The Changing of the Guard: Turnover and Structural Change in the Top-Management Positions J.

Richard Harrison
University of Texas at Dallas

David L. Torres
University of Arizona

Sal Kukalis
California State University at Long Beach

This paper explores the nature and relationship of the positions of CEO and chair of the board of directors through two related analyses, one examining CEO and board chair turnover and the other examining consolidations and separations in these two positions, using transition-rate analysis, in a sample of 671 large American manufacturing firms for the period from 1978 to 1980. Both turnover and structural change in the top positions were found to depend on firm performance and industry structure; turnover also depended on firm size and the structure of the positions, and structural change also depended on board structure, controlling for retirements. The results highlight the power of the CEO, the tendency to consolidate the top positions under the CEO, and the greater accountability of the person in the combined position for firm performance. The paper concludes with some implications of the findings for understanding the CEO and board chair positions, with an emphasis on top-management power, makes recommendations for research on turnover, and provides suggestions for corporate behavior, based on the results of this study.* At the pinnacle of leadership in American corporations are two key management positionsthe chief executive officer (CEO) and the chair of the board of directors. The CEO position has been widely studied, but the board chair position has received essentially no empirical attention. The purpose of the study reported in this paper was to gain insight into the nature and relationship of these two top-management positions by analyzing CEO and board chair turnover and structural change (consolidations and separations) in these two positions. While both analyses shed light on the nature and relationship of these positions, they are presented in two parts because they use different approaches. The turnover analysis develops and tests hypotheses concerning determinants of CEO and board chair turnover, building on previous studies of CEO turnover. Structural change in these positions has never before been studied, however, and this analysis is exploratory. CEO AND BOARD CHAIR TURNOVER The causes and consequences of turnover in organizations have been widely studied. Bluedorn (1982) reported that over 1,500 studies of turnover have been conducted in this century, but only a relatively small number have addressed turnover in the top management of organizations, and most have focused on the consequences rather than the causes. Carroll (1984) provided a thorough review of empirical studies of the consequences of leadership turnover on the subsequent performance of organizations. A few previous studies have examined the causes of top-management turnover in American corporations (Roberts, 1959; Grusky, 1961; Gordon and Becker, 1964; Pfeffer and Lebiebici, 1973; McEachern. 1975; Crain. Deaton, and Tollison, 1977; Salancik and Pfeffer, 1980; James and Soref. 1981; Osborn et al., 1981; Allen, 1981; Allen and Panian, 1982; Wagner, Pfeffer, and O'Reilly, 1984; Coughlan and Schmidt. 1985). The concepts of turnover, succession, and tenure in top management are tightly linked. Turnover and succession both
21 I/Administrative Science Quarterly, 33 (1988): 211-232

1988 by Cornell University. 0001-8392/88/3302-0211/$! .00.

The authors are listed in order of age, all three authors made major contributions to this paper. We wish to thank Marshall Meyer, Jeff Pfeffer, and two anonymous ASQ reviewers for comments on an earlier draft.

refer to the event of the incumbent leaving office, although succession implies an interest in what happens after the event. While it is theoretically possible for turnover to occur without succession, if the position is eliminated, the positions of concern herethe CEO and the board chairare never eliminated (although they could be consolidated), and this possibility is not relevant. For present purposes, then, turnover and succession refer to identical events, and tenure in a position is, by definition, the interval between turnover events. Since turnover events define tenure, variables influencing the likelihood of turnover should also influence expected tenure, but the effects of these variables on turnover should have opposite directions to their effects on tenure. Analyses of the causes of top-management turnover could be based on the individual characteristics of the incumbents, on characteristics of the organization, or on characteristics of the firm's environment. Trevino (1986) included individual characteristics in her broad review of the management-succession literature, but because this study focused on the organization and its environment, the only individual characteristic considered, to control for retirement, was the incumbent's age. Attention to the organizational environment's role in turnover has been fairly limited. Pfeffer and Leblebici (1973), who considered CEO tenure at the aggregate industry (4-digit SIC) level, rather than the firm level, found that the number of firms in the industry and the industry's productivity growth, which they used as a measure cf technological change, were positively related to CEO tenure. Osborn et ai. (1981) found that volatility in the firm's socioeccnomic environment and supplier volatility were positively related to CEO turnover, A number of studies have examined organizational characteristics as determinants of top-management turnover, focusing primarily on organizational performance, size, and form of ownership. Of these, performance has been the most frequently studied determinant of turnover, and a negative relationship between performance and turnover has been found consistently. In studies of American corporations, performance has been found to be negatively related to CEO turnover, or positively related to CEO tenure (Crain, Deaton, and Tolliscn, 1977; Salancik and Pfeffer, 1980; Osbcrn et al., 1981; Allen and Panian, 1982; Coughlan and Schmidt, 1985), negatively related tc turnover in the top-management group (Wagner, Pfeffer, and O'Reilly, 1984), and negatively related to CEO firings (James and Soref, 1981). A related measure, the level of risk incurred by the firm as indicated by the debtto-equity ratio, was found to be negatively associated with the tenure of CEOs of manufacturing firms (Pfeffer and Leblebici, 1973). Organizational size has also been frequently associated with top-management turnover. Although James and Soref (1981) reported a positive relationship between size and corporate CEO firings, si2e has not generally been found to have a clear relationship to turnover in the top management of corporations. Only two studies found a positive relationship between size and turnover for the top-management group (Grusky, 1961; Crain, Deaton, and Tolliscn, 1977). Grusky's (1961) study was seriously questioned by Gordon and Becker (1964).
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Turnover and Structural Change

who did a similar but more thorough analysis and found no support for the size-turnover relationship for the top-management group; however, the only statistical test they reported was seriously flawed by multicolinearity, since they used sales, number of employees, and an interaction between the two size measures all in the same regression equation. Roberts (1959) found no relationship between size and CEO turnover. Pfeffer and Leblebici (1973) found no relationship between size and CEO tenure, but their prospects for finding an effect may have been seriously weakened by operationalizing both variables as industry-level averages. Wagner, Pfeffer, and O'Reilly (1984) did not examine size directly, but a related variable, the number of corporate vice-presidents, was not significantly associated with turnover in the top-management group. The effect of the form of ownership of the organization on CEO turnover has been investigated in a few studies. McEachern (1975) and Salancik and Pfeffer (1980) found CEO tenure greatest for owner-managed firms. Allen (1981) and Allen and Panian (1982) reported similar findings, and Osborn et al. (1981) found higher turnover for firms with greater volatility in ownership. James and Soref (1981), however, found no relationship between form of ownership and the firing of corporate CEOs. Several other organizational variables have received some empirical attention as determinants of top-management turnover. Similarities in ages and dates of entering the firm have been found to be negatively related to turnover in the topmanagement group of corporations (Wagner. Pfeffer. and O'Reilly. 1984). Coughlan and Schmidt (1985) found turnover higher for CEOs near age 65, an expected retirement effect, and Wagner. Pfeffer. and O'Reilly (1984) found a general negative relationship between age and top-management turnover but didn't control for retirement effects. Coughlan and Schmidt (1985) also found turnover higher for CEOs with lower compensation. Both Salancik and Pfeffer (1980) and Allen and Panian (1982) found no relationship between the insider/outsider composition of the board of directors and turnover of corporate CEOs. it appears clear from previous research that there is no general theory of top-management turnover. Causes of turnover (or inversely, of tenure) have been found in individual characteristics such as age, in organizational characteristics and outcomes such as size and performance, and in environmental characteristics such as industry productivity growth. Because these perspectives are complementary rather than competing, a complete model of turnover should consider all three levels. Theory and Hypotheses With effects on tumover from variables at multiple levels, it is difficult to formulate a general theory. (Carroll and Mayer, 1986, noted a similar problem for a related topic, mobility theory.) The situation is further complicated by the variety of forms of turnover, including leaving for a more desirable position, being fired, retirement, and death. The various forms could be modeled separately, but this introduces further methodological problems, such as determining whether job
213/ASQ, June 1988

changes or retirements were voluntary or involuntary. We did not attempt to deal with these problems but took a narrower focus. Specifically, we examined the extent to which organizational and industry-level variables are predictors of turnover, without regard for the form of turnover. The underlying assumption for most of our hypotheses is that turnover is more likely for less powerful top-management positions and under conditions, either internal or external, that put more pressure on top managers or that make their jobs more difficult. Top-Management Roles. Turnover was examined in two topmanagement positions, the board chair and the CEO. The CEO has primary responsibility for the firm's operations (Mintzberg. 1983). The board of directors, which constitutes the institutional level of the firm (Parsons, 1960; Thompson, 1967), is expected to refrain from involvement in operating decisions and policies and in strategy formulation and to focus on relations with the institutional environment (Parsons, 1960). Its primary role is legitimizing the firm's activities (Selznick, 1948; Parsons, 1960). Further, the institutionalization perspective (Meyer and Rowan, 1977; DiMaggio and Powell, 1983; Zucker, 1987) as applied to the board (Harrison, 1986, 1987) again suggests that the board's role is to promote legitimacy and is ceremonial in nature, defined by institutional norms. The board projects an image to the outside world and becomes actively involved in operational matters only in periods of crisis for the firm and even then usually considers only whether to replace the CEO. Empirical support for this perspective is found in the work of Mace (1971) and Whisler (1984), The position of board chair, then, was viewed as being relatively less powerful and more ceremonial and symbolic than the CEO position, and this difference was taken into consideration in this study, as were the consequences of both positions being held by the same person. The board has also been viewed as a cooptive device to help the firm manage and adapt to its environment and to promote its survival (Selznick, 1948, 1949; Pfeffer, 1972; Pfeffer and Salancik, 1978; Mintzberg, 1983), This is a different approach to understanding the board, but it also implies that the primary orientation of the board chair is toward external relations, whereas the CEO is also responsible for internal affairs. Empirical findings supporting this perspective, however, are based on public agencies (Seiznick, 1949) or on samples containing a significant proportion of firms from heavily regulated industries (Pfeffer, 1972; Pfeffer and Salancik, 1978) and may be less applicable to manufacturing firms, which are relatively less regulated. Performance. The effect of firm performance on turnover, supported by most turnover studies, has typically been explained as a consequence of the belief that organizational performance is attributable to the leader (e.g,, Pfeffer, 1977) or as a result of scapegoating (e.g., Gamson and Scotch, 1964; Brown, 1982). It is also just common sense, when performance is poor, to see if someone else can improve the situation. Poor performance also puts the board of directors under pressure, and a leadership change can help to restore investor confidence and forestall potential shareholder lawsuits. We thus expect turnover to be more likely in firms performing poorly and the effect of performance on tenure to be
214/ASQ, June 1988

Tumovw and Structural Change

Stronger for the CEO than for the board chair, since the CEO has direct responsibility for operations. Size. Grusky (1961) argued that since larger firms tend to be more bureaucratized, turnover is less disruptive for them, and less effort may be made to keep top managers. However, Scott's (1981) review of research addressing the size-bureaucracy relationship concluded that while formaiization has shown a positive association with size, centralization, another variable associated with bureaucracy, has shown an inverse relationship. Although these conclusions cast doubt on Grusky's (1961) argument, they still support a size-turnover relationship, since both formaiization and decentralization reduce the disruptive effects of turnover. This relationship is also supported by Hannan and Freeman's (1984) argument that larger firms have greater structural inertia and, hence, more internal stability. Because heads of larger firms have greater visibility, they are also more likely to receive offers from other firms. Since larger firms control more resources, the power and privileges of leadership are greater, and there are more managers interested in succeeding to the top positions, larger firms are more likely to experience political struggles for leadership. Finally, because larger firms have greater impacts on their environments, they are subject to greater demands from external interests (Pfeffer and Salancik, 1978), producing greater pressures on the firm's leadership. Consequently, we expect turnover to be higher for larger firms, for both the CEO and board chair positions. Although few studies have found a clear size effect, both Salancik and Pfeffer (1980) and Allen (1981) found this relationship for CEO turnover in management-controlled firms. Risk. The firm's capita! structure, the amount of debt relative to equity, indicates the level of financial risk to which the firm is exposed. We expect leadership to be more tenuous in firms facing greater risks, so we expect higher turnover in both of the top positions in such firms. The effect of capital structure on turnover has been previously explored only by Pfeffer and Leblebici (1973), who found support for this relationship at the aggregate industry level. Board composition. Inside, or management, directors have stronger loyalty to the firm's leadership than do outside directors, since insiders are employees of the firm. The CEO and board chair should be more secure in their positions in firms with a higher percentage of inside directors on the board; we thus expect higher turnover in both positions for firms with a higher percentage of outside directors, although neither Salancik and Pfeffer (1980) nor Allen and Panian (1982) found a significant effect for board composition. We also expect higher turnover for the board chair in firms with larger boards, for reasons analogous to those for the effect of firm size; the board is the "organization" most immediately associated with the board chair. However, because board size is highly correlated with firm size (Pfeffer, 1972; Hari-ison, 1986), its effects cannot be assessed independently of firm size in the same model. Structure of the top positions. The positions of board chair and CEO are often held by the same person. The two positions were consolidated for 72 percent of the firms in our
215/ASQ, June 1988

sample. A person holding both positions is more powerful and less easily dislodged; when the positions are separate, we expect a greater likelihood of power struggles, with turnover in one position a possible outcome. Consequently, we expect turnover in both positions to be higher when the positions are not consolidated. This argument is similar to that of Allen (1981) and Allen and Panian (1982), who used significant stock ownership as a measure of CEO power and found lower turnover for CEO owners. Competitive uncertainty. At the industry level, following Pfeffer and Salancik (1978), we focused on the intensity of competitive demands faced by the firm. In particular, we examined the effect of competitive uncertainty. According to Pfeffer and Salancik (1978) and Pennings (1980), competitive uncertainty is highest in industries of intermediate concentration. At lower levels of industry concentration, the industry approaches the free market of classical economics, in which firms' actions have little effect on other firms. At higher levels of concentration, the market becomes oligopolistic, and firms can tacitly coordinate their activities, develop stable expectations about competitors, and avoid intense competition. Greatest competitive uncertainty tends to characterize industries of intermediate concentration, in which the number of firms is small enough that one firm's actions affect other firms but large enough that competitive uncertainty cannot be managed by implicit coordination. Thus competitive uncertainty is an inverted U-shaped function of industry concentration. Pfeffer and Lebiebici (1973) tested this hypothesis and found no effect, using an aggregate industry-level measure of CEO tenure. Since higher levels of competitive uncertainty put more pressure on top managers and make their jobs more difficult, we expect that both the CEO and the board chair will show higher turnover in such industries. As in the case of poor performance, we expect the effect to be greater for the CEO, who has primary responsibility for operations, including managing competition. Incumbent's age. Finally, the incumbent's age has an obvious relationship to turnover. We expect turnover to be higher in both positions if the incumbents in these positions have reached retirement age. Since our primary interest was in organizational and industry effects, we regarded the attainment of retirement age as a control variable. Method Our hypotheses were tested using a sample of 671 large manufacturing firms. The sample consists of all manufacturing firms included on Standard and Poor's COMPUSTAT Annual Industrial data tapes in 1980, with the exception of subsidiaries, foreign-owned firms, and 82 firms for which adequate data were not available, primarily due to lack of data on incumbents' ages. The COMPUSTAT sample consists of the largest publicly held American manufacturing firms, determined by annual sales, plus a few smaller firms in industries such as semiconductor manufacturing that were judged by Standard and Poor's to have special significance for the American economy. The firms in the sample range in size,
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Turnover and Structural Change

based on 1978 sales, from $4.4 million tc $63 billion, with a mean of $1.45 billion. Data on the independent variables were collected for the year 1978, or 1977 for industry-level variables (the most recent year such data were available), and their effects on turnover during the period 1978 to 1980 were tested. This short time frame was chosen in order to control for long-term trends, such as changing economic conditions and industry cycles, which are assumed to remain relatively constant during the period of the study. To the extent that these macroscopic conditions interact with the variables we examined, our results may not be generalizable to other time periods. CEO and board chair turnover for the period 1978 to 1980 was determined by examining Standard and Poor's Register of Corporations, Directors, and Executives (1979, 1981). Turnover was considered to have occurred in each position if the person listed as holding the position in 1980 was different from the person in the position in 1978. During this period there were 111 instances of CEO turnover and 112 changes in the board chair. Because previous studies used a variety of performance measures, several performance variables were constructed for 1978. Return on assets (ROA), return on equity (ROE), profit margin, and dividend yield were based on data from the COMPUSTAT tapes; the first three are indicators of operating profitability, and the last is an indicator of performance in the stock market. Many researchers have operationalized performance in terms of differences from industry averages. While the logic of this procedure is appealing, in practice it makes little difference. Salancik and Pfeffer (1980) tested performance effects using both "natural" and industry-comparison measures and obtained essentially identical patterns of results, and Coughlan and Schmidt (1985) reported that their results were robust with respect to the two types of measures. For cur sample, the two types of measures had correlations of at least ,92 for all four performance indicators. Firm size has been previously measured using sales, assets, and number of employees. Sales has been used most frequently in turnover research, and in the organizations literature in general, and is probably the best indicator of the firm's visibility, impact on its environment, and resource utilization, as well as a measure of the complexity and stability of the firm. For these reasons, we chose to use annual sales, obtained from the COMPUSTAT tapes for 1978, The choice of measures is probably not critical, however, since the three measures of size are highly correlated. A more important question is the functional form used for size. We have followed the standard prescription of using the log of size (Blau, 1970). It is quite interesting to note that practically all of the previous turnover studies have not considered the functional form of size but have modeled the effect as linear. This may help account for the preponderance of weak or negative findings regarding size. The only exception is James and Soref (1981), who used the inverse of assets, which has properties similar to the log (except that the sign of the estimated coefficient would be expected tc be reversed); they found a significant size effect fcr CEO firings.
217/ASQ,June 1988

Debt was operationaiized as a percentage of total capital (debt plus equity). This functional fonn differs from the standard debt-to-equity ratio but has properties more consistent with the assumptions of statistical methods. The debt-to-equity ratio is problematic because it is bounded at zero on the left but unbounded on the right, inflating the measure for high levels of debt. Data for debt and equity for 1978 were obtained from the COMPUSTAT tapes. Standard and Poor's Register of Cotporations, Directors, and Executives (1979) provided 1978 data for the percentage of outside directors and whether the CEO and board chair positions were held by the same person. Birth dates for incumbents in the CEO and board chair positions in 1978 were also obtained from Standard and Poor's Register of Corporations, Directors, and Executives (1979) and were used to determine their ages in 1978. These data were unavailable for about 10 percent of these individuals, resulting in a reduc+ion in sample size. To examine the effect of retirement on turnover between 1978 and 1980, dummy variables were constructed on the basis of whether the incumbents had exceeded age 63 by 1978 and thus would be over 65 by 1980. Approximately 21 percent of the CEOs and 31 percent of the board chairs fell into this category. It should be noted that although 65 is a common retirement age. it is often surpassed; firms in this sample had CEOs as old as 86 and board chairs as old as 89 in 1978. Data on industry concentration were obtained from the 7977 Census of Manufacturers (U.S. Department of Commerce, 1981). These data, usually provided at the 4-digit SIC level, are in the form of the four-firm concentration ratio (percent industry sales due to the four largest firms). Approximately one-fourth of the firms in the sample were classified by COMPUSTAT in a 2- or 3-digit SIC aggregate industry (sales widely dispersed over the 4-digit component industries making up the aggregate), while the concentration data were given at the 4-digit level; the concentration ratio used for these firms in the analysis was an average of the values for the 4-digit component industries, weighted by total sales for each component. Descriptive statistics for the independent variables used in the analysis are shown in Table 1, along with the distribution of firms across industries. Table 1 also gives the units and codes for variables when these are not obvious. The hypotheses were tested using log-linear models for the instantaneous rate of tumover (Coleman, 1981; Carroll. 1983; Tuma and Hannan, 1984). These are continuous-time stochastic models for the probability of changes in discrete dependent variables; in this case, the change is a turnover event. The instantaneous transition rate is defined as: r{t) = lim
At--0

Probability (turnover betyveen f and At, given an incumbent at t). _ . The models were tested using the standard general functional form ;^f) = exp Oo + PAi 218/ASQ, June 1988

Turnover and Structural Change Table 1 Descriptive Statistics for Independent Variables and Industry Representation Variable Return on assets Return on equity Profit margin Dividend yield Firm size (In of sales in millions) Debt as percent of capital Proportion outside directors CEO and chair positions separate (1 = no, 2 = yes) Concentration ratio Chair reached age 65 (0 = no, 1 = yes) CEO reached age 65 {0 = no, 1 = yes) Industry 2-digtt SIC code 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 N Mean Minimum Maximum

668 666 669 670 669 667 671 671 670 671

,058 .109 .052 ,042 5.939 .248 ,632 1.294 ,356 .309 .212

-.388 -15.372 -.321 00 . 1.476 00 . 00 . 10 . ,07 00 . Q.Q

,184 .476 .198 .112 11.054 .963 .933

20 . .4 9
10 . 10 .
Firms (A/)

657

Industry name Food and kindred products Tobacco products Textile mill products Apparel and related products Lumber and wood products Furniture and fixtures Paper and allied products Printing and publishing Chemicals and allied products Petroleum and coai products Rubber and plastic products, n.e.c. Leather and leather products Stone, clay, and glass products Primary metal industries Fabricated metal products Machinery, except electrical Electric and electronic equipment Transportation equipment Instruments and related products Miscellaneous manufacturing

58 6 20 19 18 6 24 31 74 29 25 6 20 39 36 94 70 45 36 15

or equivalently.
In r{t) = Po + ^^X^

where the X, are covariates hypothesized to influence the likelihood of turnover. The models were estimated using the "change data" option in the computer program RATE (Tuma, 1980), which provides full-information, maximum-likelihood estimates for transition-rate models. We chose to use transition-rate analysis because it enabled us to estimate models with multiple outcome states. For example, turnover in a combined CEO/chair position could result in the incumbent remaining as CEO, remaining as board chair, or remaining in neither position. With transition-rate analysis, we could estimate the effects of the independent variables on each of these possible types of changes. The instantaneous transition rates we estimated also have substantive sociological meaning. This is most easily seen from the relation
G(t) = exp
219/ASQ, June 1988

r{s)ds

where G{t) is the survivor function. G{t) gives the cumulative probability at time t that turnover has not occurred. In other words, if f = 0 is taken as the date of beginning the job, then G{t) gives the cumulative probability distribution for managerial tenure as a function of time and the independent variables, and for any given time f , G (f) gives the probability of the duration of tenure being at least t'. Thus the equation for G{t) provides a clear, direct expression of the relationship between tenure and turnover. Transition-rate analysis can be generalized in several ways important for turnover research. It can utilize data on the exact timing of the turnover event (event-history data), rather than change data, to improve the estimates, It can utilize data from multiple observations over time (either event-history or change data), rather than from only two time points as in this study, to obtain better estimates. Finally, it can be used for models with other types of multiple outcome states, such as turnover due to death, retirement, firing, etc., which have the potential to improve our understanding of turnover substantially. Results The first part of the analysis examined turnover in the CEO and board chair positions, controlling for whether they were held by the same person. The results are shown in Table 2, with the insignificant variables omitted. The only significant effects on CEO turnover are return on assets, firm size, and retirement, all in the predicted directions. For board chair turnover, the strongest effect is due to the separation of the top two positions, in the predicted direction. Board chairs who are not also CEOs are much more likely to leave the firm than are chairs who are CEOs, but the separation variable has
Table 2 CEO and Board Chair Turnover* Models for Turnover Independent Variable CEO (.423) -7,467* (2.933} .2361-* (.0574) 1.114*** (.197) 52.81 3 2.0E-11 654 111 Board chair (.638) .2355-* (.0606) 1.112" (.206) - .04181' (.01892) .0005247* (.0001899) 6133 (.2033) 75.64 5 6.8E-15 668 112

Retum on assets Firm size Separate CEO, board chair Concentration Concentration^ Age 65 reached Model x^ D.f. Prob-value Sample size Instances of turnover

p < .05; - p < ,01; - p < ,001. Coefficients are maximum-likelihood estimates of effects on the logs of the rates of CEO and board chair turnover. Standard errors are in parentheses. 220/ASQ, June 1988

Turnover and Stiitcbiral Change

no effect on CEO turnover; this suggests that the CEO position is more powerful, since power is related to entrenchment (Pfeffer, 1981). Retirement also significantly affects board chair turnover. It is interesting that the effect of the quadratic function of concentration on board chair turnover is in the opposite direction from the prediction. That is, board chair turnover is lowest in industries of intermediate concentration, where competitive uncertainty is expected to be greatest. Using elementary calculus and the estimated coefficients for the quadratic concentration function, it was found that the minimum turnover rate for the board chair corresponds to an industry concentration ratio of .40. No significant effects were found for debt or for board composition. For CEO turnover, profit margin was significant when its individual effect was estimated without other variables in the model, but it was dominated by ROA in the final model. Except for the variables in the final model, no other variable was significant when estimated alone. The estimated coefficients can be interpreted by noting that

the model
rit) = exp Oo -t- P, X, 4- ^2X2 + ...) can be written as r{t) = (exp 3o) (exp ^,)^^ (exp ^2)^2., ,, so the multiplicative contribution to the transition rate of any independent variable X, can be found by exponentiating 3, and raising it to the X, power. The effect of a change in some independent variable X, on the rate, holding other variables constant, can also be easily determined. If r(tX,i) and ritX,^) are the rates given by two different values of X^ then the last equation yields For example, to assess the effect on board chair turnover of whether the two positions are combined, Xj has the value 2 for separate positions and the value 1 for combined positions, so that X,^ - X,T = 1. In Table 2, 3, = 1,112. Then, for board chair turnover, ftseparate positions)/r(combined positions) = (exp 1.112)^ = 3.04. The rate of turnover, then, is expected to be three times as high for a board chair who is not also the CEO than for one who is, based on Table 2 and assuming that the other independent variables remain constant. This result, together with the finding that the separation variable has no effect on CEO turnover, reinforces the interpretation that the turnover analysis provides evidence of the power of the CEO relative to the board chair. Table 2 focused on the CEO and board chair positions and used a dummy variable to indicate whether the positions were separate or combined. Since 72 percent of the positions were combined, however, a majority of the instances of tumover in the two positions involved the same individuals. A more detailed picture of turnover effects can be obtained by estimating separate models for turnover of individuals holding only the CEO position, holding only the board chair position, and holding both positions, in addition, for individuals holding both positions, three possible turnover outcomes can be distinguishedthe individual could retain the CEO position, re221/ASa June 1988

tain the board chair position, or retain neither position. The results of estimating these more detailed models are shown in Table 3.
Table 3 CEO and Board Chair Turnover by Position Strtxtun* Models for Turnover Combined positions Stayed as CEO -8.538~(.707) _ Stayed as chair ~5.514*~ (^302) -8.551* (4,257) _ _ .9896~ (,3501) 47.09 7 5.37E-8 2 0,4% 471 35 7% 49 10% Left firm -6,207*^ (,834) -7.998 (4.090) ,3076^ (,0886) - .05297 (.02798) .0005484 (,0002777) 1.117*^ (.299)

Separate positions Independent Variable Constant Retum on assets Firm size Concentration Concentration^ Age 65 reached Model x^ D.f. Prob-value Sample size Instances of turnover Percent turnover .2699* (.1229) 1,020" (.402) 10.05 2 657E-3 182 27 15% CEO only -6.882*^ (.815) Chair only - 5.749^ (,551) ,2422^ (.0826) .3066 (.2631) 9.69

2
7.85E-3 197 61 31%

p < .05; - p < .O1;*^|D < .001. * Coefficients are maximum-likelihood estimates of effects on the logs of the rates of turnover in separate and combined top-management positions. Standard errors are in parentheses.

Table 3 shows that turnover in each of the separated positions is affected only by firm size and retirement, although about twice as many chairs turned over as did CEOs. For combined positions, most turnover involved the incumbent's departure, some stayed as board chair, and only two individuals remained in the CEO position. Poor firm performance was most likely to lead to the incumbent losing the CEO position but remaining as chair. Firm size and retirement were the most important factors leading tc the incumbent's departure, although the effects of performance and concentration were nearly significant. Retention as CEO involved too few cases to estimate the effects of the independent variables. These results help to clarify the findings in Table 2. Size effects are present regardless of the structure of the positions, but the incumbent in a combined position is more likely to leave than to stay as chair, and almost never stays as CEO, Retirement age affects turnover in al) positions except the separate chair. The performance effect on CEO turnover is due primarily to incumbents in the combined position being relieved of CEO responsibilities (although some remain as chair). The concentration effect on board chair turnover is due primarily to the departure of an incumbent in a combined position. Discussion The effect in Table 2 of whether the top two positions are consolidated on board chair turnover is indicative of the greater relative power of the CEO. This interpretation is rein222/ASQ, June 1988

Tumovar and StnicUiral Change

forced by the control for retirement age; without it, the higher turnover rate for board chairs who are not also CEOs could be explained as a leadership transition, or phase out. effect. Persons holding both positions sometimes relinquish the CEO position but remain in the board chair position as they approach retirement, presumably to help smooth the transition in leadership. However, since the retirement dummy picks up these transitional cases, a power interpretation is suggested for the effect of position separation on board chair tumover. Greater CEO power is also indicated in Table 3 by the much lower likelihood of turnover for CEOs relative to board chairs when the positions are separate. Although the combined position would appear to be the most powerful leadership position, the turnover behavior of the CEO does not appear to depend on whether the CEO is also the board chair. The separation dummy is not significant for CEO tumover, and the percentages of instances of tumover in the separate CEO position and in the combined position are about the same. However, the effect of performance on turnover in the combined position but not on turnover in the separate CEO position suggests that the increased power and responsibility of the combined position is accompanied by increased accountability. This increased accountability may offset any additional advantage the CEO gains, in terms of job security, from also holding the board chair position. The results show clear size effects on turnover in both the CEO and board chair positions, whether or not they are combined. This is somewhat surprising, given the inconsistent findings concerning size in previous turnover studies. One possible explanation rests with sample size. Previous studies used much smaller samples, which tend to yield less stable results. Two other explanations for the present finding concerning size may be more relevant for current turnover research, however. One concerns the functional form of size. We used the standard logarithmic function of size, whereas all previous studies that failed to find a size effect modeled the effect as linear. The other possible explanation is related to the sample composition. Both Salancik and Pfeffer (1980) and Allen (1981) found size effects consistent with the present finding for the management-controlled firms in their samples. This suggests that our sample may be dominated by management-controlled firms or, in other words, that most large manufacturing firms are management controlled. The positive size-turnover relationship for top management contrasts with the negative size-turnover relationship found for lower-level employees in many studies. The advantages of a targe organization for lower-level employees, such as stability and prospects for career advancement, may be replaced at the top of the organization by greater external pressures and political struggles for the top positions. Incumbents in these highly visible top positions are also likely to attract more outside job offers than lower-level employees. The industry concentration effect, although quadratic, is weak and in the opposite direction from expectations and appears to be due primarily to the departure of an incumbent in a combined position. There are several possible reasons why turnover in the combined position is lowest in industries of greatest competitive uncertainty, it may be that secrecy is
223/ASQ, June 1988

more important to firms in such industries, so they do more to keep this key person. They may also perceive a greater need to maintain an image of stability, and continuity in this powerful position has greater symbolic value than for separate positions, since some image of stability can be maintained when turnover occurs in one of the two positions. Finally, firms in such industries may perceive less need for scapegoating, since problems can be attributed to the industry environment. The concentration effect is the only direct environmental effect observed in this study. It should be noted, however, that neither size nor performance is Independent of the firm's environment. Size can be regarded as an indicator of the firm's level of acceptance and support by its environment, and performance is related to the firm's success in its product markets. Because Wagner, Pfeffer, and O'Reilly (1984) found a direct relationship between manager age and turnover, an additional analysis was conducted with CEO and board chair ages. After cases were eliminated in which the incumbents were approaching retirement age, as determined by the dummy variable defined earlier, no significant relationship was observed between incumbent age and turnover, even when age was the only variable in the model. This suggests that the positive relationship between age and turnover found by Wagner, Pfeffer, and O'Reilly (1984) resulted primarily from the retirement effect, or that their finding resulted from the turnover of other members of the top-management group rather than from CEO turnover. The turnover analysis demonstrates differences in the turnover behaviors of the top-management positions and suggests that the natures of the positions vary depending on whether the position is CEO only, board chair only, or a combined CEO/chair. The chair-oniy position appears to be the least powerful, while the combined position is the only one affected by firm performance. When the top positions are combined, performance problems can be more clearly attributed to the single leader, whereas with separate positions, the responsibility is more diffuse and the attributions less clear. STRUCTURAL CHANGE IN THE TOP-MANAGEMENT POSITIONS Not only can the incumbents in the CEO and board chair positions change; the structure of the positions can also change. Changes in the leadership structure are briefly examined here, since these changes are related to turnover and can provide additional insight into the nature of the top-management positions. Only two changes are possible in the structure of the CEO and board chair positions, as conceptualized herethe positions, if separate, can be merged or consolidated or, if unified, can be separated. There is a natural connection between these structural changes and turnover in the two positions. Specifically, tumover in at least one of the positions must occur in conjunction with either consolidation or separation. For example, if the positions are separated, with the former
224/ASQ, June 1988

Turnover and Structural Change

incumbent in the combined position remaining as board chair, an instance of CEO turnover has occurred. Two causal sequences are possible. The departure of a top executive from at least one position could provide the occasion to decide to change the CEO and board chair configuration. Alternatively, turnover could be the result of a decision to restructure the positions. These general possibilities include variations such as consolidating positions as a tactic to force out a board chair or a CEO. The data available for this study do not permit a direct categorization of the types of connections of turnover to the structural changes observed, but the independent variables found to be related to consolidations and separations are illuminating. It is not clear how current theories of structural change apply to the CEO and board chair positions, which are unique. The nature of the positions puts them in a separate class from other structural elements of the organization; they are at the apex of the corporate hierarchy and are highly visible. There are only two positions and two possible changes, consolidation and separation; normative prescriptions and other factors militate against the creation of muitipie holders of either position or the elimination of either position, whereas such constraints often don't exist for the creation or elimination of subunits such as departments. Accordingly, while a few ideas concerning variables influencing changes will be offered, the analysis is primarily exploratory and examines the effects of variables previously considered in the turnover analysis. According to one perspective on structural differentiation, differentiation is a response to conflicting demands from external interest groups (Thompson, 1967; Pfeffer and Salancik, 1978), and these demands increase with factors such as organizational size that capture the organization's visibility and impact on its environment. While researchers using this approach have found support for differentiation of organizational subunits, it is probably not valid for the top-leadership structure. Organizations may tend to consolidate leadership when facing external pressures, in order to centralize power and tighten control (Pfeffer, 1981), to present a stronger and more stable image, and to strengthen management bargaining power. Differentiation strategies can be effective at the subunit level, but they need to be balanced by stronger integration somewhere in the organization, and this is likely to occur at the top-management level. The same type of reasoning applies with respect to internal factors tending to produce structural differentiation. Leadership structure may be better understood by focusing on top-management power. Because the consolidation of the top two positions consolidates power, consolidation may be more likely under conditions in which stronger leadership is advantageous or when one leader, most likely the CEO, has enough power to engineer a consolidation successfully. Separation may not occur under the opposite conditions, however, since power tends to be institutionalized once it is gained and is not easily relinquished (Pfeffer and Salancik, 1978; Pfeffer, 1981). This suggests that the consolidation and separation processes are not symmetrical; different variables may be
225/ASQ, June 1988

related to the likelihood of these two processes occurring. Symmetry may exist with respect to performance, however, if the CEO has primary responsibility for operations, high performance levels will probably enhance the status and power of the CEO, which in turn could lead to consolidation, with the CEO assuming the additional role of board chair. Poor performance, on the other hand, is likely to reduce the influence of a CEO/chair and make separation more likely. If the separation entails bringing in a new CEO, then clear action is visible to external groups concerned about the poor performance, in the form of both structural change and scapegoating. The former CEO/chair may be retained as board chair to provide some appearance of stability and continuity, or as a result of the negotiations leading to the separation. In the case of a separation in response to poor performance, the external pressures on the firm have not led to more power being centralized in the top-management position. Rather, if organizations tend to centralize power under these conditions (Pfeffer, 1981), the power has settled on the board of directors, which would have to act to bring about the separation and would probably be most active in a CEO replacement. Active board involvement of this nature is rare and usually occurs only in times of organizational crisis (Mace, 1971; Mintzberg, 1983; Whisler. 1984). Retirement has clear implications for structural change because it alters the distribution of power in the organization. The retirement of a CEO/chair can leave a power vacuum, especially if no successor has been groomed for the position or if more than one strong contender is present, so the likelihood of separation of the positions is increased. When the positions are separate and one of the incumbents retires, the relative power of the remaining executive is likely to increase and, consequently, so is the likelihood of consolidation. Method and Results The data described earlier permit the identification and exploratory analysis of consolidations and separations of the top-management positions, using the same independent variables as the turnover analysis. These data show not only the dominance of the consolidated structure, with 72 percent of the firms having consolidated positions, but also an increasing tendency toward consolidation. Between 1978 and 1980, 52 consolidations were observed, compared to 42 separations. This difference is striking in the context of the risk sets involved; 29 percent of the firms with separate positions consolidated them, while only 9 percent of the consolidated positions were separated during the study period. Of these changes, 79 percent of the consolidations involved adding the board chair role to the current CEO, and 86 percent of the separations consisted of retaining the incumbent as board chair and adding a new CEO. The consolidations, then, were predominantly consolidations of CEO power, while the separations usually entailed replacements of the CEO. Transition-rate analysis enables us to estimate not only the effects on overall rates of consolidation and separation but also on different types of consolidation and separation, using models with multiple outcome states. In particular, consolidations can result in the new combined position being occupied
226/ASQ,June 1988

Turnover and Structural Change Table 4

Consolidations and Separations of tha Top-Managamit Positions*

Models for Consolidation of Top Positions New position occupied by Independent Variable Constant Return on assets Profit margin Proportion outside directors Concentration Age 65 reached Model x ' D.f. Prob-value Sample size Instances of change Percent changes All consolidations -8.196 (.910) _ 8.028* (3.887) 3.439** (1.074) .02451(.00746) ,6433* (.3189) 27,35 4 1.69E-5 182 52 29% 41 23% Former CEO -8.447 (.966) Former chair -10.80 (2.25) Neither -7.113 (,578) All separations - 5.394 (.248) -6.775" (3.086) _ 1.366 (710) 37.56 6 I,37E-6 182 8 4% 3 2% _ .7008* (.3273) 9.83 2 7.3E-3 471 42 9% 2 0.4% _ .8352* (,3471) 10.23 2 6,01 E-3 471 36 8% 4 0.8% Models for Separation of Top Positions Former CEO/chair kept as CEO -8.593 {.707) Chair -5,611 (.263) -6.492* (3.047) Neither -7.900 (.500) -

11.24(4.29) 2.649* !1.171) .03264 (.00828) ,76591* (,3412)

6.381* (3.067)

* p < . 0 5 ; - p < .01 ; p < .001. Coefficients are maximom-tikelihood estimates of > effects on the logs of the rates of consolidation and separation of the CEO and board chair positions. Standard errors are in parentheses.

by the former CEO, by the former chair, or by neither former leader; separations can entail the retention of the former incumbent in the CEO position, in the chair position, or in neither position. Table 4 shoves the significant effects on both the overall rates of consolidation and separation and on the rates of the different types of consolidation and separation. Three types of transitions involved too few occurrences to permit us to estimate anything except the constant term: consolidations in which the new position was occupied by neither former leader and separations in which the former leader was retained as CEO or was kept in neither new position. Consolidations are most likely for profitable firms, for firms with a high proportion of outside directors, for firms in concentrated industries, and for firms in which the chair has reached age 65. Consolidations in which the new position is occupied by the former CEO, the dominant transition, show this same pattern of effects, while the proportion of outside directors is the only significant infuence on consolidations under the former chair. Separations are most likely for firms with low returns on assets and for firms whose CEO/chair has reached age 65; these same variables affect the likelihood of the primary type of separation transition, the retention of the former incumbent as board chair. The only other variable showing a significant effect when estimated alone is profit margin for separations, but this effect is dominated by the ROA effect. These results show the asymmetry of effects on consolidations and separations. While retirement affects both forms of structural change, board composition and industry concentration are related only to consolidations. Strong performance
227/ASQ,June 1988

increases the probability of consolidations and poor performance increases the probability of separations, but different performance measures are involved in these relationships. Since both are measures of operating performance rather than stock performance, the reason for this difference is not clear. Discussion The findings are consistent with an interpretation of structural change based on top-management power. The asymmetry of the results for consolidations and separations, with additional factors influencing the likelihood of consolidations, is consistent with the perspective that power, once obtained, is institutionalized. The exit of a dominant executive in a consolidated position reduces the concentration of power and can lead to the separation of the positions. Strong performance can enhance CEO power, leading to a consolidation of the top positions under the current CEO. Poor performance can reduce CEO/chair influence and lead to a separation of the positions, including the appointment of a new CEO. This performance finding provides an example of active board involvement in firm affairs and suggests that poor performance can create a crisis of sufficient magnitude to shift the locus of power temporarily to the board or perhaps to activate the board's latent power, which surpasses that of the CEO/chair. The structural change data, as discussed earlier, show a strong trend toward the consolidation of CEO power. This provides additional support for the tumover evidence presented above that the CEO is relatively more powerful than the board chair. The effect of poor performance on separations also supports the conclusion drawn in the turnover analysis that the person in the combined position, while more powerful, is also held more accountable for the firm's performance. The observed effects of the proportion of outside directors and of industry concentration on the likelihood of consolidations are perhaps best understood from the institutional perspective. As we have seen, the consolidated position is the norm for large manufacturing firms. Meyer and Rowan (1977) and DiMaggio and Powell (1983) argued that structural conformity is more likely for organizations with more elaborate relational networks and higher levels of interaction among organizations and their members. One type of network that promotes interaction is the interlocking directorate network. A high proportion of outside directors indicates that the board is dominated by directors who are likely to have their primary affiliations with firms that already have a consolidated top position (and perhaps serve on the boards of other such firms). Concentrated industries are dominated by a few large, highly visible firms that have strong effects on each other and the industry; these industries are expected to be highly structured and tightly linked, with higher levels of interaction among their firms, leading to the more rapid diffusion of structural norms than in less structured industries (DiMaggio and Powell, 1983). The diffusion of the norm of a consolidated top position, then, may in effect be promoting the consolidation of CEO power.
228/ASQ, June 1988

Tumover and Structural Change

CONCLUSION The findings of these two related studies have been interpreted primarily from the perspective of top-rnanagement power. The turnover findings show differences in the turnover behavior of the CEO and board chair positions, which depend on whether the positions are combined or separate. The results indicate the greater relative power of the CEO, regardless of whether the CEO is also the board chair. The examination of structural change in the top two positions shows a tendency toward consolidation of these positions, which usually represents the consolidation of CEO power; this portion of the study also illustrates the interdependence of structural change and turnover at the top-management level. The power interpretation of structural change and of the relatively higher rate of turnover for board chairs who are not also CEOs provides additional support for the perspective that the distribution of power in an organization influences both executive tumover (Pfeffer and Salancik, 1978) and structural change (Pfeffer, 1981), In addition to providing some insight into the role of power in tumover and structural change at the top-management level, our findings have several implications for corporations. Firms that are likely to experience higher rates of top-management turnover, according to our results (e,g., larger firms), could recognize this and take appropriate action. This action could be in the form of putting more emphasis on succession planning, such as through management development efforts; alternatively, firms could reduce the likelihood of turnover by increasing compensation (Coughlan and Schmidt 1985), Firms should also be aware that changing top executives sends a signal to outside constituencies and should weight this consideration along with the advantage that a fixed CEO term of office offers for reducing the institutionalization of power in organizations (Pfeffer, 1981). Lastly, there have been many recent recommendations that the two positions be separated in order to make the board more independent of management (so as to safeguard shareholder interests) and to give the board a greater role in strategic planning. Our findings indicate, however, that separating the positions has disadvantages: it leads to higher board chair turnover, it makes it more difficult to replace either executive when performance declines, and it fails to conform to prevailing institutional norms, which may reduce perceived legitimacy. On balance, then, the separation may not be desirable for the corporation. Several recommendations can be made, based on our results, for turnover and tenure research. Turnover researchers focusing on individual characteristics should be aware of and control for organizational and environmental variables that may affect turnover, and research on CEO and board chair turnover should consider whether the positions are consolidated or separated. Turnover researchers may wish to include the incumbents' tenure as an explanatory variable in their models, since longer tenure can be an indicator of greater power and entrenchment. Turnover research can also benefit from a more detailed analysis of the form of turnover, as in James and Soref's (1981) analysis of CEO firings. Finally, compensation has been neglected in studies of top-manage229/ASQ, June 1988

ment tumover. Only Coughlan and Schmidt (1985) included compensation as a determinant of CEO turnover, and they found a significant effect. The connections between compensation, tumover, and structural change at the top-management level should be more thoroughly examined. In addition to expecting compensation to influence turnover, we would also expect the structure of the top positions to influence compensation, with the CEO/chair tending to earn more than a person in either separate position. Since tenure is the result of not turning over, it may be better understood by focusing on turnover. Those doing tenure research, however, should pay more attention to the "rightcensoring" problem inherent in most tenure analyses. In such studies, short tenure means that turnover recently occurred. Implicitly attributing short longevity to new office holders may yield misleading results. For example, a finding that short tenure is associated with poor performance may be spurious; the poor performance may be the legacy of the previous incumbent and may have led to the incumbent's exit, and the firm may not have had sufficient time to recover. Whenever possible, researchers interested in tenure should attempt to use uncensored data. The studies reported here are intended to provide insight into the nature and relationship of the CEO and board chair positions. Based on the inferences and conclusions already discussed, these studies suggest a model for the career path of a top manager. After attaining the CEO position, the successful executive typically moves up to the combined CEO/ chair position, accompanied both by the necessary structural change and by increased power and accountability, and then may eventually move "upstairs" to the less important chaironly position, again necessitating structural change. The likelihood of both career transitions is influenced by firm performance, with the combined position serving as the CEO's "reward" for strong performance and the subsequent separate chair position the "punishment" for poor performance. The unexpected departure of a top manager, the transition to separate chair, and the final transition, retirement, could be momentous for the organization because they create vacancies at the top and could precipitate power struggles. The prospect of power struggles is a reminder that directly below the pinnacle of the board chair and CEO there is an elaborate organizational structure led by a group of seasoned and often ambitious executives. The relationship of the career and structural changes at the top, incorporated in the above model, to changes in executives, in structure, and in the distribution of power in the organization just below the CEO level seems certain to provide a fruitful area for future research. At this level, we would expect the stakes to be high, the politics to be intense, and the changes to have substantial consequences, not only for the executives, but also for the dominant coalition and for the organization.
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