A contingency theory of CEO successor choice and post-bankruptcy strategic change.

While there is a wealth of research on strategic leadership, the findings are often contradictory (e.g., Carey and Ogden, 2000; Dawley et al., 2003; Hambrick and Mason, 1984; Thomas, 1988). These contradictions are further exasperated when considering organizational performance because of the multifarious measures of performance. We have chosen an initial condition where organizations have flied for Chapter 11 bankruptcy since it is a definitive measure of performance (Daily, 1994). We then examine the potential for leadership's influence on strategic changes to the organization. We assume strategic change to be a necessary precursor for future organizational performance improvements essential for emerging from bankruptcy. We suggest an interactive effect among the different constructs concerning leadership, which may help explain some of the inconsistencies in extant studies.

Several of these previous studies on leadership have examined the benefits and drawbacks of hiring an insider versus an outsider in the context of bankruptcy (e.g., Gilson, 1990; Hotchkiss, 1995; LoPucki and Whitford, 1993). Currently, little attention is given to the factors that may affect a CEO's influence within each of these classifications (i.e., insiders and outsiders).

Our study addresses this shortcoming by developing a contingency theory of how CEO successor choice, duality, and Top Management Team (TMT) tenure interact to affect post-bankruptcy strategic change. In our context, organizational breadth of diversification reflects strategic change. Our three constructs draw from agency, stewardship, and resource-based theories and were chosen for examination due to the large amount of literature that has linked them to organizational outcomes (e.g., Barker and Patterson, 1996; Boeker, 1997; Boyd, 1995; Finkelstein and Hambrick, 1990; Greening and Johnson, 1996; Pfeffer, 1982; Shen and Cannella, 2002). Figure I illustrates our relevant constructs and their three-way interaction.

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In the following sections, we review the findings relating our constructs to organizational change. In the first section, we present the relevant pros and cons of choosing a successor CEO who is an outsider or an insider. We then review the various arguments for and against having a CEO who also holds the position of the Chairman of the Board of Directors (BOD). Next is a review of the mixed influences of a TMT with either high or low team tenure. Finally, we relate all three of these constructs together in order to develop a hypothesis linking them to strategic change following reorganization necessitated by bankruptcy.

CEO Successor Choice

The CEO is ultimately responsible and accountable for an organization's strategy, design, and performance (Carey and Ogden, 2000; Conger et al., 2001; Kesner and Sebora, 1994). The CEO's role has been described as the most powerful of the power centers in controlling and directing the efforts of the organization toward achieving its goals (Brady and Helmich, 1984). As such, external parties are likely to view succession as a signal about the institution's future (Beatty and Zajac, 1987), and the successes and failures of individual CEOs often translate into the successes and failures of the firm. This makes CEO succession a defining event for virtually every organization (Carey and Ogden, 2000).

As important as the CEO is, the BOD can remove the CEO for many reasons. The BOD can be displeased with organizational performance and are holding the CEO accountable for those results (Harrison et al., 1988). They can desire a change agent (Staw et al., 1981), or they may desire to send signals to the shareholders (Carey and Ogden, 2000; Conger et al., 2001). Regardless of the reason, once the BOD decides to replace their CEO, they need to decide on an insider or outsider.

An insider has knowledge of the organization already and is also assumed to be in a better position to step in and take control since he or she "knows-the-ropes" (Zajac, 1990). This organizational knowledge, as well as his or her familiarity with the BOD, makes an insider replacement preferable to the BOD (Zajac, 1990). Empirical evidence suggests that there are both benefits and drawbacks associated with an insider replacement. Zajac (1990) found support for a positive association between insider replacement and firm performance, while Khanna and Poulsen (1995) found no market reaction to the origin of the replacement CEO.

Countering any benefits, arguments suggest that insiders perpetuate poor organizational performance (Boyd, 1994; Cannella and Shen, 2001). It is suggested that insiders are bogged down by organizational inertia (Zajac, 1990), are overly optimistic about an organization's ability when developing reorganization plans (Hotchkiss, 1995), and are associated with continued poor post-bankruptcy performance (Hotchkiss, 1995).

The benefits of an outsider replacement hinge primarily on his or her ability to afford the organization with a change agent (Carey and Ogden, 2000). Change agents result in more rapid effectual recovery of a failing firm (Datta and Iskandar-Datta, 1995). They also bring a mandate for change from the BOD (Conger et al., 2001), which can break ideological barriers. Logic would therefore support the association of survival with an outsider replacement CEO. In our context, we would suggest that the need for a change agent, as well as a corresponding need for a mandate for organizational change, would favor an outsider.

CEO Successor Choice and Duality: An Agency and Stewardship Perspective

The BOD must also consider giving the new CEO duality (i.e., a combining of the CEO and Chairman of the BOD (COB) positions). Duality has a significant effect of the power of the CEO (Boyd, 1995). Empirical results examining the advantages and disadvantages of duality, especially as it relates to organizational outcomes, are mixed (e.g., for a review see Boyd, 1995).

The main arguments against duality have their roots in the agent/principal relationship from agency theory (Berle and Means, 1932). That is, when the CEO holds a power position relative to the BOD, it is less likely that any monitoring mechanisms will function properly. When these mechanisms dysfunction, it is likely that organizational costs will rise and subsequently lower organizational performance.

Arguments supporting duality rest primarily in stewardship theory. Stewardship theory (Davis et al., 1997) can be viewed as the "anti-agency theory." It takes a humanistic approach (McClelland, 1960; McGregor, 1957), proposing that people just want to do their job and also strive to perform to the best of their ability (e.g., March, 1981). Since the theory of stewardship assumes a more humanistic approach, one could expect an easing of the monitoring demands placed on the BOD and therefore lower organizational costs.

Boyd (1995) proposed a contingent view of duality based on Dess and Beard's (1984) environmental dimensions. In particular, in a munificent environment, duality is negatively related to performance, supporting an agency perspective; in a complex environment (such as in bankruptcy), duality is positively related to performance, supporting the need for knowledgeable persons in command.

These differing findings suggest that duality may moderate the relationship between CEO successor choice and post-bankruptcy strategic change such that in the case of an outsider CEO successor, an organization may benefit more from duality (i.e., in terms of strategic change) than from a BOD that hires an insider CEO successor. This is because an outsider CEO successor with duality will provide an organization with a clear and powerful leader, and powerful leadership is particularly useful if significant changes are necessary in turning around a failing organization (Finkelstein and D'Aveni, 1994; Lorsch and MacIver, 1989).

CEO Successor Choice and TMT Tenure: A Resource-based Perspective

Resource-based theory (Barney, 1997) suggests that certain characteristics of the firm's TMT may play a pivotal role in how well a firm is able to realign systems, culture, personnel, and procedures with the new structure and ultimately to recover from bankruptcy. The resource of knowledge held by the TMT has the potential to meet the criteria to affect the organization's performance (Castanias and Helfat, 1991). Specifically, incumbent managers with long tenure generally have detailed knowledge of the firm's operations (Wruck, 1990) and access to established networks both inside and outside of the organization. However, since the organization has failed, these resources may not have been appropriate and therefore are in need of change.

A new CEO, as a change agent, would enter the organization with the appropriate mandate. However, any new CEO generally lacks extensive knowledge about contacts and procedures needed to perform his or her duties successfully, and such knowledge must be gradually obtained over time (Boeker, 1997; Hambrick and Fukutomi, 1991). Therefore, the knowledge that a long-tenured TMT would possess and its access to established networks should be of great value in assisting the CEO to progress through the disruptive process.

Thus, in the resource-based style, we are assuming the TMT's knowledge resource was already present, but its lack of use is manifest in the organization's failure. Therefore, an outsider CEO successor should be able to refocus the current resources to benefit both the organization (i.e., to recover from bankruptcy) as well as him/herself (i.e., to get "up to speed").

CEO Successor Choice, Duality, and TMT Tenure; A Contingency Theory