Replacing poorly performing CEOs is one of the key tasks of corporate boards and a potentially important source of CEO incentives. However, prior literature finds that forced CEO departures are rare, and that many CEOs remain in office in spite of poor performance. Our paper revisits this evidence and finds that performance-related turnovers are much more common than previously thought. We diverge from prior studies that classify turnovers into forced and voluntary and instead introduce the concept of performance-induced turnover, which we define as turnover that would not have occurred had performance been “good”.
To operationalize this, we estimate the turnover probability at high levels of performance and assume that any turnovers in excess of this probability are caused by performance being worse. Using this approach, we estimate that close to half of all CEO turnovers are performance induced, many more than the 20% of turnovers the prior literature classifies as forced. The key reason for this discrepancy is simple: turnovers classified as “voluntary” by prior studies are substantially more likely after poor performance, suggesting that many are in fact performance induced. This is especially true for turnovers of CEOs aged 60 or older, which standard algorithms classify as automatically voluntary.
