Wednesday, October 3, 2012

Executive Accountability around the World: The Sources of Cross-national Variation in Firm Performance-CEO Dismissal Sensitivity
INSEAD Working paper 2012/90/ST

In this study, we investigate why CEOs seem to be held more accountable for poor firm performance in some countries than others. We integrate research from comparative corporate governance and agency theory to identify and evaluate four fundamental assumptions underlying most theoretical arguments linking performance and dismissal: (1)CEOs are personally responsible for firm performance outcomes; (2) boards/owners have the power to dismiss CEOs; (3) firm performance measures are meaningful; and (4) suitable alternative candidates for the CEO role are available. We argue that CEO accountability will vary in line with the extent to which these assumptions are more or less valid from one country to the next. We provide robust evidence – across both market-based and accountingbased measures – that CEOs are more likely to be dismissed following poor firm performance in countries where managerial discretion is high, where firm performance measures are more meaningful, and where the CEO labor market is more developed. However, we do not find support for our prediction that CEO accountability varies in line with cross-national differences in CEO power asymmetry.