Are boards proactive or reactive to industry shifts?

By David F. Larcker and Brian Tayan *

(exechange) — July 1, 2019 — Public company boards are often criticized for being too slow to pull the trigger in firing an underperforming CEO. exechange data, however, casts new doubt on this viewpoint, and raises new questions.

exechange data shows that CEOs of companies facing industry-wise sources of strain — such as economic headwinds or heightened competitive activity — have average Push-out Scores over the critical threshold of 5, indicating it is more likely than not that they left involuntarily.

One example is the consumer staples industry, which includes consumer goods producers, food manufacturers, and retailers. Companies in this industry have long benefited from attractive economics, brand recognition, pricing power, and steady growth. Changes in consumer tastes, competition from generics and upstarts, and online competition — particularly from Amazon — have scrambled the equation.

The boards of these companies have not been flat-footed. Over the last 12 months, the Push-out Scores for CEOs in this industry have averaged 6.7, suggesting that boards have not been complacent in replacing CEOs who are not up to the challenge.

Many factors go into a potential decision to terminate a CEO: company performance, strategic misdirection, failure to manage risk, or leadership or behavioral shortcomings. Termination in the face of industry challenges suggests that boards might be proactive in evaluating the skills sets of their CEOs and recognizing when they are deficient to meet the future needs of the company.

If so, that’s good news, and shareholders should find comfort in the fact that their boards are not only monitoring performance but also recognizing that fundamental changes are needed in the skills of their CEO.

Whether boards are effective in identifying the correct skills or identifying the correct future strategy, however, are entirely different questions, and ones we won’t know the answers to until the next Push-out Score is published.

* The authors are a professor and researcher at the Rock Center for Corporate Governance, Stanford University.

Editor’s note: This is a guest post.