Ceo Dismissal

A Cognitive Model of CEO Dismissal:
Understanding the Inuence of Board Perceptions,

Attributions and Efcacy Beliefs
Jerayr Haleblian and Nandini Rajagopalan
University of California, Riverside; University of Southern California, Los Angeles
Extant literature that examines the role of boards in the CEO dismissal
process has focused on the impact of board composition. However, it has rarely
considered the inuence of sense making and interpretation on CEO dismissal. This
paper draws on the strategic change literature, which demonstrates a link between
cognitions and action, to develop a three-stage framework in which we articulate how
sense making (stage 1) and interpretation (stage 2) impact the decision to dismiss a CEO
(stage 3). More specically, the boards perception of performance, its attributions of
performance and efcacy assessment of the CEO, and the boards composition impact
the decision to dismiss the CEO. The resulting model illuminates the domain of board
cognitions and board composition within CEO dismissal decisions and facilitates future
empirical research.
INTRODUCTION
The rash of corporate scandals over the past few years (e.g. Enron, WorldCom) has
produced outrage at the misdeeds of top executives. The boards role in such
outcomes is not always clear. Were they aligned with the CEO? Did independent
directors lack sufcient power to oust top managers? Clearly, in recent years the
behaviour of boards has begun to change in important ways as a greater number
of non-executive directors have joined boards ( Westphal, 1998), which in turn are
demanding better information from the rms they monitor and are harder working
than before (Economist, 2004). However, boards still appear to vary in their effec-
tiveness in assessing performance problems and making appropriate managerial
changes (Useem, 2003; Westphal and Fredrickson, 2001).
Replacing a poorly performing CEO is among the most important actions a
board of directors may take because it has long-term implications for a rms
Address for reprints: Jerayr Haleblian, Anderson Graduate School of Management, University of
California, Riverside, Riverside, CA 92521, USA ( john.haleblian@ucr.edu).
Blackwell Publishing Ltd 2006. Published by Blackwell Publishing, 9600 Garsington Road, Oxford, OX4 2DQ,
UK and 350 Main Street, Malden, MA 02148, USA.
Journal of Management Studies 43:5 July 2006
0022-2380
investment, operation, and nancing decisions (Huson et al., 2001). When there is
a greater incidence of management changes in poorly performing rms, boards are
thought to act as effective control mechanisms. Consistent with this notion, it has
been well documented that there is a negative relationship between rm perfor-
mance and the likelihood of CEO turnover (e.g. Brunello et al., 2003; Denis and
Denis, 1995; Jensen and Murphy, 1990). However, research has shown that much
less than half the variance in CEO turnover is explained by rm performance alone
(Furtado and Karan, 1990). For instance, when comparing the top and bottom
deciles of rms ranked by performance, the probability of turnover for the bottom
10 per cent of rms has been shown to be only 1.5 times larger than that for the top
10 per cent ( Warner et al., 1988).
Predictions of CEO dismissal improve when the inuence of board composition
is assessed. In effect, board composition has an impact on a boards ability to
dismiss the CEO. Under conditions of poor performance, outsider-dominated
boards are more likely than CEO-dominated ones to dismiss a CEO (e.g. Boeker,
1992; Cannella and Lubatkin, 1993; Weisbach, 1988), which suggests that
outsider-dominated boards have a greater ability than CEO-dominated boards to
dismiss a CEO, because they act in the interests of shareholders rather than in the
interest of management. Additional research on board composition also supports
this contention. For example, outside directors have been shown to have a positive
impact on rm performance (Peng, 2004) because they are more likely than inside
directors to align CEO compensation with shareholder objectives (Ryan and
Wiggins, 2004) and less likely to provide golden parachutes and allow green-
mail
[1]
transactions (Kosnik, 1990; Wade et al., 1990).
However, in addition to board composition, accurately predicting when a CEO
will be dismissed requires an assessment rst of the boards sense-making of
performance and then its interpretation of performance. Board sense making
reects its perceptions of the rms performance, and if rm performance is
perceived as strong the dismissal of the CEO is unlikely. But if rm performance is
perceived as weak, the board then makes interpretations about the rms perfor-
mance, which include attributions to the causes of performance problems, along
with an assessment of the CEOs efcacy.
Interestingly, while board composition has been linked to CEO dismissal (e.g.
Weisbach, 1988), board sense making and interpretation have only rarely been
explored, and the full range of the cognitions that likely impact dismissal decisions
have not been elaborated. In prior work, Fredrickson et al. (1988) argued that more
variance in CEO dismissal decisions could be explained by examining the role of
various board cognitions. These authors took a socio-political approach to CEO
dismissal and hence, focused mainly on the effect of board composition, but only
briey touched upon cognitive expectations and attributions in their theoretical
model. Consistent with their model, we explicate how board composition inu-
ences board cognitions. However, in order to better understand the boards moti-
J. Haleblian and N. Rajagopalan 1010
Blackwell Publishing Ltd 2006
vation to dismiss a CEO, we provide a more in-depth treatment of the causal
mechanisms through which board interpretations impact CEO dismissal actions.
Drawing upon work in cognitive psychology, our model of CEO dismissal incor-
porates the boards perceptions and attributions of rm performance and its
assessment of CEO efcacy, which leads to an improved understanding of the
boards motivation to retain or dismiss the CEO.
In addition to providing increased descriptive accuracy in predicting CEO
dismissal, a better understanding of board cognitions may also have practical
applications. Recent work argues that boards may sometimes make poor dismissal
decisions that do not result in improved rm performance (Wiersema, 2002). The
domain of board cognitions has remained virtually a black box in prior empirical
research, as most prior studies have assumed the existence of board cognitions but
have not examined them. Hence, an understanding of the cognitive motivations
behind CEO dismissal decisions may offer greater insight into the appropriateness
of dismissal decisions.
THEORETICAL FRAMEWORK AND RESEARCH PROPOSITIONS
CEO rings are unique forms of involuntary turnover, the impact of which differ
from other forms of voluntary or unexpected CEO separations such as retirement
and death (Worrell et al., 1993). We focus on CEO dismissals in for-prot rms
because the decision to replace a CEO is arguably among the most important
decisions made by a board of directors (Huson et al., 2001) and represents the form
of CEO turnover in which boards have the most direct inuence (Fredrickson
et al., 1988).
Our theoretical framework is presented in Figure 1 as a three-stage model of
CEO dismissal. This model is consistent with work on strategic change that has
shown a link between managerial cognitions and strategic actions (e.g. Barker and
Barr, 2002; Ensley and Pearce, 2001; Gioia and Chittipeddi, 1991; Lant et al.,
1992; McCormick and Martinko, 2004; Walsh, 1995). A core assumption of this
model is that certain requirements must be met for the model to proceed from one
stage to the next. In the rst stage, boards make performance perceptions in which
current rm performance is assessed. To proceed from the rst (sense-making) to
the second stage (interpretation), performance must be perceived as not meeting
expectations. Moreover, for the process to proceed from the second stage (inter-
pretation) to the third stage (CEO dismissal), the CEO must either be seen as
inefcacious or performance problems must be attributed to certain causes
internal, permanent, and/or pervasive. In addition, since CEO-dominated boards
are less likely than outsider-dominated ones to dismiss the CEO, the boards
composition needs to be considered to make predictions about CEO dismissal.
Theoretical links and research propositions based on this gure are discussed in the
next section.
A Model of CEO Dismissal 1011
Key Theoretical Concepts
To show how corporate directors impact strategic actions (e.g. Rindova, 1999), the
following central cognitive concepts are developed: (a) board perceptions of per-
formance, (b) board attributions of performance, and (c) board efcacy beliefs
about the CEO. These concepts are dened before propositions are developed.
Board perceptions of performance. A boards perceptions of past performance result
from the process by which the board obtains information to understand how
effective the rm has been in its environment. Boards typically use measures of
prior rm performance or the performance of other industry competitors as bench-
marks against which to evaluate a rms recent performance (Greve, 1998).
Board attributions of performance. Attribution theory assumes that people are moti-
vated to understand and predict activities in their environment and are thus
concerned with perceived causes of prior events (Kelly, 1955). In the case of
boards, they are particularly interested in understanding the causes of poor rm
performance. Causal attributions for past performance may vary based on the
dimensions of controllability, permanence, and pervasiveness (Abrahamson et al.,
1978). Controllability is concerned with the source of the cause (i.e. personal or
environmental), permanence with its length, and pervasiveness with its breadth
(Seligman, 1990).
Board assessment of CEO efcacy. The boards assessment of CEO efcacy consists of
its belief in the ability of the CEO to mobilize the motivation, cognitive resources,
Board
Composition
CEO Dismissal
Likelihood
Perception of
Performance
CEO Efficacy
Assessment
Attributions for
Performance
P1a
P3a
Performance
History
P1b
P2b, P2c
P3c
P3b
Sense making
Stage 1
Interpretation
Stage 2
Action
Stage 3
P2a
P2e
P2d
Figure 1. Three stage CEO dismissal framework
and courses of action needed to exercise control over environmental events
(Bandura and Jourden, 1991). In contrast to effort, efcacy is a broader concept
that is concerned with the ability to produce a certain level of performance that is
based on skills, knowledge, resources, and capabilities, rather than on effort alone
( Wood and Bandura, 1989). When boards believe their CEOs are capable of
running their rms and believe their change actions will be effective, they are more
likely to retain the incumbent CEO.
These three cognitive constructs impact CEO dismissal. Perceptions of perfor-
mance are made during the rst stage of the CEO dismissal process (sense-making),
while performance attributions and efcacy assessments of the CEO are made
during the second stage (interpretations). In addition, board structural factors
impact each of the three stages of CEO dismissal.
Board Sense Making: The Inuence of Firm Performance History and
Board Composition on Performance Perceptions
Board perceptions of current performance are inuenced by past aspiration levels
(Grinyer and McKiernan, 1990). Boards set aspiration levels and then judge recent
performance as poor when it does not meet these aspirations. This inevitably leads
to different thresholds across rms with regard to what constitutes poor perfor-
mance. In addition, aspiration levels may be set relative to a rms prior perfor-
mance (Cyert and March, 1963; Greve, 1998), which means that they tend to be
raised after a period of strong performance (Bandura, 1997). Alternatively, aspira-
tion levels may be set relative to other, similar rms (Defond and Park, 1999; Lant
et al., 1992), particularly those with high performance levels (Bandura, 1986).
Performance is perceived relative to aspiration levels because decision makers use
aspiration levels to simplify a continuous performance measurement process into a
discrete assessment of success/reward or failure/punishment (March, 1988). If a
performance downturn is perceived as signicant, it is likely that this perception will
act as a cognitive motivator to drive board members toward CEO dismissal to
improve performance. The greater the gap between past aspirations and current
performance, the greater the likelihood performance will be perceived as poor.
In addition to rm performance history, the composition of the board also
inuences board performance perceptions. In order to govern effectively, outside
board members need to have appropriate and sufcient information to assess a
CEOs performance in all its aspects, as outside directors rely on the CEO to learn
about the organization. However, CEOs generally have knowledge about the
company that outside directors do not have, and such superior knowledge may give
them a power advantage (Lorsch, 1995). For example, CEOs may limit the amount
and type of information that outside directors see, or they may use their knowledge
advantage to present information to outside directors in such a way as to enhance
perceptions of rm performance. CEO-dominated boards have been found to be
more likely than outsider-dominated boards to withhold critical information from
outside directors (Lorsch and MacIver, 1989). Given a lack of critical information,
outside board members on CEO-dominated boards may be less likely to perceive
rm performance as poor. These arguments lead to the following two research
propositions:
Research Proposition 1a: The greater the gap between past aspirations and current
performance, the greater the likelihood performance will be perceived as poor.
Research Proposition 1b: CEO-dominated boards will be more likely to view rm
performance positively (based on inated performance perceptions) than
outsider-dominated boards.
Board Interpretation: The Inuence of Board Perceptions and Board
Composition on Board Attributions
If board members perceive that the rm has been performing well, then CEO
dismissal is unlikely, as research has shown that the higher a rms performance,
the lower the likelihood of CEO dismissal (e.g. Denis and Denis, 1995; Jensen and
Murphy, 1990). However, if rm performance is perceived as poor, attributions are
made to understand the causes of poor performance.
Attributions give events meaning and help individuals anticipate future events
( Weiner, 1986). However, meaning depends on how events are construed
( Weiner, 1986). Causality is not inherent in environmental events, and people do
not observe causes rather, perceivers of events construct causes in order to make
their environments more meaningful (Hume, 1739). The inuence of performance
attributions on subsequent action has a long tradition in Western thought. The
Roman philosopher Epictetus stated that Men are disturbed not by things, but by
the view they take of things. There is also a long tradition in psychology on the
subjective meaning of any situation (e.g. Lewin, 1936; Rotter, 1971). In addition,
the strategic management literature has acknowledged the important role of attri-
butions in inuencing actions (e.g. Barr, 1998; Ford, 1985). Importantly, though,
poor performance perceptions alone do not lead to CEO dismissal. Rather, poor
performance perceptions lead to attributions for the poor performance as the
board searches for the causes of poor performance.
There is a direct relationship between poor performance perceptions and the
attributions made for poor performance. The intensity of poor performance
impacts directly on permanent and pervasive attributions, because the worse the
current performance, the more likely it is that board members will be convinced
that the causes are broad and that they will continue into the future (Ford and
Baucus, 1987). Hence, the poorer the performance perceptions of the board, the
more likely the board will be to make permanent and pervasive, as opposed to
temporary and contained, attributions for the poor performance. This leads to the
following proposition:
Research Proposition 2a: The poorer the boards perception of the rms perfor-
mance, the more likely it will be to make permanent and pervasive attributions.
The boards composition also inuences the attributions it makes for poor perfor-
mance. A self-serving attribution is one in which success is attributed to internal
causes, but failure is blamed on external causes (e.g. Mezulis et al., 2004). Since
CEOs and inside directors have more knowledge about the company than do
outside directors, CEOs may use this knowledge advantage to present performance
information to outside directors that is self-serving and that enhances the reputa-
tion of the CEO. Consistent with these arguments, management research has
shown self-serving attribution patterns where top managers make attributions for
organizational outcomes such that they have a tendency to attribute positive
outcomes to their own actions, and negative outcomes to external factors and
chance. Indirect support has been found in published annual reports (e.g. Bettman
and Weitz, 1983; Clapham and Schwenk, 1991; Tsang, 2002), while direct evi-
dence has been found in responses to surveys ( Wagner and Gooding, 1997), and in
a sample of publicly traded rms, which showed that when successful organizations
initially encounter performance problems, their managers usually attribute the
problems to causes that are beyond managements control (e.g. Barker and Patter-
son, 1996).
In contrast, outside board members are thought to contribute objectivity in
evaluating managerial decisions (Byrd and Hickman, 1992), and they may ask the
difcult questions, which management may not face because of an unconscious
pride of authorship ( Winter, 1977, p. 285). Outsiders quite likely provide a fresh
perspective or stronger monitoring, which explains why a board vacancy following
poor performance is more likely to be lled by an outsider than by an insider
(Hermalin and Weisbach, 1988). Moreover, the sensitivity of CEO turnover to
performance is greater for rms with a higher proportion of outside directors,
presumably because these rms boards are more independent of management
than boards dominated by inside directors ( Weisbach, 1988). This objectivity is
particularly relevant when managers empire-building ambitions (e.g. Rhoades,
1985) or excessive pride (Roll, 1986) conict with shareholder interests.
In cases where rm performance is poor, CEO dismissal likelihood is lower
when attributions for failure are inaccurately made to external factors rather than
internal ones. Self-serving attributions are most likely to be offered for the causes of
events when the outcomes of such events can impact the self-concept of the
individual making the attributions, and a substantial performance decline is likely
to threaten the self-concept of the CEO, who often has a robust self-image based
on past career success. Thus, strong CEOs who dominate a board may display a
tendency to cognitively distance themselves from poor performance by attributing
it to factors that preserve their positive self-concept (e.g. Barker and Patterson,
1996). This idea is also supported by case research, which reports that long-tenured
top managers tend to attribute poor performance to such factors as economic
cycles that are uncontrollable by the rm and are beyond managements control
(e.g. Nystrom and Starbuck, 1984), while newly appointed top managers from
outside the industry are more likely to attribute poor performance to internal
causes (e.g. Barr et al., 1992). By extension, then, it may follow that CEO-
dominated boards are more likely than outsider-dominated boards to have self-
serving performance attributions with regard to the rm and those managing it.
Interestingly, empirical research also suggests that boards with strong indepen-
dent outsiders may make internal attributions for poor performance and blame
CEOs for performance problems beyond their control in order to placate powerful
stakeholders. For instance, Barker et al. (2001) found that when a rm began to
lose market share in its core business the founder, who was still on the board,
stepped in and convinced the board to re the CEO, and many of the rms
problems were attributed to the CEO after he departed, which the authors sug-
gested may have been designed to create an environment more conducive to
change. Thus, in the event that the outside board members are strong, ignore
information suggesting that the CEO is not at fault, and make internal attributions
to the CEO for poor rm performance that may, in fact, have more external
causes, the CEO may become a scapegoat. Hence:
Research Proposition 2b: CEO-dominated boards will be more likely to make
self-serving attributions (i.e. attributions inaccurately made to uncontrollable
factors for poor performance) than outsider-dominated boards.
Research Proposition 2c: Outsider-dominated boards will be more likely to make
scapegoat attributions (i.e. attributions inaccurately made to controllable factors
for poor performance) than CEO-dominated boards.
Board Interpretation: The Inuence of Past Performance and Board
Composition on the Efcacy Assessment of the CEO
In addition to attributions, the other interpretation a board makes that has an
impact on the CEO dismissal decision is its assessment of CEO efcacy. Boards
with a strong belief in the efcacy of their CEO are condent in difcult circum-
stances and believe the CEO can exercise control over events (Bandura, 1997).
However, boards with a weak belief in the efcacy of the CEO tend to discourage
difcult tasks (such as large acquisitions), and in the face of rm difculties and
obstacles they tend to give up on the CEO. In addition, their expectations for
future CEO performance are low, and their commitment to his or her strategy and
goals are weak, because they focus more on the CEOs deciencies and attribute
failure to a lack of CEO ability (Bandura and Wood, 1989). In contrast, boards that
have a strong efcacy belief in their CEO are much more likely to allow the CEO
to persevere and show ingenuity as he or she attempts to control environments
even those that have many constraints. In other words, the more a board believes
in the efcacy of the CEOs skills (strategic, political, and otherwise), the more
likely it will be to retain the CEO despite current poor rm performance.
[2]
Past rm performance inuences the boards beliefs regarding CEO efcacy, as
board members estimate the CEOs ability to positively inuence rm outcomes.
In particular, performance success increases a boards efcacy beliefs with regard
to the CEO, with the most enduring efcacy beliefs resulting when CEOs over-
come obstacles through innovation and strong effort. On the other hand, perfor-
mance failure decreases a boards efcacy beliefs in the CEO, especially if failures
occur early and often and attributions of controllability are made for the failures
(Bandura, 1997).
Research Proposition 2d: A rms past performance history will be positively related
to the boards efcacy assessment of the CEO.
CEOs who dominate boards are more likely to inuence the boards perceptions
through sources within their control. In extensive interviews with boards of direc-
tors, Lorsch and MacIver (1989) found that the CEO is the formal leader in the
vast majority of boardrooms and that the CEO may often inuence the perception
of his or her performance through many channels. For example, CEOs have been
found to identify and nominate potential board candidates that may be sympa-
thetic to them (e.g. Shivdasani and Yermack, 1999). They also tend to place
management-friendly directors on key committees (e.g. nominating and compen-
sation) ( Vafeas, 2003) and to otherwise collude with board members (Beetsma
et al., 2000). Hence, CEOs may use such methods to present themselves in a
manner that enhances perceptions of their own efcacy. This leads to the following
proposition:
Research Proposition 2e: CEO-dominated boards will be more likely to have higher
levels of assessed CEO efcacy than outsider-dominated boards.
Board Action: The Inuence of Board Attributions and CEO Efcacy
on CEO Dismissal
As previously developed, causal attributions for past performance vary based on
the dimensions of controllability, permanence, and pervasiveness. These three
dimensions of attributions will be expanded upon, and then predictions will be
made on how these attribution dimensions inuence CEO dismissal.
Controllability. The founder of attribution thinking is Fritz Heider (1958), who
argued that people ascribe causal factors either to a person or to the environment.
An assumption underlying this characterization is that person-related causes are
more controllable than environment-related causes. Subsequent research has
shown that individuals are more likely to respond to poor performance with
behavioural change when the cause is attributed to person-related factors rather
than environment-related factors (Rotter, 1971).
[3]
Similarly, strategy research has
found that when managers attribute poor performance to external factors, they are
less likely to change rm strategies (Lant et al., 1992).
When performance downturns are attributed to external causes such as com-
petitors actions, changes in regulatory rules, shifts in technological standards, and
changes in consumer preferences, they are more likely to be viewed as uncontrol-
lable rather than controllable. In contrast, when causes are attributed to internal
factors such as an outdated product line, poor manufacturing facilities, or poor
customer service, they are more likely to be viewed as controllable rather than
uncontrollable. Attributions of controllability give boards some degree of con-
dence in the CEOs ability to respond to poor performance. Board attributions of
poor performance to more uncontrollable factors are less likely to result in CEO
dismissal than the attribution to more controllable factors.
Permanence. As work on attributions developed, it became apparent that some
causes are more permanent than others and more likely to continue into the
future (Weiner, 1986). For instance, a more permanent attribution might be a
lack of rm competencies, whereas a lack of rm-wide effort could be classied
as a more temporary attribution. Similarly, if board members attribute poor
performance to an economic recession, this cause is classied as temporary,
while a technological change making our industry irrelevant is as an example of
a permanent attribution. Hence, the permanence dimension is concerned with
time with the underlying causes of poor performance over a range from tem-
porary to permanent.
The more that events are attributed permanent causes, the more likely board
members will be to change future actions based on these attributions (Ford and
Baucus, 1987). In other words, when board members see performance as caused by
enduring problems within or outside the organization they will be more likely to
dismiss the CEO. Thus, causal attributions of permanence impact the likelihood of
CEO dismissal.
Pervasiveness. After the dimensions of controllability and permanence, a third
dimension pervasiveness was later offered (Abrahamson et al., 1978) that dealt
with the extent to which the cause of poor performance was limited or generaliz-
able across a wider context. That is, while permanence is concerned with time,
pervasiveness is concerned with space. Some causes are specic to a narrow area,
while others affect multiple domains of performance. Thus, board members may
view poor rm performance as being caused by a particular function (e.g. a weak
marketing function) or an overarching problem that involves numerous functions
(e.g. poor R&D, manufacturing, marketing, and human resources). When the
cause of poor performance is seen as pervasive, they will be more likely to consider
CEO dismissal.
In addition to a boards attributions for poor performance, a boards efcacy
beliefs about the CEO also inuence the likelihood of CEO dismissal. Boards
develop positive efcacy beliefs regarding the CEO when they are convinced that
the CEOs abilities can affect the rm and its environment, and this increases the
likelihood of CEO retention. In contrast, when a board believes that the rm
and its environment cannot be positively impacted by a CEOs abilities, they are
more likely to have low efcacy beliefs relative to the CEO (Bandura and Wood,
1989), which increases the likelihood of dismissal. In particular, performance
success increases a boards positive efcacy beliefs with regard to the CEO, with
the most resilient forms of efcacy beliefs resulting when CEOs overcome
obstacles through innovation and strong effort. On the other hand, performance
failure decreases a boards efcacy beliefs in the CEO, especially if failures occur
early and often and attributions of controllability are made for the failures
(Bandura, 1997). The result is that board members assess efcacy based on past
performance and then develop probabilistic causal expectations about future out-
comes of a CEOs strategic actions based on assessed capability. Boards are more
likely to make retention decisions when they hold enduring beliefs that the CEO
is efcacious. Also, when a CEO is seen as efcacious boards are more likely to
view strong rm performance as caused by the CEO and weak rm performance
as caused by external causes.
In summary, board attributions of controllability, permanence, and pervasive-
ness,
[4]
as well as the boards assessment of CEO efcacy, will inuence CEO
dismissal, which leads to the following propositions:
Research Proposition 3a: The higher the attributed level of the underlying cause(s)
of poor performance (i.e. controllability, permanence, pervasiveness), the greater
will be the likelihood of a CEO dismissal decision.
Research Proposition 3b: Board efcacy beliefs with regard to the CEO will
directly inuence CEO dismissal decisions. Specically, the stronger the
boards efcacy beliefs about the CEO, the lower will be the likelihood of
CEO dismissal.
Board Action: The Inuence of Board Composition on CEO Dismissal
The composition of a board will directly impact the likelihood of CEO dismissal.
CEOs tend to act in ways that minimize their own likelihood of dismissal. In doing
so, CEOs identify and nominate potential board candidates that may be sympa-
thetic to them, and they weaken less management-friendly directors by placing
them on weaker committees (Lorsch and MacIver, 1989). Moreover, they may
determine what information the directors receive in advance and control the
agenda at meetings through choosing which issues to open and when to close them
to further consideration (Alderfer, 1985). They also tend to have extra-meeting
contact with directors to build rapport and reduce the likelihood of conict at
meetings. Finally, many boards tend to have norms with regard to not criticizing
CEO activities.
CEO turnover has been shown to be more sensitive to performance when the
board is more independent (Hermalin and Weisbach, 1998). The sensitivity of
CEO turnover to performance is greater for rms with a higher proportion
of outside directors, presumably because these rms boards are more independent
of management than boards dominated by inside directors ( Weisbach, 1988). In
contrast, the CEO sometimes dominates the board and has a disproportionately
strong inuence on board decisions relative to other board members (Lorsch and
MacIver, 1989).
Whether a board is dominated by the CEO or consists primarily of indepen-
dent outsiders inuences not only the nature of the decision to dismiss but also
when such a decision is made the likelihood that it will be carried out. Each
board member interprets the rms performance and its CEOs strategic capa-
bility, and these cognitions may vary among board members within a rm. The
dispersion of cognitions around the group average varies from (1) small in homo-
geneous boards in which members have shared history, accomplishments, norms
(Fischer and Ellis, 1990), or similar demographics (Knight et al., 1999), to (2)
large in groups with heterogeneous beliefs. On boards in which power is rela-
tively evenly balanced, differences are resolved as the group process unfolds
(Knight et al., 1999), which involves the exchanging of multiple views, after the
team has accumulated and examined information, and the integration of indi-
vidual beliefs into a consensus (Gibson, 2001). In contrast, when the board is
dominated either by the CEO or by outsiders the attributions of the powerful
stand out and have a greater likelihood of becoming the consensus view (Bales
and Cohen, 1979). Thus, while there are gradations in the compositions of
boards, from CEO-dominated to outsider-dominated, when a board largely
dominated by outsiders reaches a dismissal decision it is more likely to be imple-
mented than it is with a board containing a more equal mix of power. This leads
us to the following proposition:
Research Proposition 3c: Outsider-dominated boards will be more likely to
dismiss a CEO than CEO-dominated boards, or boards that are evenly
balanced.
IMPLICATIONS AND CONCLUSIONS
Implications for Theory and Methods
From a theoretical standpoint, our framework and related arguments provide a
more complete specication of the inuence of board interpretations and board
composition on the likelihood of CEO dismissal. The strategic management lit-
erature has identied the crucial role of sense making and interpretations in
strategic change. However, this work has not been reected in the CEO dismissal
literature. In addition, the causal mechanisms through which board interpretations
inuence CEO dismissal are under-specied. In examining the effects of board
sense making and interpretation, we postulate that the following board cognitions
play crucial roles in the CEO dismissal actions: (1) performance perceptions rela-
tive to aspirations; (2) attributions along three distinct constructs controllability,
permanence, and pervasiveness; and (3) assessments of CEO efcacy. Thereby, we
provide a more complete specication of the domain of board sense making and
interpretations, which should explain greater variance in CEO dismissal than prior
work (e.g. Puffer and Weintrop, 1991). Although prior literature has assessed a
boards monitoring role based on the boards structural characteristics, these struc-
tural characteristics may not effectively capture the underlying interpretations that
are more likely to directly predict board decisions (Forbes and Milliken, 1999). In
addition, while our models main contribution lies in specifying the domain of
board cognitions in the dismissal process, we also incorporate traditional board
composition arguments by identifying the differential effects of CEO- and outsider-
dominated boards on these cognitions as well as on the CEO dismissal action.
From a methodological standpoint, our theoretical framework and research
propositions have several implications for future research. First, while most prior
studies of CEO dismissal have relied upon archival or published data sources to
examine the antecedents of CEO dismissal, such sources are typically of limited use
when it comes to measuring perceptions, attributions, and efcacy assessments, the
main theoretical concepts in our framework. Survey questionnaires and interviews
with board members will be key to obtaining reliable, valid measures of cognitions.
Second, studies that use archival data on rm performance, board composition,
and dismissal outcomes typically use the rm as the level of analysis. However,
cognitions operate at the individual level, and data collected at the level of the
individual board member will need to be aggregated to obtain an overall measure
of board cognition that can then be related to the rm-level outcome of dismissal.
Issues of heterogeneity in perceptions and attributions will need to be addressed as
well (for instance, the more heterogeneous the perception, the less likely that a
consensus will be reached in terms of a decision to dismiss a CEO, notwithstanding
his or her poor performance). Coming to an understanding of the effects of
homogenous and heterogeneous perceptions and attributions on the dismissal
outcome would be a useful way to extend our theoretical framework. Third, in
order to test our research propositions a longitudinal research design that tracks
CEO dismissal or retention decisions through all three stages of the process will be
required. This implies an important difference vis--vis prior research on CEO
dismissal. Because prior empirical research has primarily examined the structural
attributes of board composition and rm performance as the major antecedents to
the dismissal outcome, cross-sectional research designs that sample on the dismissal
outcome and use lagged measures of performance and board composition have
thus far been adequate. In contrast, our model emphasizes the crucial intervening
role of board perceptions and cognitions and, further, allows for the termination of
the process at any of the rst two stages the perception or the attribution stage.
Hence, the starting point for testing our model would more appropriately be the
point at which a signicant gap between a boards performance aspirations and
rm performance is rst acknowledged. Such performance signals can be mean-
ingfully obtained not only from board members but also from knowledgeable
outsiders like industry experts. Once the performance gap is identied, the
researcher needs to obtain primary data on board member perceptions and if
perceptions of poor performance are acknowledged then proceed to the next step
of assessing attributions. Our three-stage model of CEO dismissal mandates the
longitudinal nature of the data collection process in which actions follow attribu-
tions that follow perceptions. Research methods that appear to be particularly
promising from this standpoint include retrospective case histories (Glick et al.,
1990) and developmental event sequence methods (Van de Ven and Poole, 1990).
Implications for Practice
From a practical standpoint, it would be useful to examine the normative impli-
cations of board interpretations that result in either appropriate or inappropriate
CEO dismissal decisions ( Wiersema, 2002). An appropriate dismissal based on
accurate performance perceptions, performance attributions, and efcacy assess-
ments of the CEO may presumably lead to improved rm performance (e.g. Denis
and Denis, 1995), assuming that a more appropriate replacement CEO is found.
However, there are also instances in which interpretations are inaccurate and may
negatively impact the outcome of the CEO dismissal decision process. By drawing
upon our framework, an improved prediction of the outcomes of dismissal or
retention decisions may follow. For instance, board members will be more likely to
inappropriately dismiss the CEO when they assess the rms poor performance as
due to the CEO, when in fact it is due to external causes (e.g. scapegoating), and
they will be more likely to inappropriately retain the CEO when they attribute rm
performance to external causes when it is actually due to the CEO (i.e. self-serving
attributions). In addition, however, both inappropriate dismissal and inappropriate
retention are likely to negatively affect subsequent rm performance. Thus, fruitful
extensions and renements of our framework include examining the inuence of
board interpretations on the subsequent rm performance that follows from these
decisions.
In conclusion, inappropriate dismissal decisions appear to be common
(Wiersema, 2002), and hence organizations have much to gain by understanding
the factors that affect these decisions. In this paper we went beyond an analysis of
board composition to develop a framework that explicates the causal processes
through which board cognitions inuence CEO dismissal. We encourage fruitful
renements and extensions of the model developed in this paper to other critical
board decisions such as CEO compensation and new CEO selection.
NOTES
[1] Greenmail is an unfriendly move by a buyer who purchases enough stock in a company to
threaten a hostile takeover but then agrees to sell the stock back to the company at a higher price.
[2] When board members make internal attributions for poor performance, they are typically more
likely to also hold a low efcacy assessment of the CEO. However, this is not always the case.
Boards may also hold a low efcacy belief of the CEO while favouring an external attribution of
rm performance. For example, as an industry contracts (external cause), the CEO may be
unable to bring him- or herself to lay off employees in response to decreasing demand. Hence,
attributions and efcacy assessments of the CEO are distinct concepts.
[3] An extension of Heiders work is Rotters more commonly known work on locus of control,
which was an attempt to account for individual differences in the attributions of reinforcement,
either internal or external. Subsequent work has been conducted to contextualize the locus of
control construct to organizations (Hodgkinson, 1992).
[4] This proposition implies that the strongest effect would be under conditions in which two or more
attributions operate simultaneously (e.g. when underlying causes are attributed as (1) controllable
and permanent, (2) permanent and pervasive, (3) controllable and pervasive, or (4) controllable,
permanent, and pervasive).
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Understanding the Inuence of Board Perceptions,

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