Are boards reluctant to remove poorly performing successors to interim CEOs?

Abstract

Research Summary: Interim CEO appointments are disruptive and costly to firms. Boards justify them as necessary to find the right permanent successor. But what happens if that successor performs poorly? This paper argues that directors may be reluctant to remove a poorly performing successor to an interim CEO early in their tenure. It posits that this may be owing to directors' concerns for their own reputations or for the firm. Results demonstrate that successors to interim CEOs are considerably less likely than successors to permanent CEOs to experience performance-related early departures. This appears to be owing to directors' efforts to avoid further harming the firm. Additional analyses suggest these concerns may be justified, as early exits by successors to interim CEOs are associated with post-succession market declines.

Managerial Summary: When faced with an unexpected CEO departure, appointing an interim CEO is often viewed as a prudent decision to ensure the selection of the right permanent successor. Yet interim appointments are disruptive and can have lasting consequences. This study finds that when a permanent successor follows an interim CEO, directors appear reluctant to remove them early for poor performance. This reluctance appears to be driven primarily by directors' concerns about causing further harm to the firm rather than their concerns that removing the successor early may damage their reputations as governance professionals. Additional analyses indicate that these concerns for the well-being of the firm may be justified, as early exits by successors to interim CEOs are associated with post-succession declines in market performance.