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CEO Turnover and Firm Performance in Russia

CEO Turnover and Firm Performance in Russia. Olga Lazareva and Sergey Solntsev Department of Economics, HSE. Research question. Agency problem in large firms: how to motivate CEO to act in the interests of shareholders? Tying CEO’s remuneration to the firm performance

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CEO Turnover and Firm Performance in Russia

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  1. CEO Turnover and Firm Performance in Russia Olga Lazareva and Sergey Solntsev Department of Economics, HSE

  2. Research question • Agency problem in large firms: how to motivate CEO to act in the interests of shareholders? • Tying CEO’s remuneration to the firm performance • Threat of firing in case of poor performance • Is there a link between firm performance and CEO turnover in large Russian firms during 2003-2012? • How did the turnover and turnover-performance sensitivity change during the crisis of 2008-2009 for the different types of firms (in particular, state-connected) and different types of managers (insiders-outsiders)? • We report preliminary results (work in progress)!

  3. Our contribution • We study of CEO turnover for the sample of the largest firms, and • We cover a long period including crisis of 2008-2009 • We compare the performance-turnover relationship for the “strategic” (state-connected/state-supported) vs. non-strategic firms, before and after the crisis • We compare the performance-turnover relationship for inside vs. outside CEOs

  4. CEO turnover sensitivity to the firm performance • Kaplan and Minton 2012: • Increased CEO turnover in large US firms (Fortune 500) over 2000s compared to previous years • Increased sensitivity of turnover to firm stock performance relative to industry or stock market • Factors: growing block holdings and board independence • Denis and McConnell (2003), Gibson (2003), and Kato and Long (2006) • Gilson (1990) recorded the significant rise of senior managers’ resignation in companies undergoing bankruptcy. • Karlssonand Neilson (2009) stated that little has changed in CEO labor market during the 2008; moreover, in North America and Europe, the CEO turnover rate has decreased

  5. CEO turnover in politically connected firms • Kato and Long 2006 find weaker turnover-performance sensitivity and slower improvement in performance following the turnover for state-controlled firms in China • Yuan 2011 – politically connected CEOs in China have lower sensitivity of their turnover to firm performance • Goldman 2009 – politically connected boards of directors positively affect firm value in US • Iwasaki and Frye 2011 – government directors on the boards of Russian firms are present in “collusion type” firms which extract and provide benefits to state

  6. CEO turnover research in Russia • Rachinsky (2002) examined senior managers’ turnover from 1997 to 2001 • Muravyev(2003) presented negative correlation between firms’ productivity and CEOs’ replacement probability in late 1990ies for the sample of industrial firms • Dyomina and Kapelyushnikov (2005) analyzed a sample of industrial firms in 1997-2003: poor firm performance increases the probability of CEO turnover • Abe and Iwasaki in Dolgopyatova, Iwasaki and Yakovlev (2009): nonpayment of dividents increases probability of CEO turnover for the sample of firms surveyed in 2005 • Solntsev 2013, Roshchin and Solntsev 2006: study top management transitions in Russian firms over 2000s

  7. Economic crisis of 2008-2009 • Russian GDP fell by 7.8% in 2009 • Companies turned from expansion to crisis management, thereby changing the demand for the skills of senior managers • Simachev et al 2009, Danilov, Simachev and Yakovlev 2010: major state support during crisis was targeted at large industrial firms and sectors with large employment (automobiles and agricultural machinery, oil and gas sector, the military-industrial complex) • Major tools of support – providing access to financing (subsidies and guarantees on loans etc.) and tax reductions • Golikova et al. (2011): Russian mid-sized companies coped with the economic recession better than large-sized ones

  8. Systemic/strategic firms during crisis (Стратегические/системообразующие компании) • In December 2008 government approved a list of 295 firms (few more added later) • These firms could expect to receive government support during the crisis (credit guarantees, interest rate subsidies, restructured tax debts, public procurements, preferential export and import tariffs). • The criteria for inclusion in this list: annual sales of over RRB15 billion (around USD500 million) and a workforce of no less than 4000 employees); also, firms on the list were required to have the status of enterprises forming company towns and a certain level of tax payments. • Selective measures to help large and very large corporations intensified lobbying efforts

  9. Data sources • Sample - 355 firms from “Expert-400” rating, which includes largest Russian firms based on sales volume in 2012 • 97 of them are “strategic” • Panel data for 2003-2012 • Data on CEOs – Spark database (provides information starting from late 1990ies) and other available sources (company websites, annual reports etc.) (collected in HSE Laboratory for Labor Market Studies) • Financial and ownership data – Ruslana (Bureau Van Dijk) • Ownership: 17% of firms are majority state controlled, 19% are foreign-owned (mostly MNCs) • Out of 97 strategic firms only 23 are state-controlled • No data on boards of directors (yet)

  10. Sector composition of the sample

  11. CEO turnover rate by year

  12. CEO turnover rate by sector

  13. CEO turnover rate (excl. electroenergy firms)

  14. CEO characteristics by year Among US S&P500 firms in 1990s 26% of new CEO hires are outsiders, in 2000-2005 – 32,7% (Murphy, Zabojnik 2008).

  15. Average tenure of an outgoing CEO

  16. CEO characteristics by sector

  17. Previous experience

  18. Previous position

  19. International comparisons • In our sample: • Average tenure 2003-2012 – 4.1 • Average completed tenure (upon leaving) – 3.2 • Average turnover rate – 17.9%, before crisis 16,4% • During 1990ies – from 7 to 12%, tenure 8-9 years (according to earlier studies) • Average tenure in large US firm (Kaplan and Minton 2012): for 1992-1999 average turnover rate 14,9%; for 2000-2007 average turnover rate 16,8% • In China: 24% annual turnover (period 1998-2002) (Kato and Long 2006)

  20. Methodology • Tt=ROAt-1 + S-list + ROAt-1 * S-list +Xt-1 + e • Tt – indicator of turnover in year t • S-list – indicator of the firm in “strategic list” • Firm performance measure – ROA, i.e. return on assets (profit to assets), winsorized at 2%, absolute or relative to industry average; additionally, sales growth, change in ROA • Controls: CEO age, gender, tenure, log assets, sector, ownership (majority state owned, foreign controlled), year • We exclude electrical energy sector firms (turnover there is related to the sector reform)

  21. Results: the effect of performance on turnover (strategic)

  22. Results: the effect of performance on turnover (insider)

  23. Results: the effect of turnover on subsequent performance

  24. Preliminary conclusions • CEO turnover rates in large Russian firms are similar to large US firms • Turnover has increased during the crisis by 50% • CEO turnover in Russian firms does increase in response to the poor financial performance • Firms that were promised state support during the crisis replaced their CEOs less often (controlling for state ownership) but performance-turnover sensitivity is the same • Insider CEOs had lower performance-turnover sensitivity before crisis and lower turnover during crisis • Firms that replaced CEOs during the crisis (in 2009) have experienced faster recovery

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