Corporate performance and CEO dismissal: The role of social category faultlines (open access)

Alana Vandebeek, Wim Voordeckers, Jolien Huybrechts & Frank Lambrechts 

In: Corporate Governance: An International Review, 29(5), 436-460.
https://doi.org/10.1111/corg.12376 

Abstract

Research Question/Issue
This study investigates the moderating role of social category faultlines in the relationship between firm performance and CEO dismissal. We also examine how two board contingencies—the presence of board evaluation and the number of board committees—affect how social category faultlines moderate the performance–CEO dismissal relationship.

Using panel data on Belgian listed firms covering 2006 to 2014, we find that the negative relationship between firm performance and the likelihood of CEO dismissal is significantly weaker when boards experience social category faultlines. Further investigation of board contingencies demonstrates that social category faultlines have a stronger influence on the performance–CEO dismissal relationship when the board does not engage in board evaluation or has greater numbers of board committees.

This study builds on the social identity perspective by providing empirical support for social category faultlines within the context of boards of directors. Social category faultlines lead to identity-based subgroups within the board, which reduce directors' identification with the board as a whole, ultimately impacting the board's capability to dismiss a poorly performing CEO. Moreover, our study demonstrates how board contingencies can promote and/or weaken directors' identification with the board, which affects the salience of identity-based subgroups.

This study offers insights for practitioners interested in improving board effectiveness. Our evidence implies that decisions concerning the appointment of directors should be based on criteria that take faultlines and subgroups into account. Furthermore, our findings highlight the importance of strengthening the superordinate board identity by implementing initiatives such as board evaluation.