Relational Ownership and CEO Continuity: A Property Rights Perspective
| Date | 01 July 2017 |
| Published date | 01 July 2017 |
| DOI | http://doi.org/10.1111/1467-8551.12223 |
British Journal of Management, Vol. 28, 464–480 (2017)
DOI: 10.1111/1467-8551.12223
Relational Ownership and CEO Continuity:
A Property Rights Perspective
Hossam Zeitoun and Paolo Pamini1
Warwick Business School, University of Warwick, Coventry CV4 7AL, UK, and 1Centre for Law and
Economics, ETH Zurich, Raemistrasse 101, 8092 Zurich, Switzerland
Corresponding author email: hossam.zeitoun@wbs.ac.uk
Inspired by agency theory, research on Chief Executive Ocer (CEO) succession often
focuses on turnovers as a mechanism to discipline CEOs in the event of poor firm per-
formance. Recent research extends this view by showing that CEO turnovers can also
lead to substantial disruption in a firm’s management. Less is known, however, about the
antecedents of disruption and continuity in the context of CEO turnovers. Drawing on
modern property rights theory,we investigate how CEO continuity varies across dierent
types of firms. Using a sample of Swiss publicly traded firms, we find that relational own-
ership enhances the likelihood of CEOs stayingin oce or moving to the position of board
chair. Firms with little relational ownership, in contrast, display a high degree of CEO
continuity only when capital intensity is high. Providedthat a CEO tur noveroccurs, rela-
tional ownership and capital intensity reduce the likelihood of interim CEO successions.
These findings highlight the importance of a nuanced view of CEO continuity,taking into
account owner types as well as contextual factors.
Introduction
Chief Executive Ocer (CEO) successions are a
central topic in strategic management and corpo-
rate governance. Since the late 1990s, the world’s
largest economies have witnessed a substantial in-
crease in the frequency of CEO turnovers, lead-
ing to the depiction of CEOs as the world’s ‘most
prominent temp workers’ (Lucier, Schuyt and Tse,
2005, p. 1). Inspired by agency theory (e.g. Jensen
and Meckling, 1976), many studies have focused
on CEO turnovers as a disciplining mechanism, i.e.
the prospect of being replaced in the event of poor
firm performance can discipline CEOs to enhance
shareholder value (e.g. Volpin, 2002). In this view,
The authors would like to thank the editor Georey
Wood and two anonymous reviewers for their helpful
comments and guidance on earlier versions of this arti-
cle. Hossam Zeitoun gratefully acknowledges the Swiss
National Science Foundationfor financial support (grant
number PBZHP1_143612).
the high rate of CEO turnover could be seen as a
desirabledevelopment because long-tenured CEOs
can become less dynamic and innovative (Miller,
1991).
Recent research, in contrast, highlights the fre-
quently disruptive nature of CEO turnovers for
a firm (e.g. Krause and Semadeni, 2014; Quigley
and Hambrick, 2012). Frequent disruption in the
CEO position can have undesirable eects, such
as power struggles among top managers and un-
certainty among stakeholders about the firm’s fu-
ture direction and policies (Kesner and Sebora,
1994). Thus, continuity in the firm’s CEO position
(henceforth: CEO continuity) has advantages and
disadvantages. Less is known, however, about the
antecedents of CEO continuity. In particular, an
important question is whether the advantages and
disadvantages of CEO continuitydier in their im-
portance for dierent types of firms.
By joining agency theory and modern property
rights theory, we can obtain a deeper understand-
ing of the trade-os that firms face with regard to
CEO successions. Modern property rights theory
© 2017 British Academy of Management. Published by John Wiley & Sons Ltd, 9600 Garsington Road, Oxford OX4
2DQ, UK and 350 Main Street, Malden, MA, 02148, USA.
Relational Ownership and CEO Continuity 465
serves as a lens to analyse the firm’s relation-
ships with its stakeholders (Asher, Mahoney and
Mahoney, 2005; Blair and Stout, 1999; Grossman
and Hart, 1986; Mayer, 2013). In this perspective,
the firm’s long-term success hinges on the con-
tributions of various stakeholders (e.g. sharehold-
ers, employees, suppliers, customers and the local
community). These stakeholders often make sub-
stantial (monetary or non-monetary) investments
that are dicult to safeguard through formal con-
tracts (Wang,He and Mahoney, 2009). This lack of
contractual protection leaves stakeholders vulner-
able to exploitation(Klein, Crawford and Alchian,
1978). Therefore,they need to rely on implicit con-
tracts, defined as ‘informal agreements and un-
written codes of conduct’ that cannot be enforced
by courts (Baker, Gibbons and Murphy, 2002,
p. 39). CEOs and top managers assume a cru-
cial role in protecting these implicit contracts, due
to their position at the centre of the nexus of
(explicit and implicit) contracts with stakeholders
(Hill and Jones, 1992). CEO continuity is likely to
reassure the firm’s stakeholders about the future
maintenance of their implicit contracts (Kochan
and Rubinstein, 2000), whereas frequent disrup-
tions create uncertainty aboutthe fir m’s adherence
to them.
This paper contributes to understanding conti-
nuity in CEO successions. We begin by contrast-
ing agency theory and propertyrights theory, high-
lighting their implications for CEO continuity. To
examine the antecedents of CEO continuity, we
develop hypotheses focusingon the distinction be-
tween relational and transactional ownership (e.g.
David et al., 2010) and on the direct and mod-
erating influence of capital intensity. The empiri-
cal analysis uses a sample of Swiss publicly traded
firms in the period 2000−2008. We explain the
empirical context and its advantages, present the
empirical findings, and discuss their theoretical
and practical relevance.
Theory and hypothesis development
Research on CEO turnovers often applies agency
theory, considering CEOs as agents of sharehold-
ers as their principals. The agency problem results
from the separation of ownership and control in
public corporations (Berle and Means, 1932). Due
to the partially conflicting goals of agents and prin-
cipals, agency theory has devoteda lot of attention
to mechanisms that align their interests (Fama,
1980; Jensen and Meckling, 1976). In this view,
CEO turnovers can improve the alignment of inter-
ests by punishing and replacing poorly performing
CEOs.
An alternative perspective −drawing on mod-
ern property rights theory (Grossman and Hart,
1986; Hart and Moore, 1990) −suggests that
the investments of multiple stakeholders (includ-
ing shareholders) need to be protected (Asher,
Mahoney and Mahoney, 2005; Blair and Stout,
1999; Mayer, 2013). For example, such invest-
ments include employees who acquirefir m-specific
knowledge; suppliers who invest in research to tai-
lor their intermediate products to the needs of
the firm; customers who assist in the development
of products; and the local community that in-
vests in better access to the firm’s facilities. Such
firm-specific investments are essential to the firm’s
long-term success (Antras, 2014; Zingales, 2000).
Therefore, these stakeholders represent multi-
ple principals whose interests require protection
(Child and Rodrigues, 2003).
Table 1 contrasts these theoretical perspectives
and their implications for CEO succession. CEO
continuity is clearly a greaterconcern when adopt-
ing the property rights perspective. CEOs assume
a unique role in safeguarding implicit contracts
with stakeholders (Hill and Jones, 1992). There-
fore, CEO continuity has an important function
in reassuring stakeholders about the future main-
tenance of their implicit contracts (Kochan and
Rubinstein, 2000).
Continuity in CEO successions
How can we conceptualize continuity in the con-
text of CEO successions? Prior studies on CEO
successions have produced numerous valuable in-
sights from an agency theoretic perspective bydis-
tinguishing between unforced CEO turnovers and
forced CEO dismissals.These studies highlight the
relationship between poor firm performance and
CEO dismissals, and how this relationshipis influ-
enced by governance mechanisms (e.g. Wiersema
and Zhang, 2011). From the property rights per-
spective, however, CEO turnovers represent dis-
ruptions for the firm and its stakeholders regard-
less of whether they are forced or unforced (Zajac
and Westphal, 1996). Indeed, Kaplan and Minton
find that both types of CEO successions are sen-
sitive to poor firm performance, and they suggest
© 2017 British Academy of Management.
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