Social Ties, Shared Values, and Turnover at the Top of Underperforming Firms

Abstract

This dissertation explores how social ties and shared political values among top management teams (TMTs) and directors influence who leaves the firm when it is underperforming. It does so in two distinct studies, using data on executive and director turnover and performance of S&P 1500 firms between 2000 and 2014.

The first study examines how individual executives’ ties to the TMT, including the CEO independently, affect their likelihood of exit in underperforming firms. I argue that greater links to the CEO and the rest of the team—via education, employment, and political ties—will decrease executives’ likelihood of exit in underperforming firms by increasing their level of integration with other team members. I also suggest that greater pay disparity between a given executive and the CEO or the rest of the team will reduce this effect by decreasing executives’ identification with their role and perceptions that they are valued members of the team. Results generally provide support for these arguments and particularly indicate the importance of employment ties and ties to the CEO in reducing executive turnover.

The second study builds on these concepts to explore how these same ties affect power contestation within the triad of the CEO, the TMT, and the board in underperforming firms. I argue that assigning blame is a social process, such that blame for poor performance will fall on whichever member of the triad is most dissimilar, increasing their likelihood of exit. I also suggest that the level of structural power of the dissimilar group will reduce this effect by preventing forced turnover. Finally, I argue that when dissimilar members take the blame for poor performance, this will result in a downward spiral scenario in which forced exit prevents turnaround and leads to poorer subsequent performance. Results provide some support for these arguments and indicate that ties to the board may be especially important in predicting whether the CEO or other members of the TMT exit. They also provide evidence that forced turnover of the CEO, but not of the TMT or board, is detrimental to subsequent performance.