Introduction

The recent forced departure of Intel’s CEO Pat Gelsinger vividly illustrates the complex dynamics of CEO dismissals. After a pivotal board meeting assessing the company’s progress in regaining market share, Gelsinger was presented with an ultimatum: retire or be removed. The board’s frustration with “slow progress” and concerns about “the lack of products capable of winning in the market” led to a reactive dismissal without an immediate permanent successor – appointing two interim co-CEOs instead. This high-profile case raises important questions about how such decisions affect the reputation of the directors involved. However, empirical evidence on reputational consequences of forced CEO turnovers on involved directors is scarce, with much of the academic literature building on the presumption that forcing out an underperforming CEO signals effective board monitoring. Our paper titled “CEO Turnover and Director Reputation”, forthcoming in the Journal of Financial Economics, challenges this view. By analyzing a comprehensive sample of forced CEO turnovers at S&P1500 firms between 2003 and 2017, we provide novel and systematic empirical evidence that decisions such as Gelsinger’s removal from the company’s helm negatively affect the reputation of directors involved and thus indicate governance failure at the board level.

Research Design and Empirical Strategy

A test of the reputational effect of forced CEO turnovers on involved directors is subject to two major empirical challenges. First, turnover decisions are endogenous and often, as in the case of Gelsinger, related to company performance. Second, widely used measures of director reputation, such as gains and losses of board memberships, are subject to endogenous selection by directors. To address these challenges, we focus on changes in the percentage of withheld votes in director re-elections as a direct and observable measure of reputation that is not subject to endogenous selection by directors and reflects shareholders’ satisfaction with individual directors. Studying this outcome at other firms where these directors hold board seats (“interlocked directorships”), and comparing it to the change in vote support across different control groups of directors not involved in a forced CEO turnover, enables us to provide a well-identified estimate of the reputational consequences of forced CEO turnovers.

Impact on Directors’ Vote Outcomes

Results from our analysis show that directors involved in forced CEO turnovers experience a significant increase in withheld votes at their subsequent re-election at interlocked firms, compared to directors not interlocked to a forced turnover, pointing to reputational losses.  The economic magnitude of the decline in vote support is economically large: Directors experience an increase in withheld votes nearly 20% above the sample mean of withheld votes, an effect larger than the increase in withheld votes resulting from financial restatements, securities litigation, or poison pill adoptions at interlocked firms, and is only exceeded by bankruptcy filings at interlocked firms. To support the validity of our findings, we show that there are no pre-trends and that the decline in vote support coincides with the CEO turnovers. Moreover, there is no reversal during the next three years, suggesting that the observed reputational loss is long-lasting. These persistent increases in withheld votes challenge the predominant view that forcing out a CEO is a sign of well-functioning corporate governance at the board level.

When Do Directors Face Reputational Penalties?

Further analyses reveal that directors are not penalized for all turnovers but for forced CEO turnovers linked to governance failures. These failures include reactive forced turnovers (such as Gelsinger’s departure at Intel), dismissals during the CEO’s most productive tenure phase, inadequate monitoring of the CEO, and the lack of a succession plan (also evident in Gelsinger’s case). Conversely, directors incur no reputational penalties for unforced turnovers or for the hiring of a later fired CEO. Notably, we find no sub-sample in which directors gain reputation from involvement in a forced CEO turnover. Collectively, these findings challenge the notion that a forced CEO turnover is a credible signal of a board’s monitoring ability. Instead, they suggest that firing the CEO is often indicative of governance failure at the board level.

The Role of Institutional Investors

Holding directors accountable across all board mandates requires shareholders to both observe and evaluate directors’ actions and recognize interlocked directorships. These criteria are most likely fulfilled by institutional investors with significant ownership stakes in both the turnover firms and the interlocked firms. Indeed, we find that the negative vote effect is concentrated in director re-elections where institutional investors hold above-average ownership stakes in both firms. This finding highlights the crucial role of institutional investors in driving accountability and shaping governance outcomes across interconnected boards.

Impact on Directors’ Career Prospects

Beyond immediate voting outcomes, we show that involvement in forced CEO turnovers can have lasting career implications. Our results show that directors involved in forced CEO turnovers are more likely to exit the director labor market. Directors who stay in the labor market typically lose board seats within five years of the turnover — primarily at the turnover firms. However, lost positions are replaced by new appointments over the subsequent years, so that the net effect on the number of board positions is small. However, the newly acquired board seats tend to be at smaller, less prestigious firms, suggesting that reputational losses stemming from involvement in a forced CEO turnover adversely affect directors’ labor market opportunities.

Implications for Corporate Governance Practices

Our findings have important implications for various corporate governance practices. For board members, they underscore the significant reputational risks associated with CEO turnovers, emphasizing the need for consistent CEO monitoring and foresighted succession planning. For institutional investors, they highlight the effectiveness of coordinated voting in enforcing director accountability across board networks. For governance professionals, they suggest that the timing and execution of CEO dismissals significantly impacts how the market evaluates board effectiveness.

Conclusion

The findings presented in our paper challenge the widely held belief that forcing out a CEO is a sign of well-functioning corporate governance at the board level. Instead, our results support an alternative view: Depending on the timing and circumstances of the turnover, forcing out a CEO can be perceived as a signal of failure in the monitoring of the CEO and thus be detrimental to a director’s reputation.

The paper is forthcoming in the Journal of Financial Economics and is available for download here (open access).