ESTUDIO ADMINISTRATIVO – LEGAL

A final sensitivity analysis was the use of alternative performance measures and in particular, of relative performance measures. As Cyert and March (1963) argue, firms do not only use their own prior performance in deciding whether or not to replace top

executives; they also incorporate the performance of competing firms. Therefore, if the firm’s performance is appreciably lower than that of several competitors, the company will replace its top manager more readily than would be the case if the firm was performing similarly to its competitors.

Relative performance measures include: a) prior years’ industry adjusted stock returns and b) prior years’ industry adjusted accounting returns. The construction of the above measures was discussed in Section 4.4.2. In summary, industry adjusted stock return and accounting earnings equal company’s stock return and accounting returns respectively minus the median value of the corresponding measure over the same period for all firms in the primary one-digit SIC industry in which the firm was active at the time of the turnover. Again, the complete Model (2) of Table 4.6 was re-run using the above alternative performance measures. Findings are summarised in Table 4.14.

Table 4.14: Base-line Results where Relative Performance Measures are Used, Time-Period: 1990-1998, Sample: Top 460 London Stock Exchange Firms

Independent

Variables All changes

Dependent Variables

Forced changes Non-Forced changes

RSHR,., -0.081 -0.043 -0.020 (0.000) (0.000) (0.072) rsh r,.2 -0.009 -0.000 -0.009 (0.539) (0.996) (0.440) REBIT,., -0.182 -0.128 -0.000 (0.002) (0.001) (0.990) REBIT,,2 0.095 0.007 0.052 (0.076) (0.831) (0.112) SIZE -0.000 0.000 0.000 (0.859) (0.883) (0.775) AGE 0.004 0.000 0.003 (0.000) (0.775) (0.000)

Time Effects Yes Yes Yes

Industry Effects Yes Yes Yes

Observations 2828 2826 2826

Pseudo R2 0.075 0.111 0.082

Log Lik. -785.2 -410.4 -513.7

As shown, results are qualitatively identical under relative performance benchmarks. The negative association between prior year's industry adjusted stock / accounting returns and the forced turnover likelihood indicates that the dismissal of a top executive is lower when the company outperforms the industry. The result can be compared with the evidence of Morck et al. (1989), who demonstrate that top management is more likely to be replaced when the firm under-performs its industry. Again, there is no association between firm performance and non-forced departures with the exception of prior year's stock returns that enters with a negative sign but significant at only the 10% level.

Interestingly enough, relative performance measures seem to have no significantly different effects when compared with the company's own performance measures. Moreover, industry adjusted performance indicators do not provide additional explanatory power over results presented in Table 4.6. This finding could be broadly compared with that of Warner et al. (1988) who show that two-digit SIC industry return variables are insignificant predictors of the CEO turnover probability. Taken together, the above suggest that either industry performance is not associated with measures used to evaluate managers or that one- and two-digit SIC-code-based measures are noisy.

4.7 Concluding Remarks

This chapter has examined top executive turnover in a sample of the top 460 UK companies over the period 1990-1998. It performed a more comprehensive analysis of UK top executive departures than before by recording the changes of not only the company's CEO but also of the company's Executive Chairman and group Managing Director. This is of particular importance in the UK, as the title "CEO" has

comparatively recently been used to signal the top corporate position. Consequently, the current study was able to identify the Most Senior Executive of each company for each year and investigate the determinants of his/her departure. Moreover, the empirical results are based on hand-collected data over a whole decade such that it was possible to discriminate between forced and non-forced departures. The size and quality of the sample allowed the analysis to provide a more powerful test o f the turnover- performance association.

The main contribution of this chapter was to extend CEO turnover-performance governance literature (e.g. Huson et al 2001; Dahya et al. 2001) in the following ways. Firstly, it considered the turnover - performance relation and the ranges over which performance had to fall to trigger a changeover event. Consistent with previous studies both in the US and the UK, the econometric evidence revealed a robust inverse relation between top executive turnover and pre-dated firm performance: top executives are dismissed for poor performance. The results suggest that directors use shareholder returns in monitoring and disciplining top managers whilst financial accounting information may also play an important role in the process of internal governance. The likelihood of dismissal for poor performance was only evidenced in companies where there was a forced change. Routine or non-forced changes had no relation to corporate performance.

Secondly, the current chapter examined the range over which Most Senior Executive turnover and performance extended. As reported, an actual Most Senior Executive forced turnover rate in the median deciles of stock performance was only 3%. For poor performance, representing returns of negative 67% to stockholders, the turnover rate

was about 13%. It seems that performance must fall considerably to significantly increase the actual MSE dismissal rate. These findings were also confirmed within the econometric results.

Thirdly, the chapter explored the time series heterogeneity in the MSE turnover- performance relationship. In particular, the focus was whether the MSE dismissal and corporate performance relation had become more negative over time. This could come about due to increased competition and consequent demands on managerial performance. However, the results of empirical analysis failed to identify any strong evidence of a change in the performance relation between 1991 to 1993 and 1994 to

1997. It would appear that the disciplining effect has not become stronger over time.

Finally, the effects of share stakes in the management turnover process were also examined. The results reported show that there is a negative correlation between Most Senior Executive turnover and management equity holdings. On the one hand this might represent entrenchment, the ability of the MSE to resist a job separation, due to his or her ownership stake. On the other hand it may reflect reduced agency costs and less of a need to remove MSEs in companies where the MSE has a large equity stake. The real point though is whether MSEs are replaced for poor corporate performance. The analysis did not generate strong evidence suggesting that MSEs become entrenched at high levels of equity ownership.

Overall, this chapter has added to the governance literature by documenting the circumstances under which poor performance can lead to a top executive job separation. In summary, it is reported that corporate performance has to be particularly bad to force

a top executive job-separation. There is little evidence that managers are disciplined more for poor corporate performance today than in the earlier years. And finally, top executives with large equity stakes are as likely to be fired for poor performance as those with low equity stakes.

Although removing inefficient managers is an important step towards maximising shareholder wealth, a corporate board for example should also be able to initiate major organisational transformations. Indeed, top executive departures are significant economic events that may have considerable organisational consequences. The following chapter addresses these issues by investigating the impact of Most Senior Executive departures on changes in the identities of the remaining top executives and in particular, on the Chairman position.