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St. Petersburg University
Graduate School of Management
Corporate governance practices, CEO characteristics and
firm performance of Russian public companies
Master’s Thesis by the 2nd year student
Podkhomutova Marina
Research advisor:
Associate Professor, Irina V. Berezinets
St.Peterburg
2017
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Table of content
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Introduction
The Queen of Hearts in Alice in Wonderland in case of her dissatisfaction of any result has
a universal method to solve this issue: "Off with persons head," she could order. In other words,
we can rephrase her idea as “No person no problem”. More interesting that Board of directors of
some companies in our real world can accept such approach to their decision. Of course, this is
said with great exaggeration, however how else is it possible to explain that companies are so
fast laying off their CEOs without giving them enough time to show better performance?
Nowadays such situation is quite typical. A lot of CEOs were fired during their first years
in the firms. The fist attention to such problem was presented by McKay & Deogun in Wall
Street Journal (1999). The authors discuss why Douglas Ivester was fired “SO FAST?”( just 2
year) from CEO position of Coca Cola in 1999. The same question was asked again regarding
dismissal other Chief executives, who could not remain in office for a stipulated time.
Another celebrity top managers also find themselves powerless before dismissal. For
example, in 2011 Yahoo! CEO Carol Bartz was fired after 2 years in the firm. During that period,
the company has become a major operator in the telecommunication market as a result of the
introduction of new technologies, changes in the structure of the organization, changes in
management team and a significant reduction in costs through the optimization of jobs.
However, due to these changes the revenue forecast was not so optimistic. Moreover, and Bartz
unexpectedly introduced a regime of strict secrecy. Bartz demanded from employees to literally
keep a "mouth shut," Thus, avoiding potential leakage of information. As a result, almost any
dissemination of information about the company, previously considered to be normal, was
ceased. Such situation entailed dissatisfaction of the board of directors with actions of the CEO,
who in their opinion did not fit the company.
At the same time Leo Apotheker also paid for his vision of the HP company future, in the
result he was removed from the CEO position after 10 months. Leo Apotheker focused on the
HP’s long-term growth prospects and refused to invest in the development of tablets. This led to
a significant decline in the company's sales volumes, a drop-in share prices and a reduction in
capitalization of $ 60 billion.
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If the situation with the dismissal of Carol Bartz and Leo Apotheker can be explained
rationally in terms of financial losses, than Joe Briner dismissal from CEO&President of Alpha
Bank & Trust was quite strange. The Board of directors decided to fire him after not so
significant loss in first quarter after stable large growth during his two years of tenure (Y. U. Kim
, 2011).
However, not only the company decides to dismiss the CEO or the president of the
company. So, Jeff Jones himself decided to resign from the post of the precedent and the CEO of
Uber after half of the year. It is worth noting that one of the main tasks of Johnson was to
improve the company's image, but the situation was much worse than he had expected. Jones
justified his decision by disappointing in the methods and leadership of Uber, saying that his
methods and principles are incompatible with the company’s ones.
Executive Director of the largest Danish bank Danske Bank Eivind Kolding was dismissed
from his post in September 2013. The Bank explains this decision by the lack of the Kolding’
necessary experience as a financier. In other words, person with insufficient experience in
banking field does not match to CEO position of the biggest Danish financial organization.
However, Board of directors noted that o under Kolding leadership during the 1,5 years the bank
conducted significant reforms and the development of a new strategy which lead to improvement
of its financial position.
In Russia, the situation is slightly different. Despite the importance of the financial
component in deciding on the imminent dismissal of the CEO, the human factor also plays a key
role. A striking example is Bu Inge Andersson departure from the CEO post in AvtoVAZ. Bu
Inge Andersson was the first foreigner at the helm of AvtoVAZ and worked there only for 2
years. He was significantly different from his predecessors in his approach to work. He was
different in everything: starting with his early gliders, repairing the premises and personal
control of cleanliness at the enterprise (On the road he could pick up a cigarette butt and throw it
in the trash), ending with an unprecedented decision for top management to change their Infinity
cars for the own AvtoVAZ product. Andersson sought to create a truly high-quality product,
reduce costs, create competition among suppliers, but preferred to work with foreign suppliers of
components. But the financial results for 2015 were record-breaking. In the conditions of a sharp
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fall in the ruble exchange rate and a sharp rise in price of components, as well as the spin-off of
the auto industry, such results, according to many analysts, could be considered legitimate and
even good, Nevertheless, Board of Directors decided to say goodbye to the head of the company.
In general, in Russia, many companies were faced with the dismissal of CEO, who could
not hold out for more than 2 years, and we tried to find foundation for it during this research.
Thus, we see enough cases when the company changed its CEO ahead of schedule. What
could be the reason? Why did the executives show unsatisfactory results? Their professionalism
they have repeatedly proved by their experience. What is the reason for such situation?
Unfortunately, the answers to this question does not lie on the surface, and that is why it is
interesting to study it in more detail within the framework of this paper.
Certainly, we can predict that these top managers lacked the knowledge and specifics of
the company or industry itself, they or the Board of Directors saw that they did not match certain
characteristics to these companies, and therefore it was necessary to terminate the employment
relationship ahead of schedule. In the other words , there are not bad leaders, but exist
inappropriate ones for certain firm. That the company and the CEO simply may not be suitable to
each other. So, the main question of the research can be formulated as what characteristics the
CEO should have in order to match or not match to the company.
It is worth noting that the study of this issue occurs mainly from in terms of the Upper
echelons theory, of the concept of human capital or from the point of view of the theory of
mobility. However, the number of studies trying to explain the interconnected practices of
corporate governance, the characteristics of CEO and the firms performance is very limited.
Therefore, it is interesting for us to study this question precisely from the point of view of the
match theory in Russian frameworks (Jovanovic, 1979).
The relevance of this study is attached to the consequences of the global financial crisis
2007-2009, which led once again to address the issue of corporate governance and the role of
CEO in the company. As a result, owners, international expert organizations and governments
began to try to understand how the internal efficiency of the company can be improved, and what
role in this issue is belonged to the correct CEO selection. In general, the crisis itself has given
a push to analyze what the CEO characteristics can influence on the firm performance.
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Moreover, the globalization of the Russian economy forced the Russian companies to
significantly tighten its corporate governance in order to comply with international standards.
That is why the candidate requirements for the CEO post are becoming more stringent.
The development of the Russian labor market itself is also the reason for analyzing the
combination of the CEO-company, in connection with the popularization of business education
and the aspects, as one of the main criteria for the manager success. The increased demand for
the top management labor has forced the performers themselves to pay attention to their human
capital, and to think about what they can give to the firms.
The additional interest to this research is the fact that the moment, studies studying the
relationship between the characteristics of CEO and the firms outcomes in Russia are very
limited. However, none of them examines this issue in terms of match concept. Moreover, The
Russia was chosen for specific reasons. First, large companies in the Russian Federation
experience a tendency towards demographic change and paying more attention to education
aspect. Also, due to numerous historical reasons of the late 20th century as the collapse of the
Soviet Union, redistribution of Soviet assets among oligopoly, foundation a new enterprise,
Russian companies have only firmly occupied their positions in the market and began to attain
the respect in corporate government fields from foreign colleagues. In additional, the majority of
Russian companies decided to be present on the stock exchange only at the beginning of the 21st
century. Therefore, only so far in Russia formed a certain information component to be able to
analyze on the basis of sufficient database. This offers a suitable context for examining the
impact CEO characteristics on firm performance in.
As result of our paper we can identify portrait of the Russian CEO, which shows us the
main aspect of the CEO's characteristics that were in demand in 2007-2013. Moreover, the
results of this study can help in the selection of an upcoming candidate. From the point of
employee view this research is significant, since it helps to understand what kind of experience
or skills you need to acquire in order to build your career in the best way possible.
Thus, we can conclude that the study of this issue is the relevant.
As result our research goal is to establish and to study a relationship between CEO
characteristics and company performance In Russia in terms of CEO-FIRM match, provide a
qualitative analysis.
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In the framework of achieving this goal, it is necessary to fulfill the following tasks:
•
Define the range of CEO rights and duties in Russian companies in the context of
Russian legislation.
•
Provide the literature review about the theoretical basis of the relationship between
the CEO characteristics and firm performance, as well as CEO-FIRM match
concept.
•
Introduce empirical analysis of the relationship among the characteristics of CEO,
CEO-Company match, and firm performance.
•
Analyze the obtained results of the study, summarize the conclusions and on their
basis, give practical recommendations.
In this research regression analysis were employed as main research techniques.
Regression analysis was used to investigate the moderating the link between individual CEO
characteristics and firm performance.
This research is structured as follows. In the first part, there is the analysis of theoretical
and empirical studies on based on which hypotheses are formulated. The second part is the
empirical analysis itself with the interpretation and discussion of the results and their application
in practice.
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Chapter 1 Theoretical background and Literature review of the CEO
characteristics and firm performance
1.
CEO definition in Russian framework
Before the exploring the relationship between the characteristics of the Chief Executive
Officer and the company performance it is necessary to briefly review the CEO definition in
Russia contest.
In modern Russian literature has not yet developed fixed term for an English definition
CEO. The scientific and business articles, legislation and statistics, the practice of Russian
companies and foreign affiliates used several different terms. This can be explained by several
factors, including: weak developed of the topic in the scientific and practical publications, lack
of a clear separation of the group in the regulatory and legal acts and statistical materials,
differences in corporate governance of Russian and foreign organizations. At the same time, it
can be argued CEOs have formed a fairly stable and the isolated segment of the labor market
with its own characteristics and differences from other salaried workers. So as we mentioned
before to study this concept it is necessary to define and organize the use of various
modifications of this terms.
In American English the person who has highest position in the company and who runs
the company is named Chief Executive Officer or CEO. In British English the same position can
be called as managing director or MD. In the world there exist some other titles of the CEO
position holder such as president, chief executive (CE) and so on.
The Russian law specifies the exact name of the head of the company's position but not in
the all cases.
The Article 65 of the Civil Code of the Russian Federation and the Article 69 of the
Federal Law "On Joint Stock Companies" indicates that the sole executive body of the company
may be called only a “director” or “general manager(director)”.
In the Federal Law "On Limited Liability Companies" there are no restrictions in the
choice of names of the sole executive body of the company. In accordance with Article 40 of the
Law, the sole executive body of the company with a limited liability company may be called a
“general manager(director)”, “president”, or it can have other names.
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A little different situation occurs in the banking sector, where Article 11.1 of the Federal
Law "On Banks and Banking Activities" does not set specific requirements for the name of the
sole executive body of the credit organization. In other words, in credit institutions the name of
the sole executive body of the credit institution may be different (for example, "President").
In case of group of the companies the head of such group is named a “President”. But there
is no any specific norms for such title name.
However, despite widely use of this term its definition is not clear. The CEO role is
varying from one firm to another and first of all depends on size and organization. In small firms
the CEO in addition to strategic decisions usually performs many functions with practical value
such as hiring new stuff. In large companies as a rule CEO responsible for high-level issues,
deals with strategic options and operating activities, ensures the growth of the company and
delegates the ordinary function to subordinates.
To sum up this small note about title of the executive body it is necessary to conclude that
there are many variants of the highest position names in Russia and in the world. However,
despite the legislative setup, in this paper we prefer to use term CEO as a more general and more
useable in the modern world.
2.
Juridical aspects of the functioning CEO of the Russian joint-stock
companies
To understand such a complex and multifaceted problem, it is necessary to start at the
very beginning. So, who can be appointed to the position of CEO?
Many people mistakenly claim that the law makes stringent demands for the candidate of
the CEO; however, it's not like that at all. The Federal Law "On Joint-Stock Companies" does
not contain any special restrictions for this position; therefore, any person can be the CEO of any
company. Of course the candidate must reach the age of majority and is legally capable.
Special requirements can be established only by specific laws. For example, in order to
become the CEO of a bank, you still need to have the proper qualifications. But, the
establishment of special requirements is an exception, not a general rule. For the vast majority of
companies, there are no legislative restrictions.
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However, these restrictions can be spelled out in the company's charter and internal
documents, but they are must not discriminating and not contradict the Constitution of the
Russian Federation. For example, it’s prohibited to prescribe in the charter of the joint-stock
company that a woman or a person of the Muslim faith cannot be appointed to the position of
CEO.
Who conducts an interview for candidates for the position of CEO? Legislatively it is not
established, but in practice the interview is conducted by the Board of Directors, since CEO is
subordinate to this management body. Preliminary search, as a rule, trusts recruitment agencies
or the HR department of the company itself. When selecting candidates at the first place, it is
necessary to pay attention on:
• Experience of applicants (can be assessed by CV and recommendations)
• Personal qualities. Especially focus on responsibility that the potential CEO is willing to
assume (can be assessed with various psychological tests)
• The availability of the required skills and competences (for assessment it’s necessary to
prepare various questions, business-cases, and other tasks)
As a rule, the best candidates are those whom your good friends and partners had offered
to you, but another interesting way of searching is to advertise an open vacancy at various
thematic conferences, forums, etc. (on the scope of the company).
General Director and Chief Executive Officer (CEO)
In countries with the Anglo-Saxon system of Law (England and the United States, in the
first place), the highest official of the company is called the Chief Executive Officer. In Russian
law, this position is closest to the position of General director. The General director manages the
current activities of the company, performs the functions of the international organization's
representative, and determines the overall strategy of the enterprise development.
However, it is interesting to note that in the Anglo-Saxon system of law the Chief
Executive Officer is a collective concept. Under the concept of CEO can be understood as the
leading person of the company, and one of the directors of the company, performing only a
certain part of the functions. Thus, in Russia, the CEO is a very specific concept, while in
England and America this is a generic concept.
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The order of appointment to the post
If the joint-stock company is created by several founders, first of all it has to convene the
general meeting of founders and the decision on appointment of the CEO is fixing in the
protocol. In case of foundation of a company by one founder, the decision shall be made by
himself and shall be fulfilled in writing. If the sole founder wishes to manage the organization
independently, the corresponding entry in the decision will look like this: "I assign the duties of
the CEO of the Company". If the sole founder decides to use the services of an employee, the
same point of the decision will be: "To elect Ivan Ivanov (passport data) as CEO of the company
and sign an employment contract with him for a period of one year".
A mandatory should be drawn up a protocol of convocation of participants of JSC, in
which everything is carefully fixed. Protocol are drawn up on several sheets, stitched, the sheets
numbered, and on the back the stitched document is sealed with the signatures and seals of the
persons who signed the protocol (or the decision of the sole participant / shareholder). The
protocol (decision) on the appointment of the CEO of the JSC are provided to the tax authorities
for registration, as well as to the bank for opening a settlement account or changing a bank card,
to counterparties.
If the joint-stock company is already established, the decision to appoint a CEO is taken
by the general meeting of shareholders, with a simple majority (>50%) or the board of directors
(transfer of this authority from the general meeting to the board of directors must be prescribed
in the charter). Further, the Board of Directors sign up an employment contract with the CEO,
since, although he holds such a high position, he must still obey the labor law of our country.
At the same time, the employment of the CEO can’t be implemented solely like the
internal issue of the company, this decision must have to be notified to numerous state and other
bodies.
Firstly, actual information about the CEO should be submitted to the Federal Tax Service
that makes changes in the Unified State Register of Legal Entities. To do this, you need to fill out
an application on Form No. P14001, in which we need Sheet B. The application is signed by the
CEO, and then it is certified by a notary and submitted to the FTS in person or by mail. It is not
necessary, but it is desirable to attach to the application an order for employment, the minutes of
the general meeting of shareholders or the board of directors, the decision of the sole founder. It
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is important to note that it is necessary to do this within three working days from the moment
that the CEO takes office.
Further, the FTS itself will take care of conveying the relevant information to extrabudgetary funds and statistical bodies.
Secondly, it is necessary to notify the bank that servicing your organization, since the
CEO has the right of signature on payment documents. As a rule, the bank requires the protocol
of the general meeting or the board of directors (decision), the passport of the CEO, and an
extract from the USRLE (Unified State Register of Legal Entities), in which this CEO will
appear soon. The period of notifying the bank is not legally fixed, however, it is in the interest of
the organization itself to do this as quickly as possible, because until that moment no payments
can be made through the bank.
Thirdly, it is often necessary to notify counterparties if the new CEO already takes office
that and a change has occurred. Usually this requirement is prescribed in contracts. This can be
done by sending an information letter via e-mail, as well as through standard mail.
Powers and responsibilities of the CEO of the joint-stock company
The CEO is, first of all, the head of the organization. He is involved in the overall
management of the all company's economic activities.
In its most general form, the CEO:
• Manages the enterprise;
• Acts on behalf of the company;
• represents the interests of the company.
The peculiarity of the position of the CEO is that he is an employee of the company and
the head of its employees at the same time.
The CEO is obliged to supervise the work of all other employees of the organization, for
which he will need understand at least In general,terms the specifics of the work of each
employee. Undoubtedly, that is possible only by a highly erudite and patient person who is ready
to constantly learn something new.
One can even say that when taking up the post of CEO, a person voluntarily subscribes to
a non-standard working day and constant stressful situations, as we all imagine how difficult it is
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to manage a huge mechanism and at the same time do his work not by “lowered sleeves”, but in
a good shape and efficiently.
In case specifying the powers of the CEO, he:
• solves the issues of hiring and firing employees (that is, from its point of view,
providing the company experienced personnel);
• organizes interaction of various departments of the enterprise, manage their work;
• Ensures that the company complies with all the requirements of the law, so that the
activities of the enterprise do not go beyond the scope of the charter;
• represents the interests of the organization in all state and municipal bodies, other
organizations, etc.
Most importantly, that the CEO must always act in the public interest; he must take care
of the prosperity and well-being of his organization.
At the same time, the Director General bears material, administrative and criminal
responsibility for his actions. He is also responsible for all decisions taken, for the effectiveness
of the organization, for the safety of the property. Thus, the work of the CEO is far from being as
easy as one can imagine at first look. Moreover, it is not everyone's responsibility to cope with
the responsibility that lies with this person, so it is certain that the CEO should be a very strong
and determined person, he must have a certain set of character traits and internal qualities.
Role of the Board of Directors of JSC. Interaction with the CEO
The main task of the Board of Directors is to monitor the activities of the CEO. The
Board of Directors, in the most general view, must ensure the activities of the CEO in line with
the decisions of the General Meeting of Shareholders, but, however, should not interrupt with the
decision-making process of the CEO.
The charter of the company may provide for the approval of certain transactions made by
the CEO or the board of directors. In the case that the CEO breaks this rule, the transaction can
be challenged. In addition, it is necessary to approve major transactions (> 25% of the book
value of the assets of the company, not taking into count transactions that occur in the ordinary
course of business, that is, differing in the frequency of their execution) and related party
transactions.
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In addition, the board of directors has its own exclusive competence of course. These
powers are regulated in Art. 65 of the Federal Law "On Joint Stock Companies", but their list is
not exhaustive. Any joint-stock company can easily supplement this list by including the
necessary powers in the charter. Exclusive competence can’t be transferred to the CEO, nor to
anyone else. As an example, we give a few such questions, the right to resolve which is granted
only to the board of directors:
• approval of the agenda of the general meeting of shareholders
• recommendations on the amount of paying dividends
• identification of priority areas of the company's activities, etc.
Compensation aspect
As of the beginning of 2017, the average salary of the CEO in Russia is 60,000 rubles.
The law does not specify which particular management body of the joint-stock company
should decide on the payment of the CEO, including determining the amount of this payment.
As a rule, this issue is decided by the board of directors and is not submitted to the
general meeting of shareholders. The amount and procedure of payment is regulated by internal
documents of the joint-stock company that are not in the public domain, and is also regulated by
the employment contract.
Transfer of powers of the CEO to the management company (manager)
This question usually arises when creating a group of companies to avoid chaos in
management.
The essence of this procedure is that the functions of the CEO are transferred to another
organization or individual entrepreneur (manager). With this organization or an individual
entrepreneur a civil-law contract is concluded, according that manager or the management
company receives the powers of the CEO. At the same time, it is necessary to draw up the
termination of the employment contract with the former CEO, and an order for dismissal. The
possibility of transferring powers, like all other issues related to the CEO of the joint-stock
company, is regulated in art. 69 of the Federal Law "On Joint Stock Companies".
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The issue of transferring authority is generally decided by the general meeting of
shareholders, but the charter may provide for the possibility of adopting a decision on this issue
by the board of directors.
One of the biggest advantages of attracting such a third-party manager is that the contract
can prescribe all of its powers, as well as the procedure for making certain decisions. Thus,
unlike the CEO, the third-party manager becomes practically controlled by the shareholders or
founders.
Dismissal of the CEO
Any employee of an organization can retire at his will. The leader is not an exception.
Since the CEO has considerable authority over the management of the organization, and
also bears tremendous responsibility for his actions and decisions, the process of his dismissal
becomes even more complicated, even if he realize it by himself.
When the CEO of the JSC wishes to terminate the activity of his own will, careful
abidance of the transfer of powers is required; this is one of the key differences between the
dismissal of such an important entity and an ordinary employee.
In addition, for any employee of the organization, the process of dismissal at will is to
apply two weeks before the final settlement date. Notification from the CEO should be followed
not later than a month before the expected date of dismissal. This is primarily due to the fact that
it is the manager who is responsible for all production processes and proper reporting, so it will
take him longer than the average employee to complete all his current affairs and transfer the
management of the organization to his successor.
Also, unlike ordinary employees, the dismissal procedure of the director requires
notification to all members of the board of directors, so that they in turn convene a general
meeting of shareholders (if the board of directors under the charter is not competent to decide on
the termination of the employment contract with the CEO).
After the transfer of cases to the successor, the CEO and his successor sign the relevant
act. Then, an order for dismissal is issued, which is signed by the CEO himself.
The entry in the employment history is also made out by the dismissed manager himself.
The powers of the director cease from the moment of issuing the order, entering the
record in the employment history and transferring the cases to them. Regardless of the reason for
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the dismissal of the director, it is necessary to draw up the minutes of the general meeting of
shareholders or the decision of the sole founder (or the decision of the board of directors).
When the CEO is dismissed, the employer must pay him severance pay (called "golden
parachute") - compensation in the amount established in the employment contract, but not lower
than his three-time monthly salary.
It should be noted that the CEO and after dismissal can maintain business ties with
partners and competitors of the organization, have access to trade secrets or even compromising
the organization of information. That is why the size of the "golden parachute" for the loyalty of
the former CEO could very recently reach the amount of an annual salary or several million
rubles. The largest amount of such compensation was paid to the CEO of Norilsk Nickel Vladimir Strzhalkovsky was enriched at his dismissal by one hundred million dollars.
Since 2014, the size of the "golden parachute" of CEO of state companies and
organizations has been limited to three-time monthly salary, more than 50% of the shares
(stakes) in the authorized capital of which are state or municipal property, and since 2015 it is
allowed to limit the size of the "golden parachute" heads of all other organizations, including
joint-stock companies.
Thus, we defined the range of CEO rights and duties in Russian companies as well as we
analyzed the peculiarities of CEOs the context of Russian legislation. The understanding of this
basis allows us to move on to the next point of the literature review.
3.
Job Match Model and the CEO Characteristics.
However, how to understand that CEO is suitable for the company? What characteristics
should he possess to maximize his productivity in order to maximize the company's positive
outcomes? It is worth noting that it is quite difficult to judge bystanders. At the same time, the
board of directors has more internal information and its decisions cannot be groundless. In this
connection, we can suggest that CEO replacement occurs when BoD’s estimation of the true
CEO-firm match level falls below a critical point. It means that CEOs with longer tenure in the
companies have a higher fitting grades with these firms and these matches create the necessary
superior results for owners if CEO-firm match is a significant indicator of company
performance.
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This description implies the following. The board of directors updates its assessment of the
CEO's activity every period, since during this period they receives new information and a new
signal about the true CEO-firm match. Moreover, the evaluation of each subsequent time period
refines and corrects the previous estimates, since the previous estimates are also taken into
account for the new ones. According to this logic, the average estimated value for shorter serving
CEO should be less than for longer ones. Thus, there is a positive correlation between match
quality and CEO tenure in the company, which led us to consider tenure as true measure of
match quality. Garen (1988), one of the first authors who provided his explanation to this theory,
stressed that participants do not know the real match level at the beginning of their relationship
which each other, they only know their expected ones. And at the initial stage the quality of this
match becomes clear, because bad matches must stop quickly and the good ones stay for a long
time. (This aspect is also considered a study by Gibbons and Murphy(1992), where they explain
resignation and dismissal as result of inconsistent of real and expected match quality occurred
du to asymmetry of information.)
We conceder CEO-firm relationship as two-side matching market. Pan (2010) sufficient
explanation to this issue, which was based on the Roth and Sotomayor (1990) study about
difference between two-sided matching and commodity markets. In accordance with their idea,
only the commodities are important on the one-sided market, and the consumer does not pay any
attention to the source of this product. The different situation occurs in two-side matching
market. The participants of the relationship are interested in the right choice of the best partner.
In this connection, the CEO market can be considered as a good example of two-way
correspondence. According to Pan's explanation, we cannot consider the competence of the CEO
as a commodity, because CEO performance depends on the place of its work, which means the
variability of this assessment. Based on same logic, we cannot consider companies themselves as
a commodity. Thus, the source of value creation is based on the compliance of the characteristics
of the firm and the CEO, since both parties are interested in selecting the most deceased
employee / employer. As a result, we can conclude that the correspondence theory can more
accurately describe the labor market.
In general,the idea of matching concept regarding CEO characteristics and firm
performance is following. Each employee with a set of unique characteristics can find a position
ore firm that maximizes his performance and will use his knowledge and skills in the highest
degree. Accordingly, each position and firm with different duties and singularities needs a person
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who, with some necessary features, can show the best result. In other words, there are not exist a
bad workers and bad jobs, as well as there are no good workers and good jobs. There is only the
presence or absence of correspondence between the employee and the position or firm.
One of the first studies examining the compliance of the firm and employees was presented
by Jovanovic (1979). It is necessary to emphasize that Jovanovic in his research did not consider
the reasons for leaving office, however, subsequent studies revealed the need to diversify the
reasons for it. In the research Jovanovic built his model in accordance with 3 assumptions.
First of all, there is exist heterogeneity among same employees due to difference in their
productivity at the same position.
The second assumption implies the necessary to experience of serving in this position to
estimate the true quality of match, which differs from expected ones. And the last assumption is
an individual base of compensation formulation through negotiation with employer.
Third, workers and firms negotiate compensation on an individual basis for each time
period. Although the last assumption is one of the main ones, in practice it is rarely observed,
since the reduction in compensation due to less efficient work is covered by the guaranteed
increase in it in accordance with the terms of the employment contract. Nevertheless, the match
theory suggest an alternative approach to a main aspect of CEO replacement in term of human
capital point of view. (Allgood and Farrell, 2003).
However, the second assumption can play big role in understanding CEO-firm match
concept. Asymmetry of information is influence on difference of match quality between insider
and outsider CEOs. In terms of match theory regarding to origin of CEO as well as
all
candidates, organizations has less information about an external candidate’s skills and abilities in
comparison with insider’s ones. (Granovetter, 1981). It happened because internal candidates
have previously worked within the firm, and thus, they have demonstrated the skills and abilities
developed during their prior tenure within the organization (O’Reilly, Chatman & Caldwell,
1991) in means that they gives signals about match quality to the board of directors. In contrast,
external candidates have not worked inside the firm, and thus, information on their past
performance is often unavailable to the organization (Zajac, 1990). Crain research (1984) has
shown that information on an external candidates’ actual skills and competencies acquired from
external sources, such as recruitment agencies or references from a previous employer, cannot
substitute for information acquired from direct interaction with the candidate. Essentially,
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information derived from inside the firm is more valuable and accurate in judging the suitability
of the candidate (Bills, 1999). Asymmetry of information also can be explanation for resignation
and dismissal explanation as result of inconsistent of real and expected match quality (Gibbons
and Murphy, 1992).
In general,the theory of higher echelons as well as other labor theories is based on the
idea of heterogeneity of CEOs which can be implemented in the matching theory. This
heterogeneity manifests itself beginning with such observable characteristics as gender, age
(Hambrick and Mason, 1984) and end and ends with CEO power (Cannella and Holcomb,2005),
management styles(), CEO ego
(Malmendier and Tate, 2005) and other non-observable
qualities.
Moreover, match theory as well as theory of human capital prove that firm specific
knowledge, industry experience as well as other quality characteristics, which increase and
improve over time, positively influence on CEO good match. If in the case of Human capital
approach, they increase a human capital of employee, that in case of match model, they increase
quality of match. As a result, it leads to increasing of productivity, which eventually influences
on firms’ outcomes.
Joos, Leone, Zimmerman (2003) identified the following aspects of CEO human capital,
which can be considered in terms of match theory as more significant for good match:
• General management skills including knowledge in
accounting, finance, marketing,
management and so on. In other words, this category includes general CEO experience in
corresponds with economics knowledge (education).
• Firm-specific beckgroung about relationship with suppliers, consumers, as well as
understanding the competence of the all staff. This aspect `CEO can get only during the work
within company.
• Industry-specific background regarding input and output markets, state regulations and
so on. (Hadlock et al. (2002) report a higher incidence of CEOs with legal backgrounds than in
unregulated industries.)
• Technology-specific knowledge about understanding new technology, and opportunity to
their application and implication to the companies needs. (Also this aspect dealing with
educational or experience background) (Feyrer, 2002).
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Moreover, for developing economies, where the production aspect prevails, industry and
technical specific knowledge and experience is of particular importance for a higher level of
CEOs match.
It is worth noting that it is naive to assume that the CEOs turnover performance and firm
performance can be explained only by the match theory. Of course, such a broad concept has
several alternative approaches to understanding the essence of the issue. However, this approach
gives a more complete understanding of the tendency of CEO replacement in the early years of
service in posts. Moreover, it is likely that this theory will also be able to determine which
characteristics of directors make them most suitable for companies.
4.
Literature review of CEO characteristics and firm performance and
Hypothesis statement
As we have repeatedly tried, any company needs a good leader for daily work. When
evaluating the activities of a company, we first of all evaluate its management by the CEO. The
actual question is whether there is a link among
Corporate governance practices, CEO
characteristics and firm performance of Russian public companies. This question has already
been investigated by foreign authors more than once, singling out several hypotheses for
conducting research on the issue under study.
However, due to the fact that the match theory, within investigation the relationship
between the characteristics of the CEO / company’s performance is not widespread, it is
necessary to look at the results of studies using other more classical approaches to identify this
connection.
Age, experience and education
It should be noted that there are many researches devoted to the study of this issue. First
of all, it is worth mentioning the work of Hambrick and Mason 1984, which included such
observable features that have effect on businesses. For example, in 1993, Cannella and Hambrick
suggested tenure as one of the key characteristics for a decision making process and company
performance. In 1997, Geletkanycz and Hambrick examined external ties of top executives. This
field was expanded in 2003 by Collins and Clark, who stressed the role of social networks.
Carpente and Fredrickson (2001) as well as Kor (2003) have received such parameters as
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managerial experience and executives' competence. In other words, the list of the observable
variables has been improved by various studies during the last 35 years.
In recent years, the correspondence between the experience and demographic
characteristics of the CEO's personality and the company performance has been tried to justify in
Emilia Peni (2014). Based on a sample of S&P 500 companies, it was revealed how the
indicators affect the company’s market valuation and financial performance. The results
concerning the CEO's age were disputable, while the experience can have a positive effect on the
company’s productivity. However, in the case of a new appointment, it may prove superfluous
(having a negative impact on the company's performance) (E. Knutsson, 2015). In most studies,
the powers of the CEO are considered as a single indicator, since it is assumed that managers are
at the same starting point and have a similar level of propensity to change when taking office.
However, in fact, the new CEO may accumulate experience through various senior positions as
the chief executive, director or president. The level of the CEO's work depends on his (or her)
previous work experience (Bigley, Wiersema, 2002). It helps to achieve the company's best
performance (H. David, Weng and Zhiang (John) Lin, 2012). In addition, you can use the
experience of the predecessor to correctly make strategically important decisions in the
management of the company (J.C. Coates IV, R. Kraakman (2010).
It is also worth to mark that despite the recent world trends to recruit CEOs from other
industries, relatively modern research in the CEO-match concept shows only a very limited
success of such actions. It’s emphasizing the importance of industrial experience and profile
education (Huang, 2008). Nevertheless, according to Jalal and Prezas (2012) there is a lack of
research and information on the difference between availability and absence industry experience.
In 2016 a group of scientists (G.R. Wang et al., 2016) conducted a study aimed at the
relationship between the CEO's characteristics and the company's performance (and their
correlation). The main attention was paid to the connection with the availability of management
education and the productivity of the company. According to the results if the company wants to
increase the innovative productivity, it’s associated with the introduction of a new product or
technological process; it must find a relatively young CEO with a profile education and little
experience in the industry. However, to gain profit, you need a more experienced manager. In
addition, the presence of the engineer (U. Çelikyurt, BN Dönmez, 2017) and the political
experience of the work (service) (Fisman, 2001, Faccio, 2006, L. Ma, S. Ma, G. Tian, 2013),
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contribute to the growth the company's performance and additional subsidies from the state for
its development (J. Wu, ML Cheng, 2011; R. Sobel, Rachel Graefe-Anderson, 2014).
In general, it may be concluded that such combinations of characteristics of CEOs (age,
ethnicity, professional qualifications, company size and steady age) affect the company’s
performance (Noor et al., 2014; M. Huysentruyt, U. Stephan, S Vujić, 2015). However they
should be studied in the multiple cultural and political contexts (C. Crossland, D.C. Hambrick,
2011), as well as free periods from global problems associated with the economic crisis (G.
Wang et al., 2016).
Nevertheless, scientists can’t find evidence of importance CEO educational background
despite the available studies about the relationship between the age of managers and the
performance of the company. Their results are ambiguous (Bertrand & Schoar, 2003, B.
Martinson, 2012, Jalbert et al. 2002). Those scientists said in their research about the significant
relationship between these variables. While the work of Ayaba (2012) and Gottesman and Morey
(2010) proved its absence. However, most investigators write about higher education does not
play a big role in the company's decision to replace its current CEO - inefficient managers should
be replaced regardless of their level of education (S. Allgood, KA Farrell, 2003; M. Eduardo, B.
Poole, D. McMillan, 2016). However, in choosing a deputy this aspect should be taken into
account. In addition, hiring new managers with MBA levels leads to short-term performance
improvements (S. Bhagat, B. Bolton, A. Subramanian, 2010).
Unfortunately, domestic researchers paid little attention to the theme of the CEO match
with the performance of the company in recent years. A.V. Hayrian (2015) on the basis of
analysis of 68 Russian public companies for 2010-2014 concluded that the presence of an MBA
degree and the age of the director adversely affects the performance of the company; the position
of the CEO as a co-founder of the company positively affects the value of the company’s
outcomes; the degree of Candidate of Science and the duration of the CEO's tenure in his
position only affect 10% of the perdormance. Gerasimova MA, (2016) using the data of
2006-2012 came to the conclusion that the sex and age of the manager does not affect the
company's performance, while citizenship and professional characteristics can affect the
company's financial performance
CEO origin and succession
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Based on two types of successors (insider or outsider), studies are conducted on the
extent to which this characteristic affects the company's performance (S. Bulmash, 2009).
Analysis of the literature showed that, in general, the characteristics of the CEO have a
significant impact on the profitability of the company. In contrast with past work, which focused
on the relationship between poor performance of the company and the choosing a CEO outside
the company (Datta DK, Guthrie JP, 1994, Thong JY, Yap CS, 1995). However, many modern
studies show the quite opposite results (A. Karaevli, 2007, EA Peyrache, F. Palomino, 2013, S.
Ma, D. Seidl, S. Guerard, 2014). Outsiders affect the efficiency of the company, because they are
interested in the job, which contributes to the company's profitability (Khurana R., Nohria N.,
1999; Chen H.-L., 2013; D. Leitch, M. Sherif, 2017). There is another point of view, according
to which the presence of corporate stability (the usual continuity, the long-awaited predecessor of
the CEO and good work of the company), help outsiders generate their ideas in the company's
activities (Zhang and Rajagopalan, 2003, 2004, A. Karaevli, E.J. Zajac, 2013). In general, it is
necessary to consider the relationship between the choose CEO from the outside the company
and the company’s performance as a multilevel structure that coordinates these opposite
perspectives and explores the conditions under which the benefits from the external succession
of the CEO outweigh the costs (D. Georgakakis, W. Ruigrok, 2017 ). However, there is an
opinion that there is a mistake in the work on the "CEO effect" - it is attributed to the
randomness effect (meant for the CEO), which violates the process of the research process itself
(MA Fitza, 2014; TJ Quigley, DC Hambrick, 2015 ).
In the context of agency theory, the status of a CEO and a sole insider contributes to
increased profits, that is the interaction between performance characteristics and organizational
factors has important implications for company performance (RB Adams, H. Almeida, D.
Ferreira, 2005, S. Her- Jiun, Y. Chi-Yih, 2005). The full share of insider ownership remains
stable, and the ratio between the executor and the insider is significantly increased while neither
full ownership by insiders nor the holding's relation to the insider have no effect on productivity.
Particular attention should be paid to the situation in which the succession of the CEO
does not take into account the critical institutional reality: some of the outgoing leaders do not
completely leave the place, but instead remain as chairman of the boards of directors. This
retention of the predecessor limits the right of the successor thereby detracting his ability to
make strategic changes or increase productivity, which differs from the succession levels (TJ
Quigley, D.C. Hambrick, 2011).
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By type of dismissal
The type of dismissal and the character of the position held by the director also affect the
company's profitability (J. Ji, O. Talavera, S. Yin, 2016). The dismissal of the CEO has a
negative impact on the company's work and that the company's profitability remains the main
criterion used to assess the performance of the CEO. An important aspect is the nature of the
dismissal. The departure of the previous CEO (by his own will (D. Jenter, F. Kanaan, 2015), by
agreement or other reason (D. Jenter, E. Matveyev, L. Roth, 2016) and the potential for the CEOsuccessor
an insider and an outsider are factors that impact the company's subsequent
performance (W. Bouaine, L. Charfeddine, M. Arouri, F. Teulon, 2014).
The connection between the type of dismissal of the previous CEO and the origin of the
existing one is reflected in the works of Kathleen A. Farrell (2003) and Khurana & Norhia
(2000), where the authors argue that companies will show the best result if inside CEOs follow
previous CEOs who quit and outside CEOs replace previous CEOs which is dismissed.
Hypothesis statement
As we noted earlier there are two dimensions of the CEO turnover may be outlined.
Firstly, it is the type of previous CEO dismissal and its effect on organizational mode. The
departure is usually classified as forced versus natural turnover. The Forced departure means that
the CEO was fired or dismissed, the natural one means the CEO decided to leave his post
voluntary. These two concepts are different in their effect on the organization, Moreover, forced
removal is conceded as much more disruptive. According to Zald and Berger (1978) forced
dismissals are involving vast amount of political coordination across a wide range of
stakeholders
Secondly, as we also mentioned, the firm performance may be affected by the origins of
successor (insider / outsider). As a rule
outside successors are more likely to cause
organizational changes ( Gouldner, 1954) more likely to break with traditional policies and
patterns in comparison to insiders states that outsider successors tend to bring and introduce new
qualities and practices (W. Bouaine, L. Charfeddine, M. Arouri, F. Teulon, 2014.)
According to Khurana (2000) The change of the CEO comprises of two stages, departure
and succession. The first is the manner in which CEO leaves the company, hence creating a
vacancy. The second stage comprises of selection between the insider or outsider successor for
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the vacancy. Hence, there is a clear connection between departure and the succession in the CEO
turnover process. That is why we can organize 4 types of CEO match
• insider CEO has replaced the predecessor who voluntarily left this post (PQCI);
• outsider CEO has replaced the predecessor who voluntarily left this post (PQCO);
• insider CEO has replaced a dismissed predecessor (PDCI);
• outsider CEO has replaced a dismissed predecessor (PDCO).
The probability of significant organizational changes in the first case is not high but, but
it is better for organization. If after the resignation of the predecessor, an internal candidate was
appointed to the CEO, then he should not radically change the firm's policy. A new person
always brings a new opinion, and therefore we can conclude that such candidate seeing the
shortcomings of the existing system, can softly change them by his actions, which should have
positivelyaffect on firm performance. Moreover, in comparison with other types, This type can
be considered as the best, because this type reflects stability of the organizational policies
Helmich (1974).
Hypothesis: Russian Companies where an insider CEO has replaced the predecessor who
voluntarily left this post demonstrates better performance compare to firms with other types of
succession.
In general, we consider forced dismissal as a signal of necessary changes. And the
outsider is more willing to make these changes.As result In total opposition to PQCI CEO match
type , the PDCO type, which
is perceived to be the most disruptive type with the highest
chances for the significant organizational changes.
Forced dismissal in combination with
outsider successor leads to both emergence of obligation and potential of realization of the
organizational change. In the new environment outsiders generate their ideas in the company's
activities he can change the structure radically because they are not used to the systems and they
are easy to change (Karaevli, E.J. Zajac, 2013)
Hypothesis: Russian Companies where an outsider CEO has replaced
a dismissed
predecessor demonstrates better performance compare to firms with other types of succession
While the PQCI and PDCO types are focused either at maintaining the status quo or
organizational change, (PQCO) and (PDCI) are in conflict, meaning that they do not effectively
influence the organizational change ( Khurana, 2000).
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As we said earlier, forced dismissal tells us about two things: dissatisfaction with the
company's activities and non-acceptance (objection from employees who never like change.
Thus, in the case of the dismissal of the company, changes are necessary. In the case of an
external candidate, there are no problems, since he is willing to do this by nature (hypothesis 2).
However, in the case of an internal candidate, the situation is different, as he tries to
maintain his status, find support in the team and at the same time he is not able to make the
necessary changes due to pressure. In connection with which we can conclude about worth
impact PDCI on firm performance in comparison with other types.
Hypothesis: Russian Companies where an insider CEO has replaced a dismissed
predecessor demonstrates worse performance compare to firms with other types of succession
In Case of voluntary departure of previous CEO the owners are satisfied with the
situation prevailing in the company and the arrival of an outsider with their changes to meet with
a great confrontation. In any case
outsider is considered as a threat because
after his
succession, changes would redistribute existing tasks and rewards, which were influenced by
specific internal individuals and if in the PDCO case this changes are necessary and
understandable than in PQCO they are not. In this connection, changes in the outsider may not
be supported by both management and employees. which will affect the firm's activities from a
negative point of view. So our next hypothesis is as follows:
Hypothesis: Russian Companies where an outsider CEO has replaced the predecessor
who voluntarily left this post demonstrates worse performance compare to firms with other
types of succession.
According to job match theory if the firm and the CEO understand their
inappropriateness, they terminate this relationship. So it is logical that the Board of Directors
makes a decision about CEO extension contract based on financial results of the company. That
is why CEO may be considered as a criterion for the suitability between the CEO and the
company. Similar logic were followed by Allgood & Kathleen A. Farrell (2003) who proposed
to classify the CEO on match and mismatch ones depending on the his tenure.
Hypothesis : Russian Companies
with GoodMatch
performance compare to firms with BadMatch CEO.
As a result we have the following hypothesizes:
CEO demonstrates better
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Hypothesis 1: Russian Companies where an insider CEO has replaced the predecessor who
voluntarily left this post demonstrates better performance compare to firms with other types of
succession.
Hypothesis 2: Russian Companies where an outsider CEO has replaced the predecessor who
voluntarily left this post demonstrates worse performance compare to firms with other types of
succession.
Hypothesis 3: Russian Companies where an insider CEO has replaced a dismissed predecessor
demonstrates worse performance compare to firms with other types of succession
Hypothesis 4: Russian Companies where an outsider CEO has replaced a dismissed predecessor
demonstrates better performance compare to firms with other types of succession
Hypothesis 5: Russian Companies with GoodMatch CEO demonstrates better performance
compare to firms with BadMatch CEO.
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Chapter 2. Empirical research
1. Methodology of the research
In this research, it was decided to focus our attention in the regression model on different
types of compliance.
The presented study uses the following regression model to test hypotheses:
Ait= b0+b1*(CMT )it+b2*HRit+b3*St r Chit+b4 Ait−1 +έit
where
A
+ it= is performance of company i in t year;
+
+
;
CMT
itare the independent variables characterized the different CEOs match types
HR
! it is the Hazard rate of the firm. This variable is modeled as a variable one and equal
to 1 if CEO has been changed during the t year, equal to 0 if such event has not happened;
+ r Chit is level of the Strategic Changesit in i company during the t year; The detailed
St
calculation of the value is presented in the description of this variable
+ it−1is performance of i company in previous (t-1) year;
A
t=2007,...,2013
Dependent Variable
In this work, we use set of dependent variables. First of all, it is annual Return on Assets.
This indicator characterizes a firm efficiently of asset use for net income production per time
period. In general, ROA is used by investors and high echelons to show the firms’ asset
profitability. Moreover, ROA is one of the most popular indicator for determination the company
performance in academic research literature (Rappaport, 1986; Mankin and Jewell, 2010), where
especially in case of its link with corporate governance, human capital and other personal
characteristics this coefficient is in demand ones ( e.g. Penni, 2014; Finkelstein and Hambrick,
1996; ….). In additional, according to Volkov, Nikulin (2009) return on asset can be considered
as true measure for short-term operational performance, as well as Hagel at al (2009) consider it
as underevaluated performance management ratio in terms of long terms profitability. In this
research we define ROA as ratio of net profit to total assets. However taking into account the fact
that ROA is best applied in companies within the same industry we adjust this indicators (as
well as others ones) on an industry-adjusted basis. Namely, we extract industry average of each
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year from each measure. And after that to avoid atypical fluctuations of the indicator, it was
decided to take the average for two years. Although most authors take longer periods to measure
the average (for example Brickley, Linck, and Coles (1999) used 4 years; Sam
Allgood & Kathleen A. Farrell (2003) - 3 years) , we preferred to use two years for more
adequate comparison of companies due to the lack of information on them for previous years. In
general,the similar procedure of calculation was presented in the research by Khurana (2000),
Ferris, Sp; Jayaraman, N; Jongha (2015), etc. To sum up the ROA formula is following:
ROAt=
(ROAit − ROAind t ) + (ROA
i t−1
2
− ROA
ind t−1
)
It is worth noting that similar to the Sam Allgood & Kathleen A. Farrell (2003) in the case
of absence of information for two years, we used information only for one year.
The second dependent variable is Return on equity. ROE shows how much the
shareholders can get from their investment in this firm. Companies try to increase this ratio
because it indicates the level of management efficiency to generate profit per each dollar( rubles)
of common stockholders' equity. In other words it can show is the management is good and
uitable for the firm or not. Return on Equity is also ratio reflecting the management effectiveness
of using equity to finance the firms’ operations and growth. In other words, ROE is ratio in term
of investors not the firm. This indicator determines what percentage of profit the company makes
for every monetary unit of equity invested in the company. (Berzkalne&Elvira Zelgalve, 2014).
At the same time ROE cannot specify the amount of money coming back to the shareholders,
because it depends on the firms’ dividend politics and stock price appreciation. Nevertheless,
ROE is a useful measure for underfunding the firms’ capability to generate a return and
reasonableness of the investment in terms of their risk (Berman et all, 2013). Put it other wise,
ROE can be use as indicator of value creation process for shareholders. Warren Buffet also
consider this ratio as the most favorable and mention it more that 30 times in his letters to
shareholders (Prince, 2012). The same position was presented by Monteiro(2006), who
emphasized ROE as main ratio for investors. Moreover, according to Rugman (1990,104) the
average of the 5 years ROE can provide to investors the best description of the growth of firms.
Rappaport (1986) has named this ratio as one of the most usable performance indicator and
nowadays it is still one of the most popular performance measure in academic researches.
Despite the fact that RОЕ is not widely common as ROA, it is still used as firms performance
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indicator in numerous corporate governance studies (Crespí-Cladera, Pascual-Fuster, 2014;
Brown&Caylor, 2009; Prinz, 2006). Nevertheless, the effectiveness of ROE use for firms’
comparison from different industries is not so high due to
high level of heterogeneity of
investors and income among industries. That is why we exclude banking industry at all and also
prefer to use the industry-adjusted indicators. As result the ROE calculation is similar to ROA:
ROEt=
(ROEit − ROEind t ) + (ROE
i t−1
− ROE
2
)
ind t−1
The third variant is Stock return. The study should include a market-based evaluation of
firm performance, because the market always reacts to the actions of the CEO or the company
situation as a whole. Moreover, unlike accounting indicators, market-based ratio is quite difficult
to manipulate. It is worth noting that we preferred to use Stock returns since this is the easiest for
calculation ratio. In this research, it Stock returns was calculated in a manner similar to the rest
of the dependent overflow ones. The same approach was presented in studies by
Sam
Allgood & Kathleen A. Farrell (2003) as well as in research by Brickley, Linck, and Coles
(1999).
Independent variables
We consider 4 cases of match types that were created in terms of combination the origin of
new CEO and nature of departure of previous ones. Due to detailed consideration these 2
categories in literature review so it is better to notion only the immediate meaning of these 4
variables.
PQCI is a dummy variable, which takes following mining:
1.
Current CEO is insider and previous CEO decided to voluntary leave his
position;
1.
In other cases:
• Current CEO is outsider and previous CEO decided to voluntary leave
his position;
• Current CEO is insider and previous CEO was dismissed;
• Current CEO is outsider and previous CEO was dismissed;
• The absence of the previous CEO as a result of the formation of a
completely new company.
PQCO is a dummy variable, which takes the value 1 in the case of the following combination:
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1.
Current CEO is outsider and previous CEO decided to voluntary leave his
position;
2.
In other 3 cases:
•
Current CEO is insider and previous CEO decided to voluntary leave
his position;
•
Current CEO is insider and previous CEO was dismissed;
•
Current CEO is outsider and previous CEO was dismissed;
•
The absence of the previous CEO as a result of the formation of a
completely new company.
PDCI is a dummy variable, which takes following mining:
1.
Current CEO is insider and previous CEO was dismissed;
2.
In other 3 cases:
•
Current CEO is insider and previous CEO decided to voluntary leave
his position;
•
Current CEO is outsider and previous CEO decided to voluntary leave
his position;
•
Current CEO is outsider and previous CEO was dismissed;
•
The absence of the previous CEO as a result of the formation of a
completely new company.
PDCO is a dummy variable, which takes the value 1 in the case of the following
combination:
1.
Current CEO is outsider and previous CEO was dismissed;
2.
In other 3cases:
•
Current CEO is insider and previous CEO decided to voluntary leave
his position;
•
Current CEO is outsider and previous CEO decided to voluntary leave
his position;
•
Current CEO is insider and previous CEO was dismissed;
•
The absence of the previous CEO as a result of the formation of a
completely new company/
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GOODMATCH
In additional we decide to check variable GOODMATCH. According to Sam
Allgood & Kathleen A. Farrell (2003) we can consider CEO-Firm good match if the CEO tenure
is equal or exceed 3 years, in other cases it is considered as badmatch. The logic behind this
expression is the following: if the CEO is suitable for the company, then the company shows
good results and the board of directors is satisfied with him. In this connection, both sides do not
have any incentives to end this cooperation. three years have been taken in connection with the
fact that, according to the studies of these authors (2000), the most probable division of the
company's and CEO paths takes place during the first three years. As result we have is a dummy
variable, which takes the value of 1 if the CEO tenure is equal or exceed 3 years, and 0 if the
CEO tenure is less than 3 years.
Controls variables
Level of Strategic changes
To understand how strong companies activity has change after New CEO appointment in
terms of strategic point of view, we need to create some specific measure. In accordance with
Finkelstein & Hambrick (1990) and Khurana (2000) new indicator will include 5 main aspects,
reflecting strategic changes in company’s behavior. Despite Khurana (2000) and Finkelstein &
Hambrick (1990) is basis for our indicator, we adopt to Russian reality almost each component.
• The first component is company size. The best proxy for this category can changes in the
number of employees. In this case we dealing with employees’ growth rate. The number of
employees was determined from the information of quarterly reports, where all employee data
relates only to the employee with official labor contracts and does not include the number of
employees of subsidiaries.
GRem pt=
Nem pt
Nem pt−1
• The second strategic aspect is changes in terms of company structure and investment
activity. To evaluate this indicator we turned to the Cash flow statement. The net amount of
investment operation with securities of other companies is dividend of our ratio, while total
sales is divisor.
I Asect=
Net prof it investment operation with securitiesot
Total salest
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• The next one is expenditures in capital, namely expenditures associated with operations
for the acquisition, creation, modernization, reconstruction and preparation for the use of noncurrent assets. This figure also considered as changes as present of total sales.
CA Pinvt=
Invest m ent in capitalt
Total salest
The forth part of our formula is R&D expenses. Due to the fact that in 2011 the accounting
records in Russia changed, data sources for this category at different time periods are different.
Until 2011, the number of R&D could be found in form number 5, while after 2011 this
information is presented in the notes to the balance sheet in the first section (as a rule it is line №
5140). It is worth noting that we only consider the completed R&D received during the t period
of time.
RDt=
RDt
Total salest
And the last component is debt to equity ratio, which reflect strategic changes in finance
approach.
As result all of these components reflect the diversity of changes in the firm's activities.
After calculation the each independent part of new ratio according to Finkelstein &
Hambrick (1990) it was necessary to generate the 2- years average for 2 year and compare it
with industry average. In the case of a positive difference, we code this value as 1, otherwise 0.
As result we have 5 components, each of them is 1 or 0. To create the variable, reflecting the
general changes we need to summarize these components. As result our Level of Strategic
changes varies from 0 to 5.
Prior Performance
The necessary to use the meaning of the previous (t-1) year is thanks to our desire to
adjust the result due to existence some endogenous variables in the model ( Khurana ,2000).
Namely the fact of CEO succession may occur due to unsatisfactory results of the company's
activities.
Hazard rate
Hazard rate is dummy variable that reflecting whether there was a appointment of a new
CEO this year (1) or not (0).
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2. Sample and Data Collection
To analyze characteristics of CEOs and their influence on company performance , it was
created a own database.
The data collection effort was based on two different steps: financial data collection and
CEO data collection ( a little bit different data collection structures were represented in Greve
2009). Regarding the company level the initial sample of the master dissertation is based on the
232 highest ranked organizations in Russia according to Thomson database estimation. This
sample was limited my research to the listed companies due to promoting more relevant and
transparent information about their governance and CEO characteristics as compared to nonlisted companies. After that we selected companies, which provided information from 2006 to
2013 years. The time framework of our database 2007-2013, however to estimate previous firm
performance we included 2006 year. The time period from 2007 to 2013 was chosen to exclude
abnormal behavior of companies due to financial crisis sanction period, which begun in 2014. In
general, the initial database consists of 1856 observation It is necessary to noted that to collect
information about the dependent variables were used SKRIN databases, as well as annual and
quarterly reports of companies presented in their websites as well as other widely available
internet sources
After financial data capture we moved on to search informational about CEOs. There were
considered more than 1000 annual reports and other open information to establish named and
other personal characteristics of CEOs of
in each company. All information about Chief
executives were hand collected are not available in any database. The next step was to select
CEOs. To be sure in a sufficient record for evaluation we take into account CEO who were
running the company as minimum last 5-6 month of the fiscal years, because only in this case
CEO can be partly responsible for firms’ outcomes and does not be excluded from the full
sample. Each company’s CEO were identified
on first of January of each year. However here
there were adjustment as plus or minuses 1-3 month from begging of the year to provide more
realistic result of CEO activity. The next action was to clearly considered the biography of
CEOs to identify personal parameters regarding their education and experience as well as
demographic factor. After that it was necessary to find information about the reasons of
departures of CEOs, who were not included in the data due to delegation of their CEO authority
to successor the was before 2007 year. All of this Information can be obtained from the annual
reports,
Forbes surveys, Vedomosti, Kommersant articles, companies websites and other
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internet recourses such as Wikipedia. The search of information about one person could take up
to a couple of days, as this process is very time-consuming, and many "non-star" companies
provide very limited information about CEOs. As a result, in order to find out the less complete
biography of the CEO, it was necessary to look through a lot of earlier reports of other firms
where this CEO held the leading position. Moreover, we also considered structure of
management in organizations to identify the level of CEO power. As result our sample include
363 persons from 143 companies represented by 11 industries, and these people generated 991
observations at all . I n case of stock return there are 331 observation after excluding
690
missing values by STATA. It happened due to strange system of typology of Russian public
companies during considerable period of time. according to this typology some
public in terms of law but at the same time do not have
firm can be
active stock trading on the stock
exchange (IV Berezinets, Yu. B. Il'ina, AD Cherkasskaya, 2013)
3. Descriptive statistics
It should be noted that the descriptive statistics includes not only variables presented in
the regression, but also other set of the indicators that were hand-collected by author.
73% of the firms in our model altered their chief executive from 2007 - 2013, 29% percent
did it two times, and 14% - three or more times. Looking at Fig. 1, at 2007 - 2012, the
percentage of chief executive substitutes dropped almost twice. Yet, the three yearly repeated
type of the alteration is established, with climaxes in 2007,2010 and 2013. The most efficient in
terms of cases was the crisis of 2007 and the 2013 pre-crisis years. It should be noticed that we
did not see instances of alteration of the chief executive after end of 2013.
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New CEO appointm
30 %
CEO AGE
29 %
59
37 49,5
58
38 45,385
50
37 44,5
57
51,333
48
transport&logistics
telecom
retail
pharma sector
Oil&gas
It
metallurgy
fmcg
engineering
coal
constr&develop
energy sector
chemical industry
23 %
22 %
2008
2009
15 %
71
36 46,643
67
40 51
57
39 49,4
47,59465
31
41
3336,75
52,61969
36
67
41 52,571
59
29 43,375
46,42 67
30
65
51,357
33
other
25 %
23 %
8 %
0 %
+
2007
2010
Figure 1 New CEO appointment
INDUSTRY FOCUS.
Chief executive change has an industrial
specificity - some sectors display considerably
greater instability in terms of equally the
number of chief executive substitutions and the
0
Maximum
20
Average
40
60
Minimum
80
proportion of firms that have changed. The
leader in both categories is the coal, energy and
IT industries.
In the coal, IT areas, in addition to the chemical sector, normally, all firms came to the
deduction that it was essential to alter the chief executive.
In the energy industry and broadcasting sector, the regularity of alteration of chief executive for
7 years has gone 2.6. A probable reason for this volatility in the energy industry is energy reform,
corresponding to which throughout 2007 nearly half of the control and 22 supply firms of the
country were privatized and by 2011 the production and allocation actions had entered free
competition market. Furthermore, throughout this period there was numerous M&A and
reorganization procedures, which led to the continuous chief executive change. Therefore, the
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alteration of ownership and volatility in the industry involved many employees reorganizations
in executive tiers.
Alternative situation is detected in broadcasting. On the whole, due to the slowdown in the
sector as a whole contrasted to 2000, stakeholders were disappointed with the economic
outcomes and tried to discover the most appropriate chief executive. It shall be noticed that,
corresponding to the Talent Equity Institute (2014), a comparable condition concerning
broadcasting was detected around the world.
At another end, or in the lower left corner, fairly steady sectors are situated. Total superiors in
this section are pharmaceuticals, in which all the chief executives were provided with
unchanged. One of the possible justifications is that in these sectors a necessarily big quantity of
firms, which are controlled by the establishing owners.
It should as well be noticed that in some sectors, for instance metallurgy, fairly few firms alter
their chief executive, but due to specific motives, this swap is very enthralling.
Portrait of typical CEO.
Demography.
Chief executive usual age is 48 years, this makes Russian chief executives one of the youngest in
the world (in the USA the same figure is 53 years, in Japan - more than 60 years), while the
world trend is the rejuvenation of chief executives.
Though, the era, when youngsters came to run firms in our country have ended. Young
executives who rose to head-positions in the 90s achieved the mean age throughout the period
under analysis. Though, in our example, the youngest chief executive was 29 years old (Hals
development), and the oldest 71 (JSC WTC MOSCOW) In Russia, the youngest chief executives
are detected in FMCG (37 years), the oldest - in engineering (53 years).
It shall be noticed that, typically, chief executives linked to the research firms 45 years old, the
freshest was 23 years old chief executive, and the oldest was 68.
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Female CEOs
Among the CEOs who headed the largest
Female
0,026
Female VS Male
CEOs
MBA per sectors
transport&logistics
telecom
retail
pharma sector
other
Oil&gas
It
Female
metallurgy
Male
Male
0,974
fmcg
Figure 3 Female VS Male CEOs
engineering
coal
Russian companies in the last
construcction&development
study period, there were only four
energy sector
women (about 2.5%). At the same
chemical industry
time, only half of them managed
the company for more than 2
0%
10 %
20 %
30 %
40 %
years. There is no any domination
of Women CEO in any sector of Russian economy. These data indicate the existence of a
"ceiling" for female employee, that is, an invisible career barrier limiting the promotion of an
employee in the company. In the world, the situation with women at the head of companies is
quit better. According to Qlik estimates (2014), only 4% of the CEOs of the world are women.
The largest share of in India - 8%, especially in women who are headed by all major financial
organizations. Following India, the proportion of women CEO in the ranking followed by Britain
and Australia (5%). For comparison: in Japan and Hong Kong, all CEOs are men.
Business Education
The average number of educations held by CEOs is 1.36, rising up to 5, while almost 2%
of CEOs did not have at least one higher education, only vocational ones. It is possible that these
Figure 4.
two percent have a higher education, since it is more likely in all job descriptions that it is
indicated as a condition for consideration for a position. A rational reason for the lack of such
degree is the fact that CEO is an owner or a founder. Another reason is to get a correspondence
Figure 4. MBA per sectors
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higher education, which is simply not included in the reporting. Nevertheless, the world knows a
lot of examples when people without education created an empire (for example, Steve Jobs) In
any case, exceeding 1 by 30% implies that every third CEO was interested in expanding his
knowledge and gaining additional degrees.
15% of CEOs have an MBA. For the Russian market this is quite high, although not
comparable with the US market CEO, where about 40% have an MBA. It should be noted that
according to the HBR(2014) survey of 100 top companies, this indicator was twice as high as
Russia's (29%). High indicators are observed in transport& logistics, in pharmaceutical sector
and in engineering. It is worth noting that these industries have indicators for turnover below the
average. An interesting factor is the total absence of the CEO with MBA degree in coal industry.
Apparently, these traditional industries value more experience and not education. Regarding
comparing Current VS previous CEOs the incidence of MBA degrees is higher among current
CEOs, than among their predecessors. On average 16% of current CEOs hold an MBA degree,
while only 13% of previous CEOs.
It is necessary to mention again that studies can not find an exact answer about the impact
of the MBA CEO on the company's performance. So in 2009 the INSEAD study confirmed the
positive effect of having a MBA degree from a CEO for a long-term shareholder value, but
Gottesman and Morey (2010), Ayaba (2012) as well as other research proves an abcence of any
link.
Nevertheless, Adi Ignatius (2014) called the MBA one of two ways for the CEO success.
The second condition is the technical education. Koyuncu et al. (2010) agrees with him, saying
that managers with technical education show better performance than managers with another
ones.
In general, technical education is the most popular major for russian CEO(68%), which
corresponds to the conclusions of gnatius and Koyuncu. The second most popular direction
among top management is economic (41%). The legal and management diplomas are owned
only by nearly 10% of the CEO.
However, in the opinion of Burkart et al. (2003) and Bhattacharya et al. (2004) the most
important is the coincidence of the specialization of the company with the specialty of education.
Since we have identified two degrees of coincidence (the narrow specialty of CEO completely
coincides with the company's activity, the broad profile (industry specific) of education coincides
[Введите текст]
with the profile of the company), in the first case the indicator reached 33% of coincidences,
while in the second case it was 69%.
Regarding scientist degree 25 % of CEOs had it. If be more precisely, 17 % had Ph.D., and
8% own a title of Doctor of Science, and 0,3% received more than two scientific degrees.
Current VS Previous CEOs. Education aspect
69 % 71 %
33 %
16 %
64 %
68 %
40 % 39 %
39 %
13 %
MBA
6 %
Specedu
+
Widespecedu
Thechical
Current
Economic
9 %
Law
13 % 12 %
Management
Previous
Figure 5 Current VS Previous CEOs. Education aspect
Industrial experience.
Industry experiance
According to the statistics, less than 25%
of cheif excecutive officers of the companies did
26 %
not have experience in the field in which the
company operates in. This actually makes sense,
as the knowledge of technology and processes is
of crucial importance in heavy industries that
form the core of russian economy. As a rule, the
future CEO would begin his or her career from
the bottom and steadily rise from there to the top.
74 %
CEOs have Industry experiance
CEOs have not Industry experiance
Actually the average industrial
experience before becoming CEO was 11
Figure 6 Industry experiance
years, but in the sample it became 41 years. In
the coal sector this figure is 21 years and in IT it is 18. In the FMCG and construction sectors the
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figure is minimum – 3-4 years. What is interesting, in Russia there are about 38% of CEOs with
governmental experience and 62.5% of them are in Oil&Gas sector. It is not a surprise as the
majority of these assets are public property.
Prior experience as CEO .
Prior experiance as
CEO
According to the survey, 54% of CEOs
previously led the company. But in construction
and development sector the figure is lower –
around 25%. In metallurgy and FMCG the survey
shows the most considerable experience of CEOs.
46 %
In average, previous experience as CEO in all
54 %
industries is around 3 years. In mechanical
engineering, chemical and coal industry, tthe figure
is under 8 years. Butin construcction &
development it is around 1 year. 63% of current
CEOs have prior axperiance as CEO
CEOs have not prior axperiance as CEO
CEOs have previous experience as chief executive officer. And out of these ex-CEOs 71%
worked in other firms.
Figure 7 Prior experiance as CEO
СEO tenure
In average CEOs remain in their positions during three years, while 30% of them left the
company one year since they were hired. For instance, the US CEO holds its position for 7-8
years (Schloetzer, Tonello, Aguilar, 2014), in Australia – for 5 or 6 years. Before the year
2010, the term of CEO's work in this organization wasn’t more than 2 years, but afterwards this
figure was overcome.
This situation may be probably caused by the crisis aftermaths in 2007, when new CEOs
got appointment to take some anti-crisis measures relevant at that time. Moreover, with the
economy being more sound, companies also got some consistent results, which, theoretically,
can help to decrease turnover of employees. At the beginning of the period under discussion,
87% of staff had experience to be a CEO, with the duration of their work from 5 till 27 years
maximum.
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CEO tenure
7
5
1,8696
2
1,6071
1,6774
4
2
0
1,7391
2,7083
4,2609
3,1429
2007
2008
+
2,9032
2,6957
2009
2010
Prior Tenure
2,6522
3,4091
2,1667
2011
2012
2,9783
2013
Company Tenure
Figure 8 CEO tenure (years)
Insider VS outsider or the CEO origin
It may be seen at the allocation of replacements amongst insider/ outsider, that the
proportion of insiders (54%) in Russia is usually lesser than in established markets. For instance,
worldwide this proportion is 76-78, in Canada and the USA it is about 80%, in China -85%, in
Japan - 97% (PWC, 2016)
From one point of view, this is due to the pretty vulnerable instruments for the growth of
future executives from inside, from another point of view, regular relocations of possession and,
therefore, disbelief of new possessors to inside administration.
Considering the distribution variation by year, several appealing problems may be seen. It is
noteworthy that in 2013 and 2007 there was a number of cases of employing internal chief
executive (63% and 54%), this underlines the firms’ aspiration to remain with the one who has
knowledge and ultimately approves the dependency of this marker on volatility Economy.
Period, when the amount of outsiders (about 60%) surpassed the amount of insiders, is
2008-2011 post-crisis years.
Hence, it results in the fact that throughout the crisis phase, firms aspire to shift their internal
employees more, as they are more devoted to the firm and its employees, but meeting the
incapacity of insider chief executive to handle the established goals, the firm turns to outsiders,
since it needs a rather solid business reformation.
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55% of existing chief executives have former practice with the same firm. Before becoming
the chief executive, present chief executives have operated in the same firm during, on average,
3,82 years. Of previous chief executives, only 47% have operated within the same firm before
becoming the chief executive. Their normal practice of working in the firm in different titles is
2,55 years. Generally, the usual firm occupation before chief executive employment is 3,75
years.
It should be noticed, that the normal occupation for insiders and outsiders is almost the
same. For insiders, it is 3 years 2 months, and for outsiders - 3 years 2,5 months. The variance of
conditions amongst the two sets is just half a month in favor of outsiders.
It should be noticed that the parity of conditions communicates about the identical
approach to the two clusters and the absence of a more recognition of belief to insiders from
proprietors.
It also must be noticed, that normally, it takes 7 years for the insiders to spend in the firm
before the employment.
One more noteworthy tendency is the fairly reverse association of firm occupancy before
employment and chief executive occupancy in this company.
Those people that have operated in the firm for more than 10 years, as a rule, can’t stay in
the company as chief executive for more than 7 years. Though, it is fairly simple to elucidate the
fairly small occupancy as chief executive for workers who have given their firms all their life. If
it is assumed, that they went to the firm after completion of university for an initial position, they
operated there for 20 years, then they have roughly just 5 years before leaving.
Furthermore, a necessary amount of individuals who after 10 years’ practice in the firm
operated in the top position for less than 3 years. This advocates that evidently, such executives
could not sufficiently demonstrate their executive abilities regardless of the massive credit of
trust and admiration from the proprietors.
Prior to consideration the subsequent parts concerning sort of substitution, it must be
noticed that in the regression analysis the Force Dismissal and Promotional motives constructed
on the character of the solutions have been unified.
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Insider VS outsider
70 %
53 %
61 %
57 %
54 %
46 %
43 %
63 %
57 %
43 %
39 %
43 %
38 %
35 %
63 %
57 %
37 %
18 %
0 %
2007
2008
2009
+
2010
Insider
2011
2012
2013
Outsider
Figure 9 Insider VS outsider by years
Reasons for Resignation of previous CEO .
First of all, it should be noted that this statistics is only relevant to the previous CEOs
who have worked in companies during 2007-2012 years.
Reasons of turnovers(%) current
CEO
Reasons of turnovers(N)for current
CEO
50
100 %
21 %
75 %
44 %
47 %
35 %
50 %
31 %
25 %
24 %
0 %
2007
38
62 %
69 %
61 %
25
14
26 %
44 %
2008
QUIT
23 %
26 %
2009
20
15 %
28 %
3 %
2010
2011
DISMISS
13
32 %
7 %
0
2012
PRMOTION
Figure 10 Reasons of turnovers(%)
+
7
16
24
12
9
11
15
2007
2008
QUIT
20
17
9
9
6
8
1
9
2
2009
2010
2011
2012
DISMISS
PRMOTION
Figure 11Figure 11 Reasons of turnovers(N) for
current CEOs
Reasons for quit of
previous CEO
In 32% of cases the new CEO came to the
office because of his predecessor decided
to quit.
16 %
The reason for quit in most cases was the job
7 %
offer from other companies (56%). We did not
57 %
16 %
distinguish
this reason between the preterm
character of the termination or not.
4 %
In 16 percent of cases, the reason was the
Other company
Сontract еxpiration
Unlkown reasons
Health issue
Retirement
Figure 12 Reasons for quit of previous CEO
expiration of the terms of the employment
s CEO dismissal
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contract, in 7% of cases- retirement and in 4 -%health problems of previous CEO.
In 45% of cases, the board of directors was forced to dismiss the previous CEO. The most
common reason is a change of ownership / restructuring / M&A, which covers
24% of all
layoffs.
In 19% of cases , the CEO was simply downgraded. It is most likely that he held this position
temporarily while searching for a more suitable candidate.
In 14% of cases the replacement occurred due to the decision of the Board of Directors to
conclude or terminate the contract with the management company. It is mainly inherent to the
holdings companies and to the energy sector.
A criminal case was filed against the CEO in 8% of cases. Naturally it entailed CEO
dismissal. In 4% , the cause was scandals, as a rule of ethical nature. Such events significantly
affect the reputation of the company, especially the value of shares.
The 6% of the CEOs were redirected to other positions within the holding for more
rational use of their knowledge and skills.
In 4% of cases, the CEO had a conflict with the owner. Most likely, both sides did not
share a common vision of the company's future.
The most interesting thing is that, due to unsatisfactory results, only 5% of the CEO was
fired! This seems extremely illogical. However, it is worth noting that companies are trying not
to classify the theta reason and offer a lesspunctual formulation.
Change of leadership due to the
promotion of the previous CEO took place only
in 23% of cases. Naturally, the largest share
belongs to the appointment of the CEO by the
chairman of the board of directors. Which is
45% of cases. Almost the same proportion is
accounted for by individuals who have been
increased by parent companies to managerial
positions (42%). 13% of the predecessors left
office in connection with appointment to state
Figure 14 Reasons of previous CEO promotions
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positions.
Thus, it can be concluded that in most cases the appointment of a new CEO was due to the
unforced release of the post by his predecessor. However, in the case of layoffs, the financial
factor does not take the first place.
Moreover, it is worth noting that 25% of the previous CEOs
have remained in the
company in one or another roles after their dismissal. This is, on the one hand, good, since it
allows smoothly transferring business and in a certain sense to organize the process of
"Succession". On the other hand, this limits the power of the head manager, since new leader is
under the pressure of his predecessor.
Regarding whole sample it is worth noting that in 57% of the previous CEO (including
previous CEO who worked before 2007) wanted to leave the position voluntarily, while in 31%
of cases this decision was made not by him.
Goodmatch or Badmatch
42 % of the entire sample is treated as goodmatch, 58% as badmatch. Of current CEOs
32% are a goodmatch to the company, while 68% are a bad match. Of previous CEOs 27% are a
goodmatch to the company, while 73% are a bad match.
On average 10% of goodmatch current CEOs decided to quit and 10% were dismissed. 3
% of the goodmatch current CEOs were promoted, and 80% were working in company at the
end of 2013.
Of goodmatch previous CEOs, 34% decided to quit, 49% were dismissed and 19% were
promoted. Of badmatch previous CEOs, 32% decided to quit, 43% were dismissed and 25%
were promoted.
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80 %
80 %
60 %
52 %
49 %
43 %
40 %
32 % 34 %
25 %
23 %
20 %
10 %
15 %
10 %
19 %
9 %
3 %
+
0 %
Quit
GoodMatch Current
Dismissal
BadMatch Current
0 % 0 %
promotion
BadMatch Previous
Still working
GoodMatch Previous
Figure 15 GoodMatch VS Badmatch by type of succession
It is worth noting that we can not consider badmatch Current and Previous CEO in
negative aspect. On the contrary, this tells us that their performance were so good that the CEO
was promoted.
Goodmatch vs Badmatch CEOs
Goodmatch current CEOs tend to be older and have shorter experience working in the
company and longer industry experience before becoming a CEO, than badmatch current CEOs.
Goodmatch current CEOs on average start their CEO tenure at 45 years old, while badmatch
current CEOs start on average at 46years old. The average CEO experience before becoming the
CEO of the current company for goodmatch current CEOs is a little bit shorter than badmatch
has, but in average it is 3 years. Current good match has a higher present of CEO with MBA and
correspondence their education with firm activity. Moreover, among current good match more
CEOs have economical and law major in comparison with badmatch. The average number
persons with academic degree is almost twice higher. However the opposite situation in term of
education regarding previous CEOs. CEOs with additional education, MBA and scientific
degree are more likely were badmatch. However, Goodmatch CEO also have less experience as
CEO in comparison with badmatch.
To sum up we can conclude that Good match CEOs as rule are older than Bad match, have
less experience as CEO, and their education should match firm activity.
CEO match types
[Введите текст]
This Descriptive statistics shows us that there are 36% of combination among Russian
Companies where an insider CEO has replaced the predecessor who voluntarily left this post. It
make this type of match the most popular.
The second place belongs to combination where an outsider CEO has replaced the
predecessor who voluntarily left this post. 208 times or in 21% of cases this combination is
watched.
The third and forth combination occur in the sample approximately the same number of
times. In case of situation when an insider CEO has replaced a dismissed predecessor ,this value
is 147 or 15% of the total sample. While the case of appointment of an outsider CEO instead of
a dismissed ones occur 157 times or in 16% of total sample
Table 1 Descriptive statistics for CEO match types
CEO match type
Name
%
Other types
Freq.
structure
%
Freq.
1
PQCI
36,53%
362 PQCO+PDCI+PDCO+NC
63,47%
629
2
PQCO
20,99%
208 PQCI +PDCI+PDCO+NC
79,01%
783
3
PDCI
14,83%
147 PQCI +PQCO +PDCO+NC
85,17%
844
4
PDCO
15,84%
157 PQCI +PQCO+PDCI+NC
84,16%
834
5
New comp (NC)
11,81%
117 PQCI +PQCO+PDCI+PDCO
88,19%
874
.
Firm Performance
We calculated the Performance by the formula, which actually gives us the average
performance deviation from the he average industrial significance. Due to the fact that the
average industrial values were calculated on the basis of the same sample, it is logical that the
average deviation will be zero.
Per ft=
(Per fit − Per f
ind t
) + (Per f
i t−1
2
− Per f
ind t−1
)
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Table 2 Descriptive statistics for performance
N
mean
ST Dev
Min
Max
ROA
991
0,00
0,26
-2,6
1,5
ROE
991
0,00
2,05
-15,49
33,71
ST return
331
0,00
0,72
-8,68
2,42
The maximum average ROA deviation from the industrial was observed 1,5 while the
minimum is -2,6. Note that the group of companies with the highest value of ROA deviation
includes AO OMPK (the average for 7 years is 0,4) ARMADA(0,3); AO MOSTOTREST (0.39)
RUSS-INVEST(0,32). At the same time group with the lowest value include GRUPPA
CHERKIZOVO (-0.69), KUZBASSENERGO (-0,32), YAKUTSENERGO (-0,31).
In case of ROE the minimal value of deviation is -15,46, maximum – 33,71. Companies
with the highest ROE deviation from industrial ones are VOLGOGRADENERGOSBYT,
APTECHNAYA SET' 36, KSK, AVIAKOMPANIYA UTAIR ; firms with the lowest are
MAGNIT, M.VIDEO, KUZBASSENERGO.
Regarding Stock returns, the maximum positive
maximal
meanings
for deviation is 2,49, and
negative value is -8,68. Companies with the highest average
deviation are
LENZOLOTO, TORGOVYI DOM TSUM, ARMADA; with the lowest average deviation VOLGOGRADENERGOSBYT , DEC, KUZBASSENERGO.
Strategic Changes
Table 3 Descriptive statistics for Strategic Changes
N of observation
Mean
ST.Dev
Min
Max
991
1.479
1.061
1
0
A large part of the sample is made up of companies with the first or second level of
strategic changes. In 35% of cases the companies have the 1 level, in 30% - the second level, in
13% -the 3 level, in 3% - the 4 level and only in 1 % of cases companies has the highest level.
The fifth level of strategic changes in different years managed to be realized by the following
c o m p a n i e s : AV T O VA Z , K O R P O R AT S I YA V S M P O , M O S T O T R E S T ,
NIZHNEKAMSKSHINA, RED OCTOBER CONF. , RUSPOLYMET
[Введите текст]
Table 4 obzervations distribution by the level of the strategic changes
Level of the strategic changes
freq
%
1
348
35%
2
302
30%
3
124
13%
4
28
3%
5
7
1%
Hazard rate
We have already mentioned general succession statistics among Russian companies,
however such indicator as Hazard rate gives us information about the total number of new CEO
appointment cases. Thus, in 2007-2013 the new CEO was appointed 339 times, which is 34%
of the total sample.
In connection with that, lets consider here additional
hazard function, that represent
probability that a newly CEO will stay in this firm during the t yearth, and after that he will
decide to leave.
Figure 16 Hazard function (years of tenure)
hazart function
100 %
75 %
50 %
25 %
+
0 %
1
3
5
7
9
11
13
15
17
19
21
23
According to match concept this function should increases and then decreases. There we
do not see a significant changes in probability. Nevertheless, during the first 7 years every two
years, the probability of leaving the position for the CEO is likely to increase. However, after
seven years of CEO tenure in office, the probability of leaving this post for CEO is declining by
[Введите текст]
year to year till tenure reaches a minimum of 13 years. Thus, the average cycle length in our
case is 8 years.
4. Regression analysis results
First of all, we created a basic model (the first column) that characterizes the relationship
between the dependent variables and the premature, describing the CEO characteristics in terms
of match concept point of view. To test our hypotheses the different of combinations of matches
were added to each basic model. As a result of testing the models, we came to the conclusion that
the most preferable is the models with OLS regression.
The basic models describing ROE or ROA were recognized as statistically significant. At
that time, the basic model for stock return has not show sufficient significance. This can be
explained by the situation that has developed in the period under consideration. As we have
mentioned before, many public companies in terms of the Russian the law did not actually trade
on the stock exchange, that lead to is impossible of determination of stock return. More than half
of our data includes missing values of stock returns. Moreover, the situation with the merger of
the two Russian exchanges in 2011 is added to this problem.it is lead to the revaluation of the
market value of the companies and stock returns has changed significantly. On the basis of the
foregoing, consideration of models, explaining the stock returns is irrelevant.
[Введите текст]
Table 5 Regression analysis (ROA)
Constant
Model 1.1
Model 1.2
Model 1.3
Model 1.4
Model 1.5
Model 1.6
-0.278*
-0.315 **
-0.317 **
-0.278 *
-0.164
-0.133
PQCI
0.117
PQCO
0.226
PDCI
0.006
PDCO
-0.495 **
goodmatch
-0.277 *
Prior
performance
0.363 ***
0.362 ***
0.364***
0.363***
0.363 ***
0.362 ***
HR
0.279 *
0.286 *
0.279 *
0.281 *
0.302 *
0.1621
Strategic
Changes
0.133 *
0.128 *
0.12715 *
0.132*
0.124*
0.147**
0.141
0.142
0.1426
0.1414
0.145
0.144
P value
0,0000000
0,0000000
0,0000000
0,0000000
0,0000000
0,0000000
N
991
991
991
991
991
991
+R 2
All the models dealing with ROA presented in Table 3
and they are statistically
significant. In the 2-4 models, all variables of the basic model are significant. In model №5
Hazard rate is considered as insignificant, in comparison with the basis ones.
Table 6 Regression analysis (ROE)
Constant
Model 2.1
Model 2.2
Model 2.3
Model 2.4
Model 2.5
Model 2.6
-0.089
(-0.10029)
-0.049
-0.102
-0.119
-0.154 *
0.042
PQCI
-0.167*
PQCO
0.011
PDCI
0.113
PDCO
0.221*
goodmatch
-0. 155 *
Prior
performance
0.595 ***
(0.595)
0. 593 ***
0.595***
0.595***
0.595***
0.595***
HR
-0.022 (-)
-
-
-
-
-
Strategic
Changes
0.107 ***
(0.108***)
0.115***
0.108 ***
0.109***
0.121***
0.117***
0.576
(0.576)
0.577
0.576
0.576
0.577
0.577
P value
0,0000000
0,0000000
0,0000000
0,0000000
0,0000000
0,0000000
N
991
991
991
991
991
991
+R 2
[Введите текст]
It should be noted that in the case of ROE as dependent variable, Hazard rate is an
insignificant variable in the basic model, and therefore it was deleted for model optimization.
Other control variables show height level of significance (1%) in all other specifications dealing
with ROE. Moreover,
in average 58% of response variable variation that is explained by our
models.
Strategic Changes
In all models, we see a we strategic changes influence on performance. It is natural, since
the aim of any strategic changes is improvement the company performance.
Even though
strategic changes are focused mainly on a long-term perspective, the first results can be seen
early. It is confirmed by the relatively low coefficients of this variable.\
HR
The HR control variable indicates that the CEO replacement event. The
regression
analysis shows that companies, where succession event has happened shows a better
performance in comparison with the firm, where CEO has not changes.. Such relationship was
presented in 1-5 models. It can be explained by main assumption of Goodmatch concept that
CEO and firm decide to separate their ways, when they understand their mismatch by poor firm
performance. The next CEO should be more suitable for the firm than the previous ones, that is
why the firm performance should be better in comparison with previous one. However, in ROE
cases we cannot find any differences in performance among Russian firms in terms of existence
or not of succession events.
PQCO and PDCI
PQCO variable as well as PDCI are statistically insignificant in all specifications, where
they are presented. It means that there are no any differences in firm performance between there
types of match and other combination together . So In other words, as results of our research we
are
not allow us to accept or reject the hypothesis № 2
(models 1.3 and 2.3) as well as
hypothesis №3( models 1.4 and 2.4).
Among the variables that characterize CEO match types, the variables PQCI in 2.2 model,
PDCO in 1.5 and 2.5 models, goodmatch in 1.6 and 2.6 models are statistically significant.
Lets consider them in more detail.
PQCI
[Введите текст]
The firms where Replacement CEO who voluntarily left this post by New insider CEO
demonstrates worse performance, expressed in ROE, than the company with other types of CEO
match types together. It means that we need to accept the first Hypothesis. This result is logical
enough, since the replacement by an insider who voluntarily left the CEO means, as a rule, the
transfer of power to one of the top managers. In this case, the company's policy and tactics
should not change, it will simply continue the line of behavior of the previous CEO., since the
new CEO worked under command of previous ones and shared his vision. However, a negative
influence is inevitable, since within the framework of the match theory this would mean that a
more suitable person (the new CEO) could take this position earlier (model2.2). As result we
reject the first hypothesis. At the same time, we can not accept or reject the hypothesis of the
impact of this category on performance expressed in ROA in comparison with other possible
combination (model1.2)
PDCO
In case of the appointment of an outsider CEO instead of a dismissed one
there are
difference in outcomes of the firm with such combination in comparison with other types
(PQCI +PQCO +PDCI+NC). however, the direction of the differences is contradictory. In case of
financial performance expressed in ROA we can see that companies with this match type of
CEO present poorer
performance in comparison with other types together (PQCI +PQCO
+PDCI+NC) (model1.5). At the same time the same category of the organizations shows the
better outcomes, expressed in ROE, as opposed to other combination together (PQCI +PQCO
+PDCI+NC) (model2.5). Taking into consideration the fact that the ROA and ROE have the
same numerator, then the different direction of communication is explained only by the
denominator. In other words, according to formulas ROE=ROA*financial leverage and Total
assets=equity
+ liabilities, difference in signs
can be explained by increasing amount the
borrowed capital in Companies where Outsider CEO, who replaced dismissed predecessor.
Thus, we can not reject the 4 hypothetic dealing with ROE an we reject the 4 hypothetic dealing
with ROA.
Goodmatch
Both models containing a Goodmatch variable present us that he firms with Goodmatch
CEO demonstrates a worse performance, than the firms with badmatch. Thus, we can conclude
[Введите текст]
that the decision on the termination of the CEO's duties is mainly made not on the basis of
financial indicators but due to other factors. In connection with that we reject hypothesis № 5.
The summary of our result present in the following table
Table 7 Result of the Hypothesis testing
№
Hypothesis
1
Russian Companies where an insider CEO has replaced ROA
the predecessor who voluntarily left this post
demonstrates better performance compare to firms with ROE
other types of succession.
-
Russian Companies where an outsider CEO has replaced ROA
the
predecessor who voluntarily left this post
demonstrates worse performance compare to firms with ROE
other types of succession.
-
Russian Companies where an insider CEO has replaced a ROA
dismissed predecessor demonstrates worse performance
compare to firms with other types of succession
ROE
-
2
3
4
5
5.
performanc Can not reject
e
reject
Russian Companies where an outsider CEO has replaced ROA
a dismissed predecessor demonstrates better performance
compare to firms with other types of succession
ROE
Russian Companies
with GoodMatch
CEO ROA
demonstrates better performance compare to firms with
BadMatch CEO.
ROE
✓
-
-
✓
✓
✓
✓
Result and their managerial application
A detailed discussion of the results of the study was presented in the section with
descriptive statistics and regression analysis. In this part, we give some excerpts that seemed
most interesting to us, and also try to give recommendations for the application of these results.
As a result of the study, we obtained the following finding:
•
Russian chief executives are considered as one of the youngest in the world (48 years old).
This indicates the desire of the owners to create conditions for the involvement
the
innovations in the company. Also it could mean the existence of the conditions for faster
career advancement in Russia, compared to other countries.
[Введите текст]
•
The overwhelming majority of senior managers are men. There is exist a "ceiling" for
female employee. At the Same time, there is no any domination of Women CEO in any
sector of Russian economy.
•
Almost 2% of CEOs did not have at least one higher education. Only a very limited circle
of people managed to achieve success thanks only to their skills. Thus, the practice of
corporate governance suggests the need for at least one major to be able to be considered
for the CEO post.
•
15% of CEOs have an MBA. The total absence of the CEO with MBA degree in coal
industry. Educationis (particularry MBA) considered as one of the criteria of the CEO
competitiveness. However, the additional research have showed that companies in which
the CEO who has an MBA, shows better performance than firms where CEO does not
have the MBA degree.
•
The share of general directors with technical education is 68%, the second place belongs to
economic education, which indicates the need for a leader to achieve goals and solve stated
problems of developed logical thinking, ability to analyze and establish causal relations
•
In average CEOs remain in their positions during three years, which agrees with the match
theory. Nevertheless, 30% of CEO left the company one year since they were hired.
•
Actually the average industrial experience before becoming CEO was 11 years, but in the
sample it can achieve 41 years. Industrial experience is considered as a significant factor
for the retention of the post for a longer tenure.
•
Due to unsatisfactory results, only 5% of the CEO was fired. which means ignoring the
financial results when making a decision to extend contracts with the CEO, as well as the
reluctance of the company to disclose the true reason for the dismissal.
•
The reason for quit in most cases was the job offer from other companies (56%), which
can mean understanding by CEO of his mismatch with the firm, and his desire to realize
his potential elsewhere.
•
A criminal case was filed against the CEO in 8% of cases . This means weak corporate
governance. Unfortunately, the CEO in Russia still want to get around the law to please
their interests.
[Введите текст]
•
Russian Companies where an insider CEO has replaced the predecessor who voluntarily
left this post demonstrates worse performance (expressed in ROE) compare to firms with
other types of succession.
•
Russian Companies where an outsider CEO has replaced
a dismissed predecessor
demonstrates better return on equity compare to firms with other types of succession
•
Russian Companies where an outsider CEO has replaced
a dismissed predecessor
demonstrates worse return on assets compare to firms with other types of succession
•
Russian Companies with Good Match CEO demonstrates worse performance compare to
firms with Bad Match CEO.. Thus, the match theory is implemented in terms of tenure, but
not in terms of the company performance
Using the findings, we can present the following conclusions and recommendations
First of all, it should be noted that the board of directors should make decisions based on
financial results. We came to this conclusion, since companies with well-match CEOs have
worse performance than the firms with badmatch CEO. In other words, our study showed that it
is not relevant for Board of Directors to extend contracts for a second term.
In cases where the company has dismissed the director, it
should prefer an outsider
candidate. Although this can have a negative impact on ROA, from an investor's point of view,
whose interests are partially reflected by ROE, it is more favorable. Moreover, we also found out
that in case of appointment of an insider to a post voluntarily left by the previous CEO, the
performance in the form of ROE may decrease. What does it mean? It means that companies
should not promote insider candidate for CEO position. This person is somehow already part of
the organization, used to the environment around him and is not able to introduce cardinal
prejudices in the firm's activities. Thanks to our finding regarding influence the level of strategic
changes on performance , CEO should introduce his changes ore trying to achieve a higher level
of the strategic chances.
Regarding the main CEO characteristics we can conclude that Goodmatch current CEOs
tend to be older and have shorter experience working in the company and longer industry
experience before becoming a CEO, than badmatch current CEOs. Moreover, their education
[Введите текст]
should match firm activity and preferable to have MBA. Nevertheless, tеhe statistics show that
about 50% of CEOs, which were considered as goodmatch, were eventually dismissed.
In other words, we can provide the following recommendation.
To company (goal: better performance).
• To make decisions on dismissal based on financial indicators;
• Do not extend contracts with the current CEO (one term);
• Looking for a new CEO among outsiders;
• Prefer CEO with industrial experience.
• The match between education and firm activity does not matter.
• Do not be afraid to say goodbye to the CEO early than three years.
• Don’t invest in education of top management
To potential or current CEO (goal: get an appointment or increase tenure as CEO)
• Start a career in the company you want to lead in the future, do not pay
attention to other companies in this industry
• Invest in education (MBA and other degrees)
• Organize the correspondence between education and the company's field
of activity.
Certainly, if the candidate's goal is to be an effective CEO, he must take into account both
parts of the recommendations
[Введите текст]
Conclusion
In this paper, a study was made of the a relationship between CEO characteristics and
company performance in Russia
The main goal of the research was achieved - we established and to studied a relationship
between CEO characteristics and company performance In Russia in terms of CEO-FIRM
match, also we have provided a qualitative analysis by fulfilling all the task. Namely we have
defined the range of CEO rights and duties in Russian companies in the context of Russian
legislation, we have provided the literature review about the theoretical basis of the relationship
between the CEO characteristics and firm performance, as well as CEO-FIRM match concept,
we have introduced the empirical analysis of the relationship among the characteristics of CEO,
CEO-Company match, and firm performance as well as we have analyzed the obtained results
of the study were analyzed, the conclusions were summarized and practical recommendations
were given on their basis.
Thus, this study succeeded in establishing, that:
•
It is preferable to look for an outsider CEO with significant industrial
experience, and major of education
or scientific degrees should not be a primary
criterion when choosing a candidate.
•
Russian Companies
with Good Match
CEO demonstrates worse
performance compare to firms with Bad Match CEO The results of this study can be
used in practice;
•
Russian Companies where an insider CEO has replaced the predecessor
who voluntarily resigned demonstrates worse performance(expressed in ROE) compare
to firms with other types of succession;
•
Russian Companies where an outsider CEO has replaced
a dismissed
predecessor demonstrates better return on equity compare to firms with other types of
succession;
•
Russian Companies where an outsider CEO has replaced
a dismissed
predecessor demonstrates worse return on assets compare to firms with other types of
succession.
[Введите текст]
The presented research can be interesting both from the theoretical and from the practical
point of view.
From the theoretical point of view, we tried to present relationship between CEO
characteristics and company performance In Russia in terms of match theory. From a practical
point of view, we have submitted recommendations for both owners of companies (boards of
directors), and for the CEO himself or candidates for this position. These recommendations
differ in their essence, since the company and the CEO have different purposes (agency
problem).
Also, the presented research can be interesting for the audience, as it presented a portrait
of a typical CEO.
In conclusion, it should be noted that this study has some limitations. Firstly, because of
the lack of open access information and the nature of data collection (hand-collected data), the
sample only covers 8 years, which does not allow for make a conclusion about the long-term
perspective.
Secondly, we can improve the selection criteria for GOOD MATCH CEO, which in our
case is determined by tenure.
Thirdly, due to the fact that all companies are public, announcements about the dismissal
of the CEO may affect the value of shares. Therefore, companies prefer not to disclose the true
reason for dismissals. In this connection, information on the type of dismissal of previous CEO
may not reflect the essence of the solution behind it.
It should be noted that the listed restrictions (except the last one) can be perceived as
further directions of research in this field.
[Введите текст]
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