Internal Control Mechanisms and Forced CEO Turnover: An Empirical Investigation

The dissertation empiricallyexamines the efficacy of internalcontrol mechanisms by analyzing 94forced turnovers of chief executiveofficers (CEOs). It seeks to answertwo primary questions: One, dogovernance-related characteristicsinfluence the promptness with whichpoorly-performing CEOs areremoved from office; and two, areremovals of CEOs followed bychanges in internal controlmechanisms? The results suggestthat poorly performing managers areremoved more quickly in firms thathave a larger percentage ofindependent outside directors ontheir board, that have higher equityownership by the non-CEOdirectors and lower equityownership by the CEO, and thatseparate the positions of CEO andchairperson. The results also suggestthat the removal of the CEOprovides both the opportunity andthe incentive to alter internalgovernance systems. There issignificant turnover of boardmembers and the new boardsgenerally have a higher fraction ofindependent outside directors andare more likely to separate thepositions of CEO and chairperson.In addition, the sensitivity of CEOcompensation to firm performanceincreases significantly followingturnover. These post-turnoverimprovements in monitoring andincentive schemes are moresignificant in those firms that requirea crisis in the product and/or capitalmarket before they remove theirCEOs. However, there is noevidence of short-term improvementin operating performance followingchanges in CEOs and governancesystems. Overall, the results suggestthat board and ownershipcharacteristics do influence theeffectiveness of internal monitoringsystems and that CEO turnover isassociated with broad changes inmonitoring and incentive systems.