The Retention of Underperforming CEOs and the Implications on Collusion
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The Retention of Underperforming CEOs and the Implications on Collusion

January 8, 2020

Is performance sufficiently reflected in the turnover rate of CEOs? Analysis of statistical data reveals that the probability of CEO retention in cartel firms is relatively higher than in non-cartel firms. Accordingly, this study aims to examine the CEO turnover rate in line with performance and draw upon a policy direction for implementing a socially desirable incentive mechanism. An examination into Korean firm data reveals that, in cartel firms, the probability of CEO replacement increases as the performance of the overall industry declines. On the other hand, in non-cartel firms, the probability significantly increases as the CEO’s relative performance deteriorates compared to that of rival firms. In fact, due to the low correlation rate between relative performance and CEO replacement, CEOs of cartel firms are more inclined to collude with competing firms, rather than outperform them. Then, what efforts are needed to prevent corporate collusion? To answer this question, a comparative analysis was conducted on the board of director’s supervisory capabilities in cartel firms and non-cartel firms. The results show that, compared to non-cartel firms, the proportion of outside board members with social ties to the CEO and the probability of CEO retention is much higher in cartel firms. Further still, there are almost no dissenting votes from board members in cartel firms, and instead, the probability of member replacement increases significantly if a member opposes a board agenda. Overall, it was found that the independence and supervisory capabilities of the board of directors at cartel firms is severly lacking, which inevitably creates an environment that prolongs and retains collusion. Therefore, policies to improve corporate governance are needed to strengthen board independence and to provide CEO incentives that are more in line with relative performance, this would also curb collusion.

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