Leadership Investigate

Insular Decision-Making In The Board Room: Why Boards Retain And Hire Sub-Standard Ceos

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Executive Summary

It is widely believed that corporate boards are overly reluctant to fire their CEOs. The conventional explanation for retaining a CEO regardless of his/her talent is that a CEO chooses the board members and has the power to fire them. However, very few studies have investigated how a new CEO is chosen. This paper explores an unexamined cause of board reluctance in removing a CEO: the incentive to minimize the leakage from the decision-makers' future surplus. The author argues that this same logic provides the theoretical explanation for how a new CEO is chosen for both voluntary and forced CEO replacements. He shows that this incentive of the incumbent board and CEO often departs from the shareholders' interest.

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