A Theory of Corporate Boards and Forced CEO Turnover

We model a corporate board evaluating a chief executive officer (CEO) of uncertain management ability. Each director receives a noisy private signal about CEO ability, after which directors discuss this ability and vote to retain or replace the CEO. Directors care about true CEO ability, since it affects their equity holding values; however, a CEO may impose costs of dissent on a director who votes to fire but fails to oust her. We relate the equilibrium CEO firing decision to board size, board composition, the effect of an imprecise public signal, and the cost and probability of finding a good replacement CEO.

The online appendix is available at https://doi.org/10.1287/mnsc.2017.2762.

This paper was accepted by Gustavo Manso, finance.