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The Leadership Quarterly
journal homepage: www.elsevier.com/locate/leaqua
Full Length Article
Leadership change and corporate social performance: The context of
financial distress makes all the difference
⁎
Shih-Chi (Sana) Chiua, , Judith L. Wallsb
a
b
Department of Management and Leadership, C.T. Bauer College of Business, University of Houston, 4750 Calhoun Road, Houston, TX 77204, USA
Institute for Environment and Economy (IWÖ), University of St. Gallen, Dufourstrasse 50, CH-9000 St. Gallen, Switzerland
A R T I C LE I N FO
A B S T R A C T
Keywords:
Corporate social responsibility
Corporate social performance
CEO succession
CEO turnover
Successor origin
Financial distress
Change in strategic leadership has important implications for corporate social performance (CSP) and sustainability. As new CEOs have a strong incentive to attend to a broad set of stakeholders to build their trust and
reputation within the firm, our study draws on stakeholder salience theory to examine a boundary condition, the
presence of financial distress, that might challenge a new CEO's ability to perform such a task. We examine the
differential impacts between externally recruited CEOs (outsiders) and internally promoted CEOs (insiders) on
CSP under the condition of financial distress. We argue that when firms experience financial distress, outsider
CEOs can more quickly shift their attention and prioritize the interests of shareholders over other stakeholders
than insider CEOs. Our study contributes to the strategic leadership and CSP literatures by offering new insights
into how corporate leadership turnover and firm context may jointly shape new CEO's decision-making in CSP
engagement.
Changes in strategic leadership affect various aspects of organizational outcomes (Karaevli, 2007) as new leaders usually differ in their
characteristics and strategic approaches from predecessors. The replacement of a CEO, the firm's chief strategist, not only changes organizational behavior (Berns & Klarner, 2017; Finkelstein & Hambrick,
1996; Kesner & Sebora, 1994) but also affects a firm's relationships with
its internal and external stakeholders (Kaplan & Minton, 2012). The
financial performance consequences of CEO turnover have received
plenty of attention from both management scholars and business
practitioners (Bommer & Ellstrand, 1996; Helfat & Bailey, 2005; Huson,
Malatesta, & Parrino, 2004). However, how CEO succession affects
corporate social performance (“CSP”), defined as the firm's impact,
policies, and programs around its social, legal, ethical, and environmental activities (Montiel, 2008), is relatively underexplored in the
management literature even though it can have an important influence
(Siegel, 2014).
Generally speaking, new CEOs have strong incentives to reach out to
a broad set of environmental and social stakeholders beyond shareholders, as a way of building trust and reputation (Barnea & Rubin,
2010). Prior work on CEO turnover and CSP, however, has yielded
inconsistent results, ranging from negative, neutral, to positive relationships (Bernard, Godard, & Zouaoui, 2016; Harrison & Fiet, 1999;
Shropshire & Hillman, 2007). Missing from this body of work is the
explicit consideration of corporate contingencies, or conditions under
⁎
which a new CEO may find it challenging to attend to a broad set of
stakeholder interests and have to narrow his or her focus on particular
stakeholders. CEO attention to stakeholders depends on the extent to
which stakeholders can influence a firm, the legitimacy of their claims,
and the urgency of the issue at hand (Mitchell, Agle, & Wood, 1997).
These attributes, known as stakeholder salience, determine how CEOs
prioritize firms' stakeholders (Agle, Mitchell, & Sonnenfeld, 1999) and
how they manage stakeholder demands strategically (c.f. Crilly & Sloan,
2012).
Of particular relevance to CSP strategy during CEO succession is the
condition of financial distress. Tensions arise under this condition because new CEOs need to prioritize the demands of financial stakeholders over other stakeholder concerns (Aguilera, Rupp, Williams, &
Ganapathi, 2007). However, the extent to which new CEOs prioritize
financial concerns is likely to depend on the origin of successor—whether a new CEO is promoted internally or recruited externally—a
key CEO-level characteristic (Zajac, 1990) that creates distinctive influences on the strategic direction and outcomes of firms (e.g., Shen &
Cannella, 2002). While externally recruited or outsider CEOs are more
likely to make strategic changes because they are free from antedating
shackles and existing routines compared to CEOs who are internally
promoted (Miller, 1991), we challenge that this assumption holds in the
context of CSP and the presence of financial distress. Instead, we propose and empirically test the boundary condition of financial distress
Corresponding author.
E-mail addresses: schiu@bauer.uh.edu (S.-C.S. Chiu), judith.walls@unisg.ch (J.L. Walls).
https://doi.org/10.1016/j.leaqua.2019.101307
Received 28 May 2018; Received in revised form 24 July 2019; Accepted 25 July 2019
1048-9843/ © 2019 Published by Elsevier Inc.
Please cite this article as: Shih-Chi (Sana) Chiu and Judith L. Walls, The Leadership Quarterly, https://doi.org/10.1016/j.leaqua.2019.101307
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S.-C.S. Chiu and J.L. Walls
(Wong, Ormiston, & Tetlock, 2011). As the most influential members
within organizations (Daily & Johnson, 1997), CEOs are the primary
decision-makers directing corporate strategies and organizational policies (Quigley & Hambrick, 2015). Through social, behavioral, and
cognitive processes, CEOs influence strategic organizational outcomes
(Bromiley & Rau, 2016) including stakeholder-related CSP outcomes
(Child, 1972). Therefore, a change of corporate leadership is an uncertain time not only for a company but also for its stakeholders as it
signals a potential change in the attention (new) CEOs pay to stakeholders.
Strong evidence from the executive succession literature shows that
new CEOs bring fresh approaches to organizational issues as they are
more open to trying new strategies (Bantel & Jackson, 1989; Miller &
Shamsie, 2001) and less constrained by existing firm routines and
practices (Giambatista, Rowe, & Riaz, 2005). By contrast, when CEOs
have been in their position for a long time, they become less sensitive to
changes in stakeholder demands (Miller, 1991) and are less likely to
modify firms' strategies (Greiner & Bhambri, 1989). CEOs with long
tenure insulate themselves from new information (Miller, 1991) and
their views become institutionalized (Westphal & Zajac, 1995) which
decreases CEOs' vigilance to changes in the external business environment (Ocasio, 2010). Early on in their tenure, however, CEOs are held
under close scrutiny by both internal and external stakeholders (Shen &
Cannella, 2002). New CEOs thus have a strong incentive to reach out to
a broad set of stakeholders beyond shareholders, as a way of gaining job
security (Fanelli & Misangyi, 2006; Harjoto & Jo, 2011; Meng, Zeng,
Tam, & Xu, 2013), personal reputation and trust (Hambrick &
Fukutomi, 1991), while avoiding negative attention from stakeholders
(Borghesi, Houston, & Naranjo, 2014).
Taken together, new CEOs are more forward-looking in terms of
supporting communities, employees, customers, and environmental
stakeholders (Gavetti & Levinthal, 2000) and attend more proactively
to their needs (Giambatista et al., 2005; Kesner & Sebora, 1994). Some
research argues that new CEOs are more likely to cut research and
development costs or pension fund investments as a way to safeguard
their new positions (Harrison & Fiet, 1999). However, in terms of CSP,
studies show that new CEOs more actively engage with stakeholders
through voluntary disclosure (Lewis et al., 2014) or charitable contributions and employee volunteer programs (Godfrey, 2005; Jones,
1995). Since the literature generally argues that positive changes in CSP
follow CEO turnover in the organization (Bernard et al., 2016; Harjoto
& Jo, 2011; Shropshire & Hillman, 2007), our baseline hypothesis is:
and argue that new outsider CEOs are less likely to focus on CSP. Both
insider and outsider CEOs face the mandate to turn around firms in
financial trouble. However, new outsider CEOs can more easily defer
demands from non-financial stakeholders than new insider CEOs due to
their perceived employment risk as well as their lack of legacy relationships with the firm's non-financial stakeholders.
Our work contributes to the literature on CEO succession, specifically in the space of non-financial performance outcomes. Building on
earlier studies, we find that a change in strategic leadership at the top
positively influences CSP, showing that new CEOs can and do direct
their attention toward CSP because they are more likely than incumbent, long-tenured CEOs to pursue new strategies (e.g., Lewis, Walls, &
Dowell, 2014). In addition, we extend prior research on leadership
change and CSP by showing that the presence of financial distress is an
important boundary condition that shapes new CEOs' strategic decisions associated with CSP. Therefore, our second contribution is to
provide a more nuanced, contextualized perspective of CSP after leadership change. Prior research has shown that CEOs play a critical role
in firms' stakeholder management strategies (Walls & Berrone, 2017);
however, CEO succession and firm-level financial conditions have not
been considered simultaneously in stakeholder management research.
Our findings further demonstrate that, under the condition of financial distress, new outsider CEOs are associated with less positive
change in CSP than new insider CEOs. Thus, new outsider CEOs can
divert their attention away from various stakeholder groups more
quickly than new insider CEOs to focus on financial stakeholders. This
result offers novel insights into work on micro-level determinants of
macro-level organizational outcomes. We show that new CEOs who do
not have a legacy relationship with the firm's stakeholders (i.e., outsiders) may experience fewer constraints in pursuing urgent financial
goals than new CEOs who have embedded, pre-existing connections
with firm stakeholders (i.e., insiders) and a greater sense of duty to
balance all stakeholder needs. This result has important implications for
a firm's relationship with its stakeholders during financial distress, and
hiring decisions for CEO succession, a situation that arises frequently in
practice. We thereby contribute to a deeper understanding of leadership
change and CSP (Siegel, 2014) by highlighting the nuanced role of firm
context and the importance of the successor origin.
Leadership change and corporate social performance
A firm's very survival and continuing success depends on its ability
to achieve “triple bottom line” performance (Elkington, 2006), or CSP,
through balancing the demands from environmental, social and economic stakeholders (Clarkson, 1995; Freeman, 1984). Stakeholder
theory is a vast and prominent area of research in strategic management
(Harrison, Bosse, & Phillips, 2010; Luque, Washburn, Waldman, &
House, 2008; Walsh, 2005). Managing the interests of stakeholders—groups or individuals who can affect or are affected by the
firm's actions—is considered a necessary aspect of strategy to create
firm value in the face of unprecedented levels of turbulence in business
environments and ensure the continual success of firms (Clarkson,
1995; Freeman, 1984). In essence, organizations have a social contract
with their stakeholders through mutually supportive relationships
(Donaldson & Preston, 1995). Managing these relationships helps firms
to maintain organizational legitimacy (Carter, 2006; Chiu & Sharfman,
2011; Eesley & Lenox, 2006), and requires a long-term, future-oriented
outlook with significant investments in products, people, and systems
(Bansal, Gao, & Qureshi, 2014; Walls, Phan, & Berrone, 2011).
Corporate executives have a profound impact on setting the direction and scope of CSP due to their influential position within companies
(Eesley & Lenox, 2006; Freeman, 1984; Hill & Jones, 1992). Central to
this process is actively integrating the interests of customers, suppliers,
communities, shareholders, employees and other stakeholder groups
(Freeman, 1984) and identifying which stakeholders are relevant and
important, what solutions to develop, and what strategies to implement
Hypothesis 1. Firms led by new CEOs are more likely to improve
corporate social performance than firms without a CEO change.
Stakeholder salience and the moderating role of financial distress
Organizational context is a critical contingency of corporate
strategy during leadership change (Barker, Patterson, & Mueller, 2001).
While CEOs exercise plenty of discretion in strategy setting, the context
of firms they inherit affects the range of new CEOs' choices (Nisbett &
Ross, 1991; Ocasio, 1997), including how they balance demands from
financial and non-financial stakeholders. Because CEOs are centered at
the upper echelons of the firm, they act as information-filtering and
sense-making interpretation hubs, a strategic cognition process affected
both by internal organizational factors and the external business context (Busenbark, Krause, Boivie, & Graffin, 2016; Narayanan, Zane, &
Kemmerer, 2011).
Stakeholder salience theory considers the attention managers pay to
a diverse set of stakeholders with a multitude of competing demands
(Agle et al., 1999; Mitchell et al., 1997). For example, demands
shareholders place on firms do not always align with those of social and
environmental stakeholders (Hahn, Figge, Pinkse, & Preuss, 2010;
Kaptein & Wempe, 2001). Knowing which stakeholders to prioritize is a
difficult and complex task due to the heterogeneous nature of
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stakeholder issues and the idiosyncratic interactions firms have with
their stakeholders (Bakker & Hond, 2008). In prioritizing stakeholder
demands, CEOs need to consider the power stakeholders can exercise
over the firm, the legitimacy of their claims, and the urgency of the
issue (Mitchell et al., 1997). These three attributes determine how CEOs
attend to stakeholders (Agle et al., 1999; Eesley & Lenox, 2006).
Which set of stakeholders a CEO attends to is based on organizational- and individual-level contextual factors (Jawahar & McLaughlin,
2001). In particular, when the contextual setting carries potentially
negative consequences, individuals' attention is narrowed and their
focus becomes short-term rather than long-term (Gray, 1999). For example, when firms face takeover threat, managers pay more attention
to shareholders than other stakeholders (Kacperczyk, 2009). Similarly,
when organizations face financial distress, shareholders take precedence over other stakeholders. Corporate financial performance is
therefore a prominent factor that can directly or indirectly influence
changes in both strategic leadership and CSP (Giambatista et al., 2005;
Orlitzky, Schmidt, & Rynes, 2003).
Financial distress or a “turnaround condition” is defined as several
consecutive years of decline in economic performance (Barker et al.,
2001) that poses threat to firm survival. Unlike a short-term, temporary
dip in financial performance, financial distress creates significant
challenges for executives to attend to concurrent stakeholder demands
(Cyert & March, 1963). In the absence of consistent, positive financial
returns, the pragmatic legitimacy of the organization—or the exchange
relationship the firm has with its primary audience, the shareholder—is
threatened (Suchman, 1995). Under this circumstance, the salience of
shareholders is of prime concern because they are the firm's residual
claimants.
Therefore, even if a new CEO has a personal inclination or incentive
to attend to a broader set of stakeholder groups, the presence of financial distress will likely take priority over other agendas competing
for new CEO attention (Aguilera et al., 2007). Under financial distress,
new CEOs may also have less latitude in developing and managing CSP
since longer term investments into corporate social and environmental
practices have uncertain outcomes (Hart & Ahuja, 1996; Roome, 1992)
and might be discouraged by the firm's board (Walls & Hoffman, 2013).
Accordingly, we propose that the context of financial distress will
weaken the relationship between new CEOs and CSP.
corporate objectives, subject to behavioral biases and interpretative
frames (Dutton & Jackson, 1987; Thomas, Clark, & Gioia, 1993; Walsh,
1995). A new CEO's strategic goals are shaped by their cognitive understanding of the business environment (Gavetti & Levinthal, 2000),
prior experience at the firm (Nadkarni & Barr, 2008), access to collective organizational memory, and their pre-existing relationships with
the firm's stakeholders (Ocasio, Mauskapf, & Steele, 2016).
We posit that the effects of successor origin on CSP are amplified
when firms face financial distress for three reasons. First, when taking
over the reins of a firm facing financial distress, the new CEO needs to
re-assess stakeholder relationships (Myllykangas, Kujala, & Lehtimäki,
2011). Although outsider CEOs are typically more likely to make organizational changes or engage in new strategic initiatives because they
are not tied to the new firm's routines and practices (Miller, 1993), their
lack of prior involvement in the firm means that they are not bound by
collective memory or the legacy of the firm's relationships with internal
and external stakeholders (Pierce, Kostova, & Dirks, 2001). By contrast,
new insider CEOs have dealt with the firm's stakeholders in the past and
may feel an obligation to fulfil any prior promises made to non-financial
stakeholders, in addition to shareholders. Thus, new outsider CEOs
have more freedom to focus on the most salient stakeholder to ensure a
firm's survival. In the case of financial distress, financial stakeholders
take primacy.
Second, new outsider CEOs typically lack in-depth cognitive understanding of the new firms' business environment (Gavetti &
Levinthal, 2000) and operations (Zhang & Rajagopalan, 2003). As a
result, they must invest a considerable amount of time and energy diagnosing the firm's problems. Due to their limited experience and time
pressure to solve urgent problems, such as financial distress, new outsider CEOs face greater constraints in dealing with complex issues and
relationships (Simon, 1991). Therefore, even though both types of CEOs
face the mandate to improve their firms' financial performance during
turnaround conditions, new outsider CEOs struggle to attend to a wider
scope of stakeholders. By contrast, new insider CEOs can afford to pay
some attention to CSP due to their ex ante experience and knowledge of
the firm's operations.
Third, under turnaround conditions, new outsider CEOs face greater
threat of dismissal than new insider CEOs (Zajac, 1990; Zhang, 2008)
because sometimes an outsider CEO is brought in as a change agent to
ward off the threat of takeover (Jensen & Ruback, 1983). As such,
outsider CEOs may experience heightened job insecurity and be more
likely to narrow their focus of attention to aspects of corporate strategy
that produce short-term financial results to benefit shareholders. Consequently, when the firm faces financial distress, outsider CEOs are less
likely to engage in CSP.
Hypothesis 2. The positive relationship between new CEOs and CSP is
weakened in financially distressed firms.
CEO successor origin and CSP during financial distress
New CEOs may be recruited externally (outsiders) or promoted from
within the firm (insiders), a distinction known as “successor origin.”
Research has shown that insider and outsider CEO successors bring
idiosyncratic characteristics to their new firms (Zajac, 1990) resulting
in different strategic decisions and organizational outcomes (Kesner &
Sebora, 1994; Shen & Cannella, 2002; Zhang, 2008). The role of successor origin is also relevant to CSP. For example, Meng et al. (2013)
proposed that firms led by a succeeding leader (in this case, Chairperson) hired from the outside would exhibit better environmental
disclosure practices but their analysis, based on a sample of Chinese
firms, could not substantiate this empirically. Using a sample of French
firms, Bernard et al. (2016) found a distinctive impact between new
outsider and insider CEOs on CSP, but this effect appeared only after a
period of five years. These inconclusive findings suggest that we need to
look into the context in which the new CEO inherits the firm to better
understand the differential impacts of insider and outsider CEOs on
CSP.
We propose that when firms face financial distress, new insider and
outsider CEOs differ in their attention to stakeholders and subsequent
CSP. Under this condition, executives handle multiple, conflicting stakeholder demands (Bundy, Shropshire, & Buchholtz, 2013) to achieve
Hypothesis 3. During financial distress, firms led by new outsider CEOs
are less likely to improve CSP than those led by new insider CEOs.
Methods
We compiled a panel data sample from four major data sources,
including MSCI/Kinder, Lydenberg, Domini (KLD) Social Ratings,
Compustat North America (NA), Compustat Execucomp, and BoardEx.
We chose a U.S. setting to test our hypotheses because prior research
based on U.S. firms has documented the crucial impact of CEO characteristics on firms' stakeholder management and social performance
(e.g., Chiu & Sharfman, 2016; Lewis et al., 2014; Tang, Mack, & Chen,
2018). Since our paper focuses on CSP, we started with the MSCI/KLD
database, the most popular data source for CSP research due to its
objectivity and comprehensiveness (Deckop, Merriman, & Gupta, 2006;
Graves & Waddock, 1994; Hillman & Keim, 2001). We chose 2001 as
the start year as MSCI/KLD expanded its coverage that year to include
the largest 1000 firms by market capitalization. Our end year was 2013,
the most recent available MSCI/KLD data. This time period encompasses both economic growth and recession for greater
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generalizability of our findings. We merged the MSCI/KLD data with
Compustat North American database, to obtain firm-level fundamentals
data. This step provided 10,794 year-firm observations for 851 firms.
We next merged our data with Execucomp and BoardEx for information
on CEO-related variables as well as governance-related controls. After
accounting for missing values and different coverage across the four
databases, our final sample included 7322 firm-year observations for
684 firms (a panel average of 10.7 years per firm). The final sample
contained 976 CEO replacements, of which 233 were outside successions and 743 were inside successions.
(ROA) preceding the focal year (i.e., ROAt−3 > ROAt−2 > ROAt−1).
We used an industry-adjusted measure, calculated as the median industry ROA subtracted from the firm's ROA (Barker & Mone, 1994).
Control variables
We included several control variables to reduce omitted variable
bias and to rule out alternative explanations in our estimations. We
controlled for Firm size, measured as the log of firm assets, because
larger organizations have more resources to dedicate toward social and
environmental initiatives (McWilliams & Siegel, 2001). We used the
number of employees as an alternative proxy for firm size and obtained
similar results. The availability of Slack, measured as free cash holdings,
may influence a new CEO's discretion to tap into resources to manage
stakeholder issues (Tang, Qian, Chen, & Shen, 2015). We controlled for
a firm's Leverage, estimated as the ratio of long-term debt to equity
(Bromiley, 1991), because higher debt levels make it more challenging
to invest in CSP activity (Barnea & Rubin, 2010). We controlled for
Product diversification using the entropy measure (Palepu, 1985), because firms' product portfolio may influence their attention to stakeholders from different industry sectors (Kang, 2013; Wickert, Scherer, &
Spence, 2016). We controlled for a firm's governance characteristics
that have been found to impact CSP, such as the Proportion of independent directors (Haleblian & Rajagopalan, 2006), and Institutional
equity held by mutual and pension funds (Harjoto & Jo, 2011). We
controlled for CEO equity ownership relative to the total firm shares,
because CEOs' equity position signals their potential power over board
decisions on critical corporate strategies (Cannella & Lubatkin, 1993),
including environmental initiatives (Walls & Berrone, 2017).
We also controlled for Dynamism, the level of environmental instability and uncertainty that could threaten firms' survival (Anderson
& Tushman, 2001) and managerial discretion over long-term decisions
such as social activity (Chiu & Sharfman, 2016; Goll & Rasheed, 2004).
We measured the volatility of the industry (four-digit SIC) using the
standard error of the regression slope over the mean industry sales in
the five years prior to a firm's CEO change (Dess & Beard, 1984; Sharp,
Bergh, & Li, 2013). For example, if a firm experienced CEO turnover in
2008, we used the population industry sales data from 2003 to 2007 to
calculate dynamism. The variable was log-transformed to reduce the
influence of some extreme values in the sample.
We used (one-year) lag control variables because the effects of independent variables and controls on CSP may not be observed in the
year that succession occurs.
Dependent variable
Corporate social performance (CSP)
CSP represents corporate attention to a broad set of stakeholders,
such as employees, customers, communities, and the natural environment (Kacperczyk, 2009). The MSCI/KLD uses performance ratings to
capture firms' CSP as a multi-dimensional construct across several dimensions: community, diversity, employee relations, environment,
human rights, governance, and products. Each of these dimensions has
a strengths score (socially responsible behavior) and a concern score
(socially irresponsible behavior). Empirical research has demonstrated
that the strengths and concerns scores represent separate constructs
(Strike, Gao, & Bansal, 2006) due to poor convergent validity
(Mattingly & Berman, 2006; McGuire, Dow, & Argheyd, 2003; Walls
et al., 2011). Since it is inappropriate to combine the strengths and
concerns scores (for example, by subtracting the concerns from the
strengths), we used only the strength scores because, theoretically, our
study focuses on the proactive, forward-looking changes in stakeholder
management as an incentive and opportunity for incoming CEOs. In
addition, corporate managers generally have a greater control over the
positive aspect of social and environmental performance than the negative consequences (Manner, 2010).
We measured a firm's post-succession CSP one year after CEO succession (or the corresponding baseline year for non-succession firm
years). Since firms' CSP practices are likely influenced by the idiosyncrasies associated with their industry, we used industry-adjusted CSP
values, calculated as the firm's CSP score minus the median CSP score of
all the industry firms (4-digit SIC) excluding the focal firm. This procedure generated a more objective CSP measure as it accounts for the
performance of firms' industry peers. Finally, since MSCI/KLD made
changes to its rating schemes as well as categories during some years,
we standardized the composite CSP index for each firm-year in the
sample.
Endogeneity check and model estimations
Independent variables
A potential selection bias related to the sampling process may arise
because of the use of MSCI/KLD database which has expanded over
time from Russell 1000 (2001–present) to Russell 3000 (2007–present)
firms. According to MSCI/KLD's official manual, firm size is the criterion for the inclusion in the dataset. A selection bias occurs when
unknown or unobservable variables related to the sample selection
criteria correlate with the predictor variables and the outcome variable.
In this case, the selection criterion of the MSCI/KLD database is both
known and observable, thus we have controlled for firm size (log of
assets) in the analysis to reduce the selection bias concern (Kang, 2016).
Our conceptual model, however, might face endogeneity related to
CEO turnover because leadership change at the top is often not a random
choice in organizations. If there are unobservable variables related to a
CEO's replacement and the firm's CSP activity, our models would suffer
from endogeneity. To check for potential endogeneity, we employed an
instrumental variable (IV) method (Stata 15.1 command “xtivreg2”)
followed by an endogeneity test. We chose Average board tenure (excluding the CEO) and CEO board tenure as instruments because senior
directors or CEOs with long board tenure become less sensitive to environmental changes and tend to keep the status quo due to inertia
CEO succession
The replacement of a CEO in a given year during the sampling
period was coded as 1, and 0 otherwise.
Successor origin
We classified new CEOs with equal or less than two years of tenure
within the focal firm as Outsiders (=1), while those with more than two
years of tenure were considered Insiders (Cannella & Lubatkin, 1993;
Ocasio, 1999; Zhang, 2008).
Presence of financial distress
While there is no set standard to measure the condition of corporate
financial distress, prior research has defined it as multiple years of
declining economic performance (Bromiley & Harris, 2014), in which
firms experience pressure from financial stakeholders. We focused on
accounting performance which has both direct and indirect impact on
firms' CSP (Chiu & Sharfman, 2011; Zhao & Murrell, 2016). Specifically,
we operationalized a financially distressed condition if the firm had
three consecutive years of performance decline in return on assets
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(Kiesler & Sproull, 1982; Staw, Sandelands, & Dutton, 1981). Long tenure among board members increases the social pressure for conformity, which may reduce their vigilance of governing firm executives
such as exercising their fiduciary duty of hiring or firing CEOs. At the
same time, a CEO's power increases the longer he or she serves on the
board (Zajac & Westphal, 1996), which reduces boards' ability to remove the CEO from the post. We next checked the exogeneity as well as
relevance of these two instruments empirically. The Sargan test result
indicates that the two instruments were exogenous, i.e., they were
uncorrelated with the error term (p-value = 0.248). The weak identification test (Stock, Wright, & Yogo, 2002) confirms the relevance of the
instruments as the F-statistic (=124.34) exceeds the 10% minimal
cutoff value for two instruments. We regressed the probability of CEO
change on Average board tenure (excluding the CEO) and CEO board tenure while including all the control variables (Bascle, 2008). The
coefficients for both instruments are negative and significant (pvalue < 0.001), which provides support for the predictive power of
average director board tenure and CEO board tenure for CEO change.
After confirming the exogeneity and relevance of the two instrumental
variables, we performed an endogeneity test (Durbin-Wu-Hausman or
DWH). The DWH test result generated p-values > 0.1 for all models,
indicating that CEO succession is not an endogenous variable.
Furthermore, there might be potential endogeneity related to a CEO
successor's origin (insider versus outsider status) as well. We again used
the IV method with average board tenure (excluding the CEO) and CEO
board tenure as instruments. As noted, long-tenured directors favor
strategic persistence (Finkelstein & Hambrick, 1996). Insider succession
is more likely when companies experience strategic stability (Zhang &
Rajagopalan, 2003), such as through long board tenure of directors.
Relatedly, the likelihood of outside succession decreases when internal
constituencies, including directors of the board, resist change
(Friedman & Singh, 1989), which is more likely with a longer tenured
board. Thus, a board with a high average tenure is less likely to recruit
an external CEO candidate. In addition, a CEO's board tenure is an
important source of power (Zajac & Westphal, 1996), which enhances a
CEO's ability to influence the succession process. Boeker and Goodstein
(1993) found that outsider succession is less likely when executives
have a greater power in the firm. The Sargan test (p-value = 0.311) and
the weak identification test (F-statistic = 92.13) from the IV regression
satisfy the exclusivity and relevance criteria for these instruments. The
first-stage regression shows that both average board tenure (p-value <
0.001) and CEO board tenure (p-value < 0.001) are negatively related
to outsider succession. The Hausman test similarly rejects that a CEO's
origin is endogeneous (p-value = 0.31). Accordingly, we did not use
two-stage least square (2SLS) regression for our analysis.
As our sample was constructed in a longitudinal panel, we employed
a time-series regression method to examine the CEO turnover impact on
CSP. We first performed a Breusch-Pagan Lagrange multiplier test and a
Fischer test (F-statistics). The results confirmed that using panel regressions method would be more efficient than the pooled ordinary
least squares method (p < 0.001) to capture the time effect (Allison,
1994) associated with how new CEOs affect changes in the organization
across time. We further conducted a Hausman test and the result indicated that fixed effects models are more appropriate for our sample
(p < 0.001). The approach of using a fixed effects method is also more
conservative and can better accommodate for firm specific effects that
are correlated with the independent variables. Theoretically, it is also
meaningful to examine the within-firm effects which explain firms' CSP
between pre- and post-CEO succession (i.e., Do firms have higher CSP
over time, after hiring a new CEO?). We used robust variance estimators
clustered by firm unit identifiers (GVKEY) to reduce disturbances related to heteroscedasticity and autocorrelation (Hoechle, 2007) in our
panel dataset.
Table 1
Summary statistics based on firm-level clusters.
Variables
(1) Post-succession CSP
(2) CEO succession
(3) Outsider CEOs (=1)
(4) Financial distress
(5) Firm size (log of assets)
(6) Free cash flow (millions)
(7) Leverage
(8) Board independence
(9) Institutional equity
(10) Diversification
(11) CEO equity
(12) Dynamism (log)
(13) Succession × financial
distress
(14) Outside CEOs × financial
distress
Between firms (overall)
Within firms
Betweencluster
mean
Betweencluster SD
Withincluster
mean
Withincluster
SD
0.338
0.130
0.031
0.203
8.768
1.317
0.226
0.770
0.733
1.967
0.013
−3.892
0.031
0.874
0.096
0.061
0.138
1.555
4.160
0.593
0.108
0.154
0.398
0.021
0.595
0.056
0.000
0.003
0.001
0.002
8.746
−0.043
−0.006
−0.002
−0.003
−0.027
0.000
0.000
0.001
0.594
0.326
0.162
0.378
1.593
2.637
0.675
0.097
0.107
0.394
0.011
0.585
0.165
0.011
0.038
0.000
0.098
Results
As our empirical analyses are based on a panel dataset clustered by
firms, we report cluster-level descriptive statistics. In Table 1, we present the means and standard deviations (SD) for all the variables based
on between-firm and within-firm values. Table 2 displays correlation
coefficients for all the variables including interaction terms. We report
between-firm cluster correlations below the diagonal and within-firm
correlations above the diagonal. Overall, the correlation coefficients
between the key predictors (CEO succession, successor origin, and the
interaction terms with financial distress) and post-succession CSP are
highly consistent with our hypotheses.
Table 3 displays the results of the panel fixed-effects regressions
predicting firms' post-succession CSP. Model 1 in Table 3 is a control
model; it shows that firm size and board independence are strong
predictors for firms' subsequent CSP, consistent with the previous
findings that larger firms and stronger board vigilance may positively
contribute to firms' CSP (Stanwick & Stanwick, 1998; Webb, 2004).
Model 2 in Table 3 displays the main effect of CEO succession on firms'
subsequent CSP and shows a positive and significant result (β = 0.060
(p-value = 0.007),
CI = 0.017–0.107,
F-statistic = 16.927
(pvalue = 0.000)). This suggests that a new CEO contributes to higher
CSP, as predicted in Hypothesis 1. Model 3 tests the interaction term
between CEO change and financial distress which is negative and significant (β = −0.195 (p-value = 0.001), CI = −0.298 to −0.092, Fstatistic = 16.727 (p-value = 0.000)), consistent with Hypothesis 2. For
firms facing financial distress (consecutive years of decline in ROA), the
positive effect of new CEOs on CSP is weaker. Fig. 1 is the marginal plot
of CSP based on CEO succession and financial decline, which provides
further support that the presence of financial distress (a solid line)
mitigates the positive effect of new CEOs on CSP (an upward slope).
These findings suggest that CEO succession and financial distress drive
changes in CSP, in support of Hypotheses 1 and 2.
Hypothesis 3 posits that financial distress creates a distinctive impact for new insider versus outsider CEOs on CSP, such that outsider
CEOs are more likely to reduce their commitment to CSP. To test this
hypothesis, we created two dummy variables to represent the three CEO
change categories (no succession, outsider succession, and insider
succession). Using insider succession as a reference category in the regressions, Model 4 shows a negative coefficient for the interaction term
between outsider succession and the presence of financial distress
(β = −0.247 (p-value = 0.016), CI = −0.447 to −0.047, F-statistic = 16.0 (p-value = 0.000)), suggesting that firms facing financial
5
The Leadership Quarterly xxx (xxxx) xxxx
S.-C.S. Chiu and J.L. Walls
Table 2
Correlations based on firm-level clusters.
Variables
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
(13)
(14)
(1) Post-succession CSP
(2) CEO succession
(3) Outsider CEOs (=1)
(4) Financial distress
(5) Firm size (log of assets)
(6) Free cash flow (millions)
(7) Leverage
(8) Board independence
(9) Institutional equity
(10) Diversification
(11) CEO equity
(12) Dynamism (log)
(13) Succession × financial distress
(14) Outside CEOs × financial distress
1
0.13
−0.05
−0.10
0.51
0.42
0.12
0.11
−0.15
0.25
−0.16
−0.12
−0.15
−0.15
0.02
1
0.62
0.06
0.00
0.04
0.01
−0.09
−0.15
0.03
−0.32
0.03
0.42
0.33
−0.04
0.46
1
0.10
−0.14
−0.02
−0.03
−0.03
−0.08
−0.01
−0.16
0.07
0.38
0.57
−0.10
0.06
0.10
1
−0.09
0.00
−0.06
−0.08
0.06
−0.04
0.03
0.00
0.41
0.26
0.51
0.00
−0.14
−0.09
1
0.50
0.30
0.09
−0.17
0.15
−0.24
−0.09
−0.10
−0.13
0.42
0.04
−0.02
0.00
0.50
1
0.39
0.02
−0.13
0.11
−0.09
−0.02
−0.08
−0.05
0.12
0.01
−0.03
−0.06
0.30
0.39
1
0.04
−0.08
0.05
−0.03
0.02
−0.07
−0.05
0.11
−0.09
−0.03
−0.08
0.09
0.02
0.04
1
0.13
0.18
−0.12
−0.03
0.02
0.05
−0.15
−0.15
−0.08
0.06
−0.17
−0.13
−0.08
0.13
1
−0.03
−0.02
−0.12
0.05
0.05
0.25
0.03
−0.01
−0.04
0.15
0.11
0.05
0.18
−0.03
1
−0.06
0.11
−0.02
−0.03
−0.16
−0.32
−0.16
0.03
−0.24
−0.09
−0.03
−0.12
−0.02
−0.06
1
−0.01
−0.13
−0.08
−0.12
0.03
0.07
0.00
−0.09
−0.02
0.02
−0.03
−0.12
0.11
−0.01
1
0.05
0.05
−0.15
0.42
0.38
0.41
−0.10
−0.08
−0.07
0.02
0.05
−0.02
−0.13
0.05
1
0.71
−0.15
0.33
0.57
0.26
−0.13
−0.05
−0.05
0.05
0.05
−0.03
−0.08
0.05
0.71
1
Note: Absolute values of the correlation coefficients > 0.02 are significant at p < 0.05.
The “between-cluster” (based on firm GVKEY) correlation values are reported below the diagonal; the “within-cluster” correlation values are reported above the
diagonal.
CEOs divert their attention away from social and environmental stakeholders more quickly than their insider counterparts.
distress with a new outsider CEO (versus a new insider CEO) experience
significantly lower post-succession CSP. The marginal plot, shown in
Fig. 2, provides further evidence that new insider and outsider CEOs
differ in their impacts on CSP even when firm conditions require them
to pay more attention to financial stakeholders. The slope tests for the
interactions (Hypotheses 2 and 3) are both significant (p-values = 0.001 and 0.015, respectively).
The results from the variance inflation factors (VIF) tests suggest no
serious multicollinearity in our analyses as all VIF scores were within
the recommended threshold of 10 (Neter, Wasserman, & Kutner, 1985).
The F-statistic results reported above also demonstrate strong goodnessof-fit for all the models. Considered collectively, the empirical findings
suggest that firms with a new CEO are more likely to experience an
increase in CSP. However, the condition of financial distress reduces
new CEOs' attention to a broad range of stakeholders; new outsider
Supplemental analyses
Dimensional-level CSP as dependent variables
While our main analyses focused on the overall CSP based on the
aggregated measure, examining individual CSP dimensions as alternative outcome variables might offer a deeper insight into how CEO
succession and successor origin impact managerial attention to different stakeholders (Hillman & Keim, 2001). In terms of the CEO succession effect, the results in Table 4 show that more positive change in
CSP takes place in the ‘environment’ (ENV), ‘employees’ (EMP), and
‘human rights’ (HUM) dimensions. It may be that newly-minted CEOs
focus on these stakeholders to establish a reputation quickly and build
Table 3
Results of panel regressions.
DV = corporate social performance
Constant
Firm size
Free cash flow
Leverage
Board independence
Institutional equity
Diversification
CEO equity
Dynamism
Financial distress
Hypotheses 1 & 2
Succession
Succession × financial distress
Hypothesis 3 (reference group: Insider succession)
No succession
No succession × financial distress
Outsider succession
Outsider succession × financial distress
Year-fixed effects included
Root MSE (mean squared errors)
F-test
Degrees of freedom
Firm-year observations (N)
Number of unique firms
Model 1
−1.167⁎⁎⁎
0.138⁎⁎⁎
0.001
−0.007
0.398⁎⁎⁎
−0.139
0.006
0.396
−0.028
−0.051⁎⁎
Model 2
(0.360)
(0.040)
(0.004)
(0.016)
(0.131)
(0.117)
(0.040)
(1.070)
(0.018)
(0.021)
Yes
0.601
17.572⁎⁎⁎
21
7322
684
6
Model 4
−1.226⁎⁎⁎
0.140⁎⁎⁎
0.001
−0.007
0.407⁎⁎⁎
−0.134
0.008
0.502
−0.030⁎
−0.052⁎⁎
(0.360)
(0.040)
(0.004)
(0.016)
(0.131)
(0.117)
(0.040)
(1.073)
(0.018)
(0.020)
−1.213⁎⁎⁎
0.138⁎⁎⁎
0.001
−0.007
0.405⁎⁎⁎
−0.138
0.006
0.472
−0.030⁎
−0.023
(0.359)
(0.040)
(0.004)
(0.016)
(0.131)
(0.116)
(0.040)
(1.074)
(0.018)
(0.023)
0.062⁎⁎⁎
(0.023)
0.108⁎⁎⁎
−0.195⁎⁎⁎
(0.027)
(0.052)
Yes
0.598
16.827⁎⁎⁎
22
7316
684
Note: Robust standard errors clustered by firms (GVKEY) in parentheses.
The coefficient and standard errors for free cash flow are multiplied by 103.
⁎
p < 0.10.
⁎⁎
p < 0.05.
⁎⁎⁎
p < 0.01.
Model 3
Yes
0.598
16.727⁎⁎⁎
23
7316
684
−1.062⁎⁎⁎
0.137⁎⁎⁎
0.001
−0.007
0.400⁎⁎⁎
−0.140
0.003
0.417
−0.029
−0.116⁎⁎
(0.356)
(0.040)
(0.004)
(0.016)
(0.131)
(0.115)
(0.040)
(1.078)
(0.018)
(0.056)
−0.130⁎⁎⁎
0.093
−0.115⁎⁎
−0.247⁎⁎
Yes
0.597
16.000⁎⁎⁎
25
7316
684
(0.031)
(0.061)
(0.056)
(0.102)
The Leadership Quarterly xxx (xxxx) xxxx
S.-C.S. Chiu and J.L. Walls
Marginal Plot of CEO Succession vs. No Succession and Financial Distress on CSP
Fig. 1. Marginal plot of CEO succession vs. no succession and financial distress on CSP.
Marginal Plot of Outside vs. Insider Succession and Financial Distress on CSP
Fig. 2. Marginal plot of outside vs. insider succession and financial distress on CSP.
legitimacy with internal as well as external stakeholders to protect their
new, precarious positions as CEO. However, the dimensional CSP
analysis also shows that when firms suffer from financial distress, those
with new CEOs are likely to forego longer-term CSP investments such as
personnel training and human capital development related to the ‘employee’ dimension. In particular, compared to insider CEOs, outsider
CEOs in financially distressed firms are associated with more negative
impact on the ‘employee’ dimension, as demonstrated in Table 5. Evidence from prior research suggests that higher staff changes and senior
executive turnover often occur in firms with outside compared to inside
succession (see Kesner and Sebora (1994) for a review). Hence, the
presence of financial distress may exacerbate the situation.
predict negative aspects of CSP, i.e., corporate social irresponsibility
(CSiP). We followed the same approach as in CSP but instead used
concerns scores from MSCI/KLD dimensions to compute a firm's CSiP
index, which were industry-adjusted and standardized to allow for
comparison across years and industries. We did not find a significant
effect of CEO succession on CSiP, nor did we find a significant interaction effect of CEO succession and financial distress on CSiP. These
results seem to support the notion that factors related to CEOs or their
characteristics have a stronger predictive power on the positive, rather
than negative, aspect of CSP (Manner, 2010) and that CEOs generally
have a less direct control and discretion over firms' engagement in socially irresponsible activities.
Socially irresponsible behavior (CSiP) as a dependent variable
While our paper focused on the positive aspect of CSP given that
new CEOs have an incentive to improve CSP to build their reputation,
we conducted additional test to see whether our theoretical model can
Alternative proxies for financial distress
In this study we chose accounting performance (three consecutive
years of decline in ROA) to measure the presence of financial distress
because research has shown a stronger link between CSP and firms'
7
8
0.073⁎⁎
−0.143⁎⁎
Yes
33.102⁎⁎⁎
21
0.668
−1.166
0.084
0.016⁎⁎⁎
−0.017
0.232
−0.108
0.008
1.292
0.008
−0.011
(0.030)
(0.057)
(0.465)
(0.051)
(0.004)
(0.014)
(0.163)
(0.111)
(0.051)
(1.209)
(0.022)
(0.025)
−0.010
0.034
Yes
6.355⁎⁎⁎
21
0.628
−1.356
0.122⁎⁎⁎
−0.027⁎⁎⁎
0.016
0.181
−0.042
0.021
0.454
−0.044⁎⁎
−0.024
⁎⁎⁎
COM
ENV
⁎⁎
Model 2
Model 1
(0.028)
(0.058)
(0.442)
(0.046)
(0.006)
(0.015)
(0.137)
(0.153)
(0.050)
(0.660)
(0.019)
(0.026)
⁎⁎⁎
0.098⁎⁎⁎
−0.143⁎⁎
Yes
18.304⁎⁎⁎
21
0.744
−1.425
0.116⁎⁎
0.007
−0.028
0.217
−0.017
−0.044
0.322
−0.065⁎⁎⁎
−0.010
EMP
Model 3
(0.036)
(0.071)
(0.477)
(0.052)
(0.007)
(0.018)
(0.159)
(0.148)
(0.062)
(1.169)
(0.021)
(0.028)
⁎⁎⁎
0.018
−0.045
Yes
15.482⁎⁎⁎
21
0.497
−1.686
0.122⁎⁎⁎
−0.009⁎⁎⁎
0.024⁎⁎
0.494⁎⁎⁎
0.099
0.022
1.904⁎⁎
−0.011
−0.012
DIV
Model 4
N = 6996 firm year observations (681 unique firms). Robust standard errors clustered by firms (GVKEY) in parentheses.
The coefficient and standard errors for free cash flow are multiplied by 103.
⁎
p < 0.10.
⁎⁎
p < 0.05.
⁎⁎⁎
p < 0 01.
Constant
Firm size
Free cash flow
Leverage
Board independence
Institutional equity
Diversification
CEO equity
Dynamism
Financial distress
Hypotheses 1 & 2
Succession
Succession × financial distress
Year-fixed effects included
F-test
Degrees of freedom
Root MSE (mean squared errors)
Variables
Table 4
Supplemental analysis based on individual CSP dimensions: CEO succession and financial distress.
(0.024)
(0.046)
(0.338)
(0.036)
(0.002)
(0.010)
(0.134)
(0.116)
(0.037)
(0.743)
(0.015)
(0.021)
⁎⁎⁎
0.072⁎
−0.014
Yes
6.078⁎⁎⁎
21
0.794
−1.651
0.174⁎⁎⁎
0.003
−0.033⁎⁎
0.239
−0.044
0.005
0.134
−0.010
−0.070⁎⁎
PRO
Model 5
(0.040)
(0.071)
(0.540)
(0.062)
(0.008)
(0.015)
(0.191)
(0.128)
(0.061)
(1.079)
(0.025)
(0.030)
0.055
−0.085
Yes
5.657⁎⁎⁎
21
0.811
−0.567
0.043
0.007
−0.016
−0.134
−0.165
0.094
1.619
0.008
0.000
CGOV
Model 6
(0.043)
(0.079)
(0.467)
(0.047)
(0.011)
(0.015)
(0.198)
(0.184)
(0.063)
(1.379)
(0.024)
(0.031)
0.070⁎
−0.056
Yes
3.370⁎⁎⁎
21
0.876
−2.904⁎⁎⁎
0.291⁎⁎⁎
−0.009
−0.023
−0.048
−0.091
0.218⁎⁎
0.888
0.022
0.032
HUM
Model 7
(0.040)
(0.074)
(0.816)
(0.084)
(0.006)
(0.016)
(0.164)
(0.302)
(0.097)
(1.003)
(0.020)
(0.038)
S.-C.S. Chiu and J.L. Walls
The Leadership Quarterly xxx (xxxx) xxxx
9
−0.090⁎⁎⁎
0.123⁎
−0.086
−0.021
Yes
30.343⁎⁎⁎
23
0.668
−1.073
0.084
0.016⁎⁎⁎
−0.017
0.233
−0.108
0.007
1.282
0.008
−0.134⁎⁎
(0.034)
(0.065)
(0.084)
(0.125)
(0.463)
(0.051)
(0.004)
(0.014)
(0.164)
(0.111)
(0.051)
(1.210)
(0.022)
(0.062)
−0.005
−0.067
−0.075
−0.064
Yes
5.964⁎⁎⁎
23
0.628
−1.347
0.122⁎⁎⁎
−0.027⁎⁎⁎
0.016
0.180
−0.043
0.020
0.442
−0.043⁎⁎
0.043
⁎⁎⁎
COM
ENV
⁎⁎
Model 2
Model 1
(0.033)
(0.070)
(0.067)
(0.111)
(0.441)
(0.046)
(0.006)
(0.015)
(0.137)
(0.153)
(0.050)
(0.659)
(0.019)
(0.065)
⁎⁎⁎
−0.107⁎⁎
0.027
−0.044
−0.315⁎⁎
Yes
16.924⁎⁎⁎
23
0.743
−1.303
0.116⁎⁎
0.007
−0.028
0.210
−0.024
−0.046
0.293
−0.064⁎⁎⁎
−0.037
EMP
Model 3
(0.041)
(0.086)
(0.082)
(0.142)
(0.476)
(0.052)
(0.007)
(0.018)
(0.159)
(0.148)
(0.062)
(1.171)
(0.021)
(0.082)
N = 6996 firm year observations (681 unique firms). Robust standard errors clustered by firms (GVKEY) in parentheses.
The coefficient and standard errors for free cash flow are multiplied by 103.
⁎
p < 0.10.
⁎⁎
p < 0.05.
⁎⁎⁎
p < 0.01.
Constant
Firm size
Free cash flow
Leverage
Board independence
Institutional equity
Diversification
CEO equity
Dynamism
Financial distress
Hypothesis 3 (reference group: insider succession)
No succession
No succession × financial distress
Outsider succession
Outsider succession × financial distress
Year-fixed effects included
F-test
Degrees of freedom
Root MSE (mean squared errors)
Variables
Table 5
Supplemental analysis based on individual CSP dimensions: successor origin and financial distress.
⁎⁎⁎
−0.030
0.006
−0.064
−0.087
Yes
14.269⁎⁎⁎
23
0.497
−1.651
0.122⁎⁎⁎
−0.009⁎⁎⁎
0.024⁎⁎
0.493⁎⁎⁎
0.097
0.021
1.891⁎⁎
−0.011
−0.018
DIV
Model 4
(0.027)
(0.054)
(0.061)
(0.099)
(0.339)
(0.036)
(0.002)
(0.010)
(0.134)
(0.115)
(0.037)
(0.745)
(0.015)
(0.050)
⁎⁎⁎
−0.082⁎
0.015
−0.049
0.025
Yes
5.664⁎⁎⁎
23
0.794
−1.570
0.174⁎⁎⁎
0.003
−0.033⁎⁎
0.240
−0.043
0.005
0.131
−0.010
−0.086
PRO
Model 5
(0.047)
(0.085)
(0.085)
(0.155)
(0.542)
(0.062)
(0.008)
(0.015)
(0.191)
(0.128)
(0.061)
(1.079)
(0.025)
(0.082)
−0.086⁎
0.060
−0.159⁎
−0.005
Yes
5.317⁎⁎⁎
23
0.811
−0.479
0.043
0.007
−0.016
−0.132
−0.164
0.093
1.603
0.009
−0.059
CGOV
Model 6
(0.048)
(0.098)
(0.085)
(0.132)
(0.462)
(0.047)
(0.011)
(0.015)
(0.198)
(0.184)
(0.062)
(1.384)
(0.024)
(0.089)
−0.095⁎⁎
−0.002
−0.131⁎⁎
−0.111
Yes
3.116⁎⁎⁎
23
0.875
−2.802⁎⁎⁎
0.291⁎⁎⁎
−0.009
−0.023
−0.049
−0.093
0.216⁎⁎
0.867
0.022
0.033
HUM
Model 7
(0.047)
(0.104)
(0.062)
(0.132)
(0.813)
(0.084)
(0.006)
(0.015)
(0.164)
(0.300)
(0.097)
(1.005)
(0.020)
(0.109)
S.-C.S. Chiu and J.L. Walls
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developing timely solutions through selling underperforming or nonstrategic assets due to greater, in-depth knowledge about the strengths
and weaknesses of the operations (Chiu, Johnson, Hoskisson, & Pathak,
2016). Our findings complement prior research by showing that new
insider CEOs seek to strike an acceptable balance between financial,
social, and environmental stakeholder demands. Achieving this balance
is more difficult for new outsider CEOs due to bounded rationality that
prevents them from spreading their attention too broadly (Simon,
1957).
Our supplemental analysis suggests that stakeholders like employees are prone to suffer when new CEOs are outsiders and firms face
financial distress. Most likely, new outsider CEOs engage in cost-cutting
exercises like layoffs to turn the company around financially, without
considering long-term consequences. Yet, poor corporate social performance can have detrimental effects on firms' financial outlook, and
such behavior is punished by investors (Groening & Kanuri, 2018; Walls
et al., 2011) as it reduces brand value (Lee, Lau, & Cheng, 2013), damages corporate reputation, and may have long-term (negative) consequences for the firm in the form of customer loyalty and price premiums (Deephouse, 2000; Rindova, Williamson, Petkova, & Sever,
2005; Standifird, 2001). Therefore, when firms neglect the interests of
social and environmental stakeholders as a reaction to financial distress, they may lose trust with stakeholders who value such things that
could affect the firm's survival, legitimacy, and profitability (Walls &
Triandis, 2014).
In practice, our findings have implications for the executive recruitment process of corporate boards. With each new incoming CEO,
relationships with stakeholders need to be rebuilt and reaffirmed. If the
goal of the board is to preserve the firm's standing relationships with
stakeholders, while simultaneously addressing the context of financial
distress, new insider CEOs may be better equipped to handle the
complexities and paradoxes that arise from meeting the needs of a
multitude of stakeholders (Hahn, Pinkse, Preuss, & Figge, 2016; Kaptein
& Wempe, 2001; Schad, Lewis, Raisch, & Smith, 2016). Thus, new insider CEOs seem better placed to address the Grand Challenge of firms'
environmental and social impacts (George, Howard-Grenville, Joshi, &
Tihanyi, 2016). While the context under which a new CEO inherits a
company affects attention to stakeholders, a thoughtful succession
process and grooming new leaders may help external candidates to
transition into their new roles ahead of their appointments. By promoting new CEOs internally, or by grooming new outsider CEOs prior
to their appointments, new leaders build up not only complex firmspecific knowledge but also develop relationships with stakeholders
before succession. This could limit the effects of bounded rationality
and ensure that companies preserve important stakeholder relationships during realignment.
ROA than other performance indicators (Zhao & Murrell, 2016). We
conducted supplemental analyses using annual stock returns
(RETt = log (Pt/Pt−1) = log (Pt) − log (Pt−1)) and earnings per share
(EPS) as alternative proxies for financial distress. We followed the same
approach as in our main analysis using a binary measure coded as 1 if a
firm experienced three consecutive years of decline in RET (or EPS)
prior to the focal year. Using fixed-effects panel methods, results show
that the positive impact of CEO succession on CSP is not significantly
affected by firms' recent decline in RET or EPS. This suggests that different financial performance indicators do not generate a uniform impact on diverting organizations' attention toward or away from social
and environmental stakeholders following leadership change.
Alternative timeframe
Our main models reported results based on one year after CEO
change. We performed several sensitivity tests predicting firms' CSP
beyond the first year to gain insight into the long-term effect of CEO
succession on CSP. The results indicate that the interaction effect between CEO successor origin and financial distress is more prominent at
t + 1 before diminishing in the subsequent years (t + 2–t + 4). Thus,
new CEOs, in particular those recruited from outside, seem to react
quickly and strongly to the financial distress condition by diverting
their attention to financial stakeholders' concerns.
Discussion
As with any corporate strategy, management of social and environmental performance requires a long-term, future outlook with
significant investments. The CEO, as chief strategist in the organization,
has to manage concurrent stakeholder demands and decide what to
prioritize given the context of the firm. When firms change leaders, the
organization's relationships with stakeholders, and subsequent CSP,
also change. Our findings suggest that firms with new CEOs pay more
attention to CSP than CEOs who have been at the helm for longer
periods. This association is weakened when firms face financial distress.
Also, in the presence of financial distress, new outsider CEOs pay less
attention to CSP than new insider CEOs. These findings have a number
of important implications for research and practice.
While our research highlights the importance of contingencies such
as financial distress for CSP outcomes during leadership change, improving CSP does not necessarily mean neglecting financial performance (Zhao & Murrell, 2016). However, during financial distress, financial stakeholders become the most salient (Mitchell et al., 1997),
forcing new CEOs to narrow their attention to financial stakeholders.
Nevertheless, how much new CEOs prioritize financial stakeholders
depends on their legacy with the company. When CEOs are hired from
within the firm, they have stronger pre-existing relationships with environmental and social stakeholders, and therefore balance these demands against financial demands. In contrast, new outsider CEOs have
more freedom to focus on ‘fixing’ the financial distress.
Clearly, companies cannot ignore sound financial performance
which is a necessary, but likely not a sufficient, condition for CSP. This
insight helps us to understand not only how leadership change, in
conjunction with organizational context, affects CSP (Aguinis & Glavas,
2012), but also has implications for the limitations of agency theory.
Agency theory maintains that CEOs engage in CSP purely as a self-interested exercise such as gaining job security within an organization
(Cespa & Cestone, 2007; Harjoto & Jo, 2011). This view may be relevant for new outsider CEOs but our work suggests that stewardship
theory could provide more accurate insights into the role of new insider
CEOs for CSP (Davis, Schoorman, & Donaldson, 1997; Lan &
Heracleous, 2010). Thus, while new outsider CEOs are conventionally
thought to bring more changes to the organization (Bernard et al.,
2016), there are contexts in which new insider CEOs may be preferred
(Greiner, Cummings, & Bhambri, 2003; Wiersema, 2002). For example,
new insider CEOs are more efficient than new outsider CEOs in
Limitations and research extensions
This study has a number of limitations. First, we were not able to
measure new CEO decisions regarding stakeholder management directly. Instead, we drew inferences from the succession context and
assumed that under the condition of financial distress, the most critical
and salient stakeholder perceived by new CEOs is the shareholder. We
assume that new CEOs have to make decisions about competing interests from different stakeholder groups when firms face financial distress. We also did not directly measure the pressure a company might
face from social and environmental stakeholders. Survey or experimental research could tease apart the trade-off choices new CEOs need
to make in prioritizing stakeholder groups. Field-based methods could
assess the underlying decision-making processes in board meetings or
other CEO-based activities.
The use of MSCI/KLD data as a proxy for CSP has some shortcomings. In particular, the equal weighting for each dimension might
not be appropriate for every firm or industry (Waddock & Graves,
1997). For example, product quality or other consumer issues may be
10
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S.-C.S. Chiu and J.L. Walls
more salient for consumer-facing companies than for primary industries
further upstream the supply chain. Human rights issues may be more
relevant for companies that are vertically integrated and own factories
compared to companies that outsource such activities. Future research
could conceptualize CSP as a latent construct and use structural equation modelling (SEM) to overcome this limitation. In addition, companies may need to make trade-offs between individual CSP dimensions
(Barnett, 2007), because of resource and capability constraints. More
in-depth, industry-specific analyses could be helpful to understand
nuanced trade-offs between financial versus non-financial stakeholders,
social versus environmental stakeholders, or those made between subsets of social stakeholders.
Our work offers paths for research extensions. Leadership is a socially complex and relational capability and top executives are a critical
node to engaging with stakeholders, with enormous discretion and
flexibility to run the corporation (Lan & Heracleous, 2010). Future research can examine additional firm-specific conditions that affect executives' decisions related to CSP. For example, family-owned businesses are more likely to preserve relationships with suppliers (Miller &
Le Breton-Miller, 2005) and be embedded in local communities (Dyer Jr
& Whetten, 2006). Therefore, family firms are more likely to preserve
long-term reputations and avoid detrimental actions on their stakeholders such as laying off employees even in conditions of economic
crises (Block, 2010).
Adopting a cross-level approach could provide insights into the
complexity of organizations as open systems (Ocasio, 1997; Scott,
1992) and a deeper understanding of the dynamics of stakeholder salience models when various stakeholder groups compete for executive
attention. In addition, more research is needed to integrate microfoundational theories with organizational theories of CSP and stakeholder management (Aguinis & Glavas, 2012; Laplume, Sonpar, & Litz,
2008). For example, strategic cognition theories of CEOs are increasingly placing emphasis on aspects such as emotions, values, and empathy as possible determinants for firm-level outcomes (Bromiley &
Rau, 2016; König, Graf-Vlachy, Bundy, & Little, 2018). These aspects
have not been extensively considered in the CSP literature even though
CSP topics logically lend themselves to such CEO-level factors.
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Conclusion
Change in corporate strategic leadership is increasingly common in
practice. CEO succession has potentially massive implications for firms'
long-term sustainability because corporate leadership is an important
source of competitive advantage. This study highlights the role of leadership change in corporate stakeholder management by showing that
when undergoing financial distress, companies are faced with trade-offs
about triple bottom line performance. The conditions of financial distress could be bad news for social and environmental stakeholders that
seek to hold companies responsible for broader performance impacts
because firms prioritize financial stakeholders during such times. This
study helps us gain a deeper understanding of the mechanisms that
trigger top managers, especially CEOs, to attend to a multitude of stakeholders. It is clear that when firms face financial distress, the attention trade-offs at the top become more prominent, especially when
succession happens by outsider CEOs who prioritize shareholders more
easily than insider CEOs even though both face clear mandates to improve the firm's financial outlook. Nevertheless, by being cognizant of
this fact, companies with new CEOs may be able to seek a better balance between financial, social, and environmental stakeholder interests.
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