Can powerful allies protect the CEO against performance declines? The role of the CEO's subgroup power in CEO dismissal

Abstract

Research summary: Drawing on research about power and faultlines, we identify the subgroup of directors in the board who share the same social identities with the CEO (i.e., CEO subgroup) and develop a concept of CEO subgroup power. We examine how CEO subgroup power affects the board's decision to dismiss the CEO, particularly when the firm experiences a performance decline. Using data from S&P 500 boards from 1998 to 2018, we find that powerful CEO subgroups reduce the risk of CEO dismissal and that the negative effect of CEO subgroup power on CEO dismissal is magnified when the firm experiences a decline in performance. Managerial summary: Why do some boards fire the CEO when the firm is performing well, while others retain the CEO despite poor performance? We believe that looking into power dynamics among directors may help answer this question. Using data from S&P 500 boards from 1998 to 2018, we investigate how the risk of CEO dismissal varies by the power of the subgroup within the board that consists of directors who share the same social identities with the CEO (i.e., CEO subgroup). The results reveal that a powerful CEO subgroup can reduce the CEO dismissal risk and that this effect becomes stronger when the firm goes through a performance decline.