Too comfortable in the saddle? CEO tenure, board attributions of poor performance and CEO dismissal

This research project explores the relationships between CEO tenure, attributions that boards make regarding their perceived causes of poor performance, and CEO dismissal. Long-tenured CEOs have long been criticised as being “too comfortable in the saddle” because they may gradually lose the ability to adapt to the changing external environment but continuously accumulate power to deflect boards’ disciplinary actions over tenure. However, an important but overlooked fact is that regardless of how great the power possessed by underperforming CEOs, boards would not make dismissal decisions if they were unable to identify CEOs’ obsolescence in tenure and wrongly attribute poor performance to environmental difficulties. Therefore, this study focused on boards’ attribution decisions because making appropriate attributions of poor performance is a critical step in the board assessment process linked to subsequent disciplinary actions. Drawing on attribution theory and the literature of CEO-board dynamics, this research accordingly aims to answer two specific research questions: (1) How does CEO tenure influence board attributions of poor performance? and (2) How do board attributions of poor performance influence the likelihood of subsequent CEO dismissal. By employing content analysis, 3,760 boards’ attribution statements were manually coded from 973 annual reports of poorly performing high-tech Chinese listed firms between 2007 and 2013. With a complete sample of 726 firm/year observations, findings show that, with longer CEO tenure, boards are actually more likely to attribute poor performance to internal, CEO-related factors, rather than to external, environment-related ones, particularly when prior performance is more unstable or the level of industry dynamism is higher. Surprisingly, the more boards attribute poor performance to external factors, the more they are likely to take dismissal actions. As a supplement to the perspective of CEO power, this research project provides new insights into the mechanism between CEO tenure and dismissal and the dynamics of the relationship between CEOs and boards. Moreover, by integrating attribution theory with the dynamic of CEO-board relationship literate, the study discusses how boards’ perceptions may be formed through potential social, political, psychological dynamics between CEOs and other directors over tenure and how such perceptions influence the subsequent dismissal actions. Finally, it also contributes to the board assessment literature by reconciling the long-standing debate over CEO effect on firm performance between the leadership school and the environmental constraint school. It is suggested that CEO dismissal decisions may not always be made for the actual poor performance itself, but for boards’ perceptions of CEOs’ accountability for poor performance and abilities to revive it. This thesis may also suggest practical recommendations on how CEOs and boards should appropriately react to the occurrence of poor performance