CEO Selection and CEO-firm Fit

Abstract

The upper-echelon framework posits that a match between CEO characteristics and firm's leadership requirements (CEO-firm fit) is beneficial for firm performance. However, we have limited understanding on three key issues related to CEO-firm fit. First, how does the CEO-firm fit come about? That is, how do boards establish leadership needs of the firm in foreseeable future (CEO search criteria). Second, how boards ascertain whether the potential CEO candidates' skills match the search criteria. Third, how does the CEO-firm fit evolve over time. Specifically, what are the CEO characteristics which differentiate CEOs in their ability to adapt over time. Broadly, the dissertation focuses on how boards through their CEO selection decision achieve, and CEOs, mainly though their skills maintain, CEO-firm fit over time.In the first essay, I draw upon the dynamic managerial capabilities framework which suggests that CEOs differ in their ability to deal with a changing environmental context. In a sample of 3,482 CEOs, I find evidence that CEOs differ in their capacity to respond to changing environment and this adaptive capacity is rooted in their prior experience. Specifically, greater the breadth of CEO's prior work experience higher the CEO's adaptive capacity. It contributes to dynamic managerial capabilities literature by empirically validating its presence at the CEO level. Second essay focuses on how boards ascertain whether the potential CEO candidate(s) match the CEO selection criteria. Specifically, I theorize that boards use their professional networks to obtain information about external CEO candidates to ensure that CEO profile matches the selection criteria. In a sample of 410 external CEO appointments I find that likelihood of selecting candidate with whom board has a connection is very large. It contributes to CEO succession literature by showing that directors can use professional network as a mechanism to address the information asymmetry problem encountered during CEO selection. Third essay argues that the degree of uncertainty about the strategic direction of a company is associated with observable CEO selection choices. When a company faces considerable uncertainty at the time of CEO selection, boards are likely to be ambivalent about which CEO characteristics to look for in a new CEO. Consequently, boards' CEO selection decisions are likely to be driven by the criteria of flexibility, ability to monitor CEO and ease of reversibility. These reflect in selection choices of interim CEO and CEO non-duality and result in shorter CEO tenure. Empirically, I find evidence of increased likelihood of selecting an interim CEO and shorter CEO tenure when selected at the time of higher strategic uncertainty. It contributes to CEO succession literature by highlighting the information availability constraints boards may face while selecting a new CEO which can make the possibility of achieving CEO-firm match during succession difficult.