Can non-CEO inside directors add value? Evidence from unplanned CEO turnovers

Purpose - This paper aims to investigate the roles of non-CEO inside directors (NCIDs) in the new CEO-firm matching process using the context of unplanned CEO departures when immediate CEO succession planning becomes a sole board responsibility. Although critics argue that inside directors decrease the monitoring effectiveness of a board, inside directors arguably possess superior firm-specific experience and knowledge that can be beneficial during the leadership transition. Design/methodology/approach - The authors use a comprehensive, manually collected data set of unplanned CEO departures from 1993 to 2012. Findings - The authors find that NCIDs play an important role in the CEO transitioning process. They help firms identify qualified inside replacements and provide stability as the new permanent or interim CEO. In addition, NCIDs facilitate the transfer of information and help the new external CEOs succeed. They show that the longer the NCID stays with the company, the longer the tenure of the new CEO. They also document that the presence of NCIDs improves operating and stock performance; especially when the new CEO is hired from outside of the firm. Practical implications - The impact of NCIDs is particularly important when the firm hires an outsider as the new CEO. These results suggest that board composition affects frictions in the CEO labor market. Originality/value - The literature has predominantly focused on the downside of having inside directors. Too many inside directors on a firm’s board is often associated with ineffective boards and entrenchment. To the contrary, the authors focus on a potential benefit of having inside directors.