STRATEGIC LEADERSHIP ASSIGNMENT

A SUMMARY

Changes at the Top - The Consequences

of Executive Turnover and Succession

BY GROUP 1

RISA LIANDA PUTRI 07 152 11

YULIA RAHMAWATI 07 152 112
WIRAHAYU 07 152 1

MANAGEMENT DEPARTEMENT, INTERNATIONAL PROGRAM

ECONOMIC FACULTY
ANDALAS UNIVERSITY
2010
What Are the Consequences of Succession?

Gordon and Roses (1981) made a point in a thoughtful article in which they proposed a
succession model with numerous pre-arrival and post-arrival factors. Indicates the thinking: one
cannot make cogent predictions about the effects of succession without considering the factors
precipitating the succession, the succession process, and the characteristics of the successor.
Moreover, events and actions following the succession affect each other; these include the new
leader’s behaviors, organization changes, organizational performance, and stakeholder’s
reactions.

The new Executive’s behaviors and organizational Change

A new executive often lack of information to make prudent decisions. They are under
great pressure to demonstrate worthiness for the job and managerial efficacy, generally requiring
that some early actions be taken. A new executive enters the position at a disadvantage in terms
of knowledge of the task at hand; pertinent facts, contacts, trends, and issues are not yet well
understood. At the same time, the new executive will feel pressure to show promptly that he or
she was the right choice for the job. So, constructive and supportive relationships with members
of the management team and the board may well be the most important factors for surviving.

The Going-In Mandate

Most new executive have a mandate, even implicit, stemming from the organization’s
current performance and prospects, as well as board expectations. New executives often are
selected because their experiences and credentials align with the mandate, and thus their initial
actions also tend to align with the mandate. A new CEOs are likely to have been selected with at
least some consideration for their skills and how those skills match the perceived needs of the
firm and its context. It follows that a going-in-mandate is present in many succession settings.

The lower the performance of the organization prior to the succession, the greater the
strategic and staffing changes made by the successor. The more dissimilar the successor is from
the predecessor, the greater the changes made by the successor. The more the successor is an
extreme outsider, the greater the changes made by the successor. The correspondence between an
executive’s background characteristics and the amount and type of strategic actions taken is
stronger in the first years of tenure than at any other time in the positions.

The Executive’s Early Survival Prospects

There is some evidence that CEO successions bring about change, regardless of the
nature of the succession. Probability of divesting a poorly performing acquisition would rise
following the exit of the CEO who made the acquisition. Smooth successions permit new leaders
to make changes that the prior CEO may have been unwilling or unable to make. Executive’s
behaviors entering their positions vary widely and cannot be universally predicted. However, by
incorporating the precipitating context, succession process, and successor characteristics into a
predictive model, a greatly improved understanding of early executive actions can be achieved.

Implications for Organizational Performance

The Sports Team Studies

4 succession situations in most organizational settings:

1. Organizations with no executive succession – these were high performing, and in the
following year, they were still high performing.

2. Organizations with inside successions - these were slightly inferior, and in the following
year, they were still a slightly inferior.

3. Organizations with outside successions – these were very inferior, and in the following
year, they improved somewhat, but probably due primarily to regression to the mean.

4. Organizations with multiple successions – these were very inferior. Regression to the
mean somehow eluded them, and their performance deteriorated even more.

Thus succession events tend to occur under certain conditions, which may create the
erroneous impression that the successions caused the conditions. But the mere act of succession
particularly when the qualities required of the leader have not changed and there is no reason to
believe the new leader is necessarily any better than the old allows no convincing predictions
about the new leaders effects.
 Specifically, sports team does not face major changes in their environments. Their rules,
playing surfaces, ball size, and so on, all remain roughly the same over time. Competitive
advantage depends greatly on firm-specific factors. To extent that all competitors are the same,
and all draw from the same pool of input resources, it is quite difficult to develop firm-specific
competitive advantages. It is very hard for competitors to imitate the firm-specific human capital.

It Depends on the Succession Context

When the rules change, when environments shift, when major new strategies have to be
developed and implemented – these are conditions in which succession effects may be profound.
It is reasonable to expect that the executive succession has differing effects, depending on the
organization’s stage of life. Apparently, as the organization becomes more substantial and
institutionalized the departure of the first CEO is not as disruptive. Presidential exit increased
organization mortality. These effects were pronounced in younger organizations but diminished
as time passed.

New leadership is needed for a turnaround to be successful. A change in leadership is

needed if a turnaround is to be successful, because incumbent management has a difficult time
making the required changes and has a lost too much credibility with key stakeholders. In
turnaround situations, these changes of CEOs might amount to little more than ritual rain dances.
A change in management, particularly bringing in an outsider, provides the best chance for
performance improvement in a turnaround.

The institutional context in which the succession takes place is another important factor
in the strategic changes that the succession initiates, or fails to initiate. Alternatively, when
environments are turbulent, and particularly if there is a major discontinuity, incumbent
executive competencies may be rendered obsolete. Under such conditions, executive succession
may generally be salutary.

When the institutional context changes dramatically, organizations that are central within
the industry are often at a loss in dealing with the change. But, interestingly discontinuous
environment change may not bring about uniform pressures for leadership change among all
firms in the industry, especially early in an environmental shift. So, on average, new executives
will fit current and emerging requirements more than departures executive.
Executive Turnover: Beyond the CEO

Turnover in executive ranks, beyond the CEO, may also be reflective of predictive of
important organizational phenomena. The most consistent predictor of top executive turnover is
organizational performance. There is a similarly strong association between low performance
and executive departures. CEOs seem to be held more accountable for poor firm performance
than lower-level managers. Once they controlled for CEO dismissal, the link between
performance and team member exit was weak.

Overall performance does not fully explain executive turnover rates. it can happen
because of departure reflects power. In poorly performing firms, highly powerful CEOs were not
dismissed. The powerful CEOs were able to deflect scapegoating and pass it on to their fellow
executives. So, individual power (individual stockholdings, elite connections, the degree of fit
between their competencies and the firms’ critical contingencies) would be highly predictive to
adapt in a turbulent industry.

There are two-way causal process or a vicious circle through cross lagged analysis of
team changes and performance changes:

1. Team deficiencies bring about or aggravate corporate deterioration, either through

strategic errors or stakeholder uneasiness with the visibly inadequate team.

2. Corporate deterioration brings about team deterioration, through a combination of

voluntary departures, scapegoating, and limited resources for attracting new executive
talent.

At a broad level, that external labor markets extract a penalty from managers of failed
firms, although their evidence pointed clearly toward external factors as the chief causes of
failure. Another context in which to consider top team turnover is in corporate acquisitions.
Acquisitions are socially disruptive events that provide a crucible for studying turnover
phenomena.
Conclusion

A good deal of work has attempted to examine the linkage between CEO turnover or
executive turnover and organizational performance. The link between CEO succession to
organizational performance tend to suffer from a single inescapable fact: organizational
performance is a very broad concept and it arises from very complex antecedents. It is difficult to
rigorously link any single organizational antecedent to overall organizational performance. New
leaders cannot directly create organizational performance, but must influence performance
through the changes they initiate and the actions they take.

Succession and turnover below the CEO level is also a very important issue and one in
need of further research attention. It is important to identify and capture the actual
responsibilities of the executive studied. For example, in top management team, the most
common title is probably executive vice president. That title clearly indicates high status, but
suggest little about what its holder’s actual responsibilities are.