October 2007 - Strategic Management Society Conference in San Diego (USA)

When do Chief Executive Officers (CEOs) get dismissed? The most obvious answer would be
that CEOs of organizations that perform poorly are more likely to be dismissed than do CEOs
of organizations that perform well. Surprisingly however, extant research examining the
relationship between prior firm performance and CEO dismissal rates has produced mixed
and sometimes contradictory findings. As a result of these mixed findings, several studies
have focused on a number of factors which may moderate the relationship between firm prior
performance and CEO dismissal. This paper builds upon and extends previous research
examining the moderating impact of ownership structure on the relationship between firm
prior performance and CEO dismissal by suggesting that employee ownership may decouple
firm prior performance from CEO dismissal. Indeed, under specific conditions, employee
owners have an incentive to push corporate policies away from, rather than toward,
shareholder value maximization (Faleye, Mehrotra & Morck, 2006). In such cases, employee
ownership might be used by the CEO to reduce the efficiency of internal and external
corporate control mechanisms, and hence, to prevent his or her own dismissal even in the
presence of poor firm performance (Gordon & Pound 1990; Chang & Mayers, 1992;
Chaplinsky & Niehaus, 1994; Park & Song 1995; Faleye et al, 2006). We suggest that CEOs
are willing to do so because it allows them to initiate and sustain implicit contracts with
employee owners (Breton & Wintrobe, 1982). Such implicit contracts enhance collusion and
mutual protection between CEOs and employee owners.