspective of power contes-

tation, found that non-CEO executive ownership and the

proportion of non-CEO inside directors increase the likeli-

hood of CEO dismissal followed by inside succession. Simi-

larly, Ocasio (1994), building upon the theory of power

circulation, reported that the likelihood of CEO turnover

among companies with low performance is positively

related with the proportion of inside directors. Thesestudies

suggest that competition from non-CEO executives can

improve a corporation’s internal monitoring system and

reduce agency costs arising from the separation of owner-

ship and managerial control. However, how CEOs will

respond to the intra-team conf‌licts of interest and power

dynamics is largely unknown. In particular, while it was

found that CEOs transfer blame for low performance onto

*Address for correspondence: Long Zhang, Business School, Hohai University,

Nanjing 211100, China. E-mail: zhangl@hhu.edu.cn

547

Corporate Governance: An International Review, 2011, 19(6): 547–561

© 2011 Blackwell Publishing Ltd

doi:10.1111/j.1467-8683.2011.00855.x