The Relation between Strategy, CEO Selection, and Firm Performance

Abstract

We examine whether a firm's strategic priorities influence its selection of a new CEO and what conditions enable such an appointment to add value to the firm. More specifically, this study investigates the value-adding effect when prospector firms (i.e., those pursuing a prospector-type strategy) select a CEO with high social capital. We argue that uncertainty, driven by a firm's strategy, will determine the decision to select a CEO with high social capital; such CEOs can use their networks to mitigate the uncertainty and thus can be valuable to the firm. However, prior research indicates that CEOs with high social capital can engage in behavior detrimental to firm value. To mitigate the potential for this to occur, we assess whether corporate governance can play a role in prospector firms who appoint CEOs with high social capital. Drawing on archival data of CEO successions over a 14-year period, we find that prospector firms have greater incentives to appoint CEOs with high social capital. We also find that prospector firms who appoint a CEO with high social capital improve their performance. Furthermore, the value-adding effect of this selection choice is stronger in prospector firms with good corporate governance.