The Moderating role of non-executive directors: their influence on CEO replacement decisions in the context of poor company performance

This study examines the impact of four directors’ characteristics (tenure, busyness, diversity and industry related experience) on board effectiveness by investigating the influence of these characteristics on non-executive directors’ incentives and willingness to monitor and replace top management for actions that result in poor firm performance. Board characteristics have been shown to be related to certain strategic and performance outcomes as well as to strategic change. Theoretical streams include resource dependence theory, stewardship theory, upper echelons theory, stewardship theory, institutional theory, and social network theory. The measures of board effectiveness used in this study are more sophisticated than those used in prior studies after taking into account the findings in the literature and considering the non-linear (complex) relationships among factors that affect board effectiveness. The study uses a restricted sample of 1500 S&P US firms with poor performance and replacement CEOs between 1998 and 2011, to examine the relation between independent directors characteristics (tenure, busyness, industry related expertise, and diversity) and CEO replacement. I’m using a modified version of Fredrickson et al. model to study CEO replacement. The internal factors in terms of the board’ attributes and the firm’s financial performances are the primary drivers of CEO replacement in the Fredrickson et al. model. My study expects to find that increases in board control effectiveness will moderate the relation between CEO replacement and poor firm performance. The results of the study will help to resolve the confining and confounding findings in the literature by seeking to establish a possible link between measures for non-executive directors’ attributes (measures for board’s independence/effectiveness) and poor firm performance before firm poor performance’s influence becomes sufficiently strong enough driver of the CEO replacement decision- making process. The findings are likely to lead to the development of optimum tenure, busyness, experiences and diversity definitions for independent directors.