Ch6 - Retention Decision

Question 1

Determinants of CEO change

Answer 1

• Performance
• External Shock (market & industry)
• Internal Conflict

Question 2

Influence of board size to CEO turnover

Answer 2

Smaller boards tend to be more effective in monitoring CEOs and initiating changes when necessary. Larger boards can lead to slower decision-making processes and diffuse accountability.

Question 3

Influence of BoD incentives on CEO turnover

Answer 3

Boards where outside directors receive significant incentive-based compensation are more likely to exhibit performance sensitivity in CEO turnover decisions.

Question 4

Consequences of CEO change

Answer 4

• Forced CEO changes have a general positive effect of company performance, as reflected in stock returns & accounting based measures
• Firing high performance CEO can be detrimental to shareholder value

Question 5

CEO change due to internal conflict

Answer 5

• Internal conflicts and disagreements (leadership style or strategic decision) can lead to CEO departures even with strong performance
• alignment of Board and CEO is important

Question 6

CEO change due to performance

Answer 6

Performance sensitivity for CEO turnover
- independence of board
- board size (smaller more often)
- industry competition (if others do better, more often)
- industry homogeneity (the more, the often)

Question 7

Comparison CEO & football manager

Answer 7

• Football managers have higher turnover rate
• higher costs of CEO change
• measurement difficulties (for football much easier)
• lack of board supervision: board members are not as much (emotionally) involved, hence reduced willingness to change CEO

Question 8

Five universal functions of CEOs

Answer 8

• Forecasting & Planing
• Organising
• Commanding
• Coordinating
• Controlling