Corporate GovernanceEmerald Article: CEO turnover and firm performance, evidence from ThailandParichart Rachpradit, John C.S. Tang, Do Ba Khang

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To cite this document: Parichart Rachpradit, John C.S. Tang, Do Ba Khang, (2012),"CEO turnover and firm performance, evidence from Thailand", Corporate Governance, Vol. 12 Iss: 2 pp. 164 - 178

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CEO turnover and firm performance,evidence from Thailand

Parichart Rachpradit, John C.S. Tang and Do Ba Khang

Abstract

Purpose – This paper seeks to examine the relationship between chief executive officer (CEO) turnoverand firm performance and the moderating effects of ownership structure and board structure withrespect to listed non-financial companies in Thailand.

Design/methodology/approach – Logit model is employed to analyze the relationship between CEOturnover and firm performance.

Findings – The paper finds that both ownership and board structure have effects on the relationshipbetween CEO turnover and firm performance. The probability of CEO turnover is lower when the firm iscontrolled by family, the CEO is part of the controlling family, and board size is larger. Contrary toprevious studies, sensitivity of CEO turnover to firm performance is higher with the presence of CEOduality and lower degree of board independence. When a CEO continues to work beyond retirementage, the probability of turnover is not associated with firm performance.

Originality/value – This study provides evidence that CEO duality and low independent board is notnecessarily bad corporate governance practice for Thai companies and would be of interest toregulatory bodies, practitioners, and academic researchers.

Keywords Corporate governance, Boards of directors, Ownership, Chief executives,Corporate ownership, Thailand

Paper type Research paper

1. Introduction

Previous studies find that majority of public companies inmost parts of the world are controlled

by family (La Porta et al., 1999; Claessens et al., 2000; and Faccio and Lang, 2002). Economic

theories posit that family firms play the role as second-best solution to imperfection of financial

markets and the lack of managerial talent in developing countries (Burkart et al., 2003; Caselli

and Gennaioli, 2005). The theories assume that trusts among family ties should (partially)

solve agency problem between shareholders (principal) and managers (agent).

Researchers examine agency problem in the firms through various proxies. Those proxies

include firm performance, CEO compensation, anti-takeover provisions, likelihood of frauds,

and the relationship between the probability of Chief Executive Officer (CEO) turnover and

firm performance. One of the frequently observed proxies is the relationship between the

probability of CEO turnover and firm performance. The association between the probability

of CEO turnover and firm performance implies that there is a mechanism providing

motivation for the CEO to align his interests to those of shareholders. The relationship is

generally found to be negative (Warner et al., 1988; Weisbach, 1988; Morck et al., 1989;

Murphy and Zimmerman, 1993; Kang and Shivdasani, 1995; Denis et al., 1997; DeFond and

Park, 1999; Renneboog, 2000; Huson et al., 2001, 2004; Lausten, 2002; Brunello et al., 2003;

and Easterwood and Raheja, 2007).

However, the likelihood of CEO turnover following poor performance is found to be

influenced by board structure and ownership structure of the firm. In the case of board

PAGE 164 j CORPORATE GOVERNANCE j VOL. 12 NO. 2 2012, pp. 164-178, Q Emerald Group Publishing Limited, ISSN 1472-0701 DOI 10.1108/14720701211214061

Parichart Rachpradit is

Lecturer at the Department

of Business Management,

Asian Institute of

Technology, Pitsanuloke,

Thailand. John C.S. Tang

and Do Ba Khang are

based at the School of

Management, Asian

Institute of Technology,

Pitsanuloke, Thailand.

Received: March 2010Revised: March 2010Accepted: June 2010

structure, it has been widely acknowledged that board with small size, high independence,

and separate role of CEO and chairman will be better in performing its monitoring duty. This

view has been supported by many empirical studies. Yermack (1996) finds that the

probability of CEO turnover following the decline of firm performance decreases as board

size increases. Weisbach (1988) and Renneboog (2000) find higher level of board

independence increases the chance of CEO turnover following poor firm performance.

Renneboog (2000), Goyal and Park (2002), and Hou and Chuang (2008) find that the

sensitivity of CEO turnover to firm performance is lower when CEO chairs the board.

In the case of ownership structure, types of controlling owner affect the likelihood of CEO

turnover. Kang and Shivdasani (1995) find that when the firms are controlled by banks,

likelihood of CEO turnover following poor firm performance increases. However, when the

firm has family as a controlling owner, the effects on the likelihood of CEO turnover are mixed.

Tsai et al. (2006) provides evidence that family is effective in monitoring by showing higher

sensitivity of CEO turnover to firm performance for Taiwanese family controlled firms

compared with non-family controlled firms. On the contrary, Lausten (2002) and Volpin

(2002) find that family control decreases the probability of CEO turnover for Danish and

Italian firms, respectively. For Italian firms, Volpin (2002) finds lower sensitivity of CEO

turnover to firm performance when CEO is part of the controlling family while Brunello et al.

(2003) show that the negative relation between CEO turnover and firm performance holds

only if the controlling shareholder is not the CEO.

Ownership of Thai firms is heavily dominated by family (Claessens et al., 2000 and

Wiwattanakantang, 2001.) Family members are actively involved in management of the firms

and serving on the board. The in-depth knowledge of family involvement in business in Thai

firms has been considerably extended by Bertrand et al. (2008). The paper reveals that

involvement in business by the family members is related to the size of the family. Sons of the

founders normally play central role in the family business: the more sons in the family, the

more is the involvement in the business by the family. The more involvement in business by

the family leads to poor corporate governance and poor firm performance. The findings by

Bertrand et al. (2008) suggest that involvement in business of the family members in Thai

firms depends upon size of the family rather than managerial ability. Instead of the family

being a talent pool for managerial talent for the firm, the firm is rather a guaranteed job

market for family members. The fact that family foregoes an opportunity to hire probably

more qualified professional manager suggests an evidence of agency problem in family

firms. Furthermore, Bertrand et al. (2008) find that the more involvement in business by

family leads to poor corporate governance suggests that family ties are not mitigating but,

rather, creating agency problems. The association between family involvement in business

and family size suggests that there are agency costs involved.

From the discussion about family involvement in business which creates agency problem in

family firms, the effects should be the same for CEO turnover. The board is supposed to

monitor the management without bias. However, when the board members and the

management are from the same family, the board is expected to be unwilling to replace the

CEO even when the firm performs poorly. Due to the substantial voting rights and thus ability

to control the board, the controlling family should be able to protect the nonperforming CEO.

Additionally, ownership concentration in Thailand leads to absence of hostile takeover. Since

the majority of shares are owned by the family, share prices may fall greatly without the firm

becoming a takeover target. Without the threat of takeover, the family has no risk of losing

control. As a result of the lack of threat of losing control, the family has no pressure to correct

the poor performance in the short term by replacing the CEO. Hence, the likelihood of CEO

turnover in Thai family firms would unlikely be associated with firm performance.

Regarding board structure, there have been administrative efforts made by the Securities

and Exchange Commission (SEC) promoting better corporate governance in Thailand since

1995. One of those measures promoted by the SEC includes encouraging better board

structure which would gear toward smaller size, higher independence, and separation of

CEO and chairman position.

VOL. 12 NO. 2 2012 jCORPORATE GOVERNANCEj PAGE 165

Currently, most of the studies on the relationship between board structure and CEO turnover

are focused on dispersed ownership environments. Given the importance of family-owned

business in developing countries like Thailand, it would be of interest to see how ownership

and board structure are related to CEO turnover.

The rest of the paper is organized as follows. Section 2 discusses the related literature and

the formulation of hypotheses. Section 3 describes the data set and research methodology.

Section 4 gives the results of the study, and discusses and interprets empirical findings. The

conclusion is in section 5.

2. Related literature and hypotheses

The main objective of this paper is to examine the relationship between probability of CEO

turnover and firm performance for Thai firms. This paper follows the assumption that when

CEO is found to be poorly performing, the board may decide to remove that underperforming

CEO (Jensen and Meckling, 1976; Weisbach, 1988; and Hermalin and Weisbach, 2003).

Firm performance is usually used to determine CEO performance. Kim (1996, cited in Huson

et al., 2004) argues that firm performance at any time interval is assumed to be the sum of

management’s quality. Therefore, poor performance of the firm should be an evidence of

management failure and thus trigger CEO turnover, which is the essence of our main

hypothesis:

H1. The likelihood of CEO turnover is negatively related to firm performance.

The next step is to examine the effects of family ownership. There are two contrasting views

on the effects of family ownership on monitoring role of the board. On the one hand, the

controlling family, with incentive for close and effective monitoring, should increase the

likelihood of CEO turnover (Jensen and Meckling, 1976; Jensen, 1993). On the other hand,

since CEO is usually part of the controlling family, ownership and family ties should weaken

the likelihood of CEO turnover in family firm (Furtado and Karan, 1990, cited in Lausten,

2002). Empirical studies of the effects of family ownership, for example Volpin (2002),

Lausten (2002), Brunello et al. (2003), and Tsai et al. (2006), are usually conducted by

observing CEO turnover in two cases:

1. when the firm is controlled by the family; and

2. when CEO is part of the controlling family.

To hypothesize the effects of family ownership in the case of Thai firms, it is important that

strength of the family ties be taken into account. As discussed in the previous section, strong

family ties and incentives to retain involvement in business within family, coupled with the

lack of takeover threat would lead to unwillingness on the part of the board to replace the

nonperforming CEO. Therefore, we expect that family ownership would have a negative

effect on the likelihood of CEO turnover. The next two hypotheses are:

H2. CEO turnover is less likely when the firm is controlled by family.

H3. CEO turnover is less likely when CEO is part of the controlling family.

If family ownership decreases the likelihood of CEO turnover when firm performance

declines, it cannot be good news for minority shareholders in family firms. The role of board

structure therefore needs to be examined in order to understand how such structure has

effect on corporate governance.

The hypothesis regarding leadership of the board is to be discussed first. CEO duality refers

to the structure of the board where the role of CEO and chairman is combined (Rechner and

Dalton, 1991; Boyd, 1995; and Lam and Lee, 2008). Despite some advantages of CEO

duality – for example, clear leadership of the board and the firm, no rivalry between CEO

and chairman of the board, and lower cost of information sharing between CEO and

chairman (Lorsch and Zelleke, 2005; and Brickley et al., 1997) – such duality can also harm

the board’s critical roles in monitoring the CEO.

PAGE 166 jCORPORATE GOVERNANCEj VOL. 12 NO. 2 2012

The job of chairman is to run boardmeetings and supervise the board’s activities. Compared

to other board members, the chairman has strong influence on the board’s decision

including monitoring CEO performance. When CEO chairs the board, it is unlikely that the

board can evaluate CEO’s performance without bias. Previous studies provide evidence of

weaker monitoring effectiveness of the board with CEO duality by reporting lower likelihood

of CEO turnover in poor performing firm when CEO chairs the board (Goyal and Park, 2002;

and Hou and Chuang, 2008). This leads us to the next hypothesis:

H4. CEO turnover is less likely when CEO chairs the board.

The next hypothesis relates to the effect of board independence. When there is higher

proportion of outside directors on board, the board is said to be more independent since

there will be less potential domination by the management. Outside directors are supposed

to be better in CEO monitoring (Fama and Jensen, 1983; Jensen, 1993; and Hermalin and

Weisbach, 2003) due to twomajor reasons: First, outside directors have incentives to display

their expertise in decision making. As a result, they are more inclined to remove the

nonperforming CEO (Fama and Jensen, 1983). Second, with their careers tied to the CEO’s,

inside directors are generally unable or unwilling to replace the CEO while outside directors

can make the decision independently (Weisbach, 1988). Weisbach (1988) and Renneboog

(2000) find higher level of board independence increases the chance of CEO turnover

following poor performance. The next hypothesis therefore assumes that board with higher

degree of independence is more likely to replace poor performing CEO:

H5. CEO turnover is more likely when board independence is higher.

The next hypothesis of the effect of board structure is on board size. Most studies generally

recommend keeping the board size small for better effectiveness and less chance of being

controlled by the CEO (see Lipton and Lorsch, 1992 and Jensen, 1993 for example).

Yermack (1996) finds that the probability of CEO turnover following the decline of firm

performance decreases as board size increases. We therefore hypothesize that following

poor performance of the firm, board with larger size is less likely to replace CEO:

H6. CEO turnover is less likely when board size is larger.

In addition to board and ownership structure, probability of CEO turnover can be influenced

by CEO’s age (Weisbach, 1988; Murphy and Zimmerman, 1993; and Goyal and Park, 2002).

The likelihood of turnover following poor performance is found to be higher for younger CEO

(Parrino, 1997; and Hou and Chuang, 2008). To explain the higher chance of being replaced

after poor performance for younger CEO than those of older CEO, Parrino (1997) suggests

that ‘‘It is more costly to retain a poor CEO who is ten or 15 years from retirement than it is to

retain one who is likely to step down voluntarily in the next few years.’’ Chevalier and Ellison

(1999) add that older manager has advantage of prior success to reduce likelihood of being

replaced for current poor performance. When the manager is able to continue his position

beyond retirement age, it should have proved that the manager’s experience is highly valued

by the firm and the firm cannot find a younger match to replace the manager. This argument

may be able to explain the case of Thai firms. In Thai firms, there is significant proportion of

CEOs working beyond retirement age, which may be evidence of valuable expertise. This

leads to the following hypothesis:

H7. CEO turnover is less likely when CEO is older than retirement age.

3. Sample, data, and method

3.1 Data sources

This study uses 1,036 firm-year data of non-financial firms listed in the Stock Exchange of

Thailand (SET) during 2003-2007. Most of the data can be obtained from SETSmart

database provided by the SET. SETSmart database provides firm-level data including

financial statements and financial ratios, ownership of shareholders with 0.5 percent or more

shareholding, list of directors, and company files (form 56-1) which all public companies are

VOL. 12 NO. 2 2012 jCORPORATE GOVERNANCEj PAGE 167

required to submit to the SET annually. Form 56-1 contains extensive details of family

relationship among top management and their shareholding, and details of aggregate

shareholding of the controlling family and ultimate shareholders of private firms. Missing

details of family relationship is supplemented by the work of Polsiri and Wiwattnanakantang

(2006). Other supplementing sources of data include the company web sites, SET’s official

web site, and Business on Line database (BOL).

We exclude from our sample if the companies, during 2003-2007, had changes in controlling

owners, were running under rehabilitation plans, or were under investigation by the

Securities and Exchange Commission for financial fraud. These firms usually have top

management turnover with reasons unrelated to firm performance.

3.2 Empirical model

The relationship between CEO turnover and firm performance will be tested by logit model

following Weisbach (1988), Kang and Shivdasani (1995), Denis et al. (1997), Denis and

Kruse (2000), Huson et al. (2001), Suchard et al. (2001), Goyal and Park (2002), and Lausten

(2002). The estimated logit model is as follows:

Probability ðCEO turnoverÞ ¼ f ðfirm performance; family ownership; family CEO;

board leadership; board independence; board size;

CEO’s ageÞ

The dependent variable, CEO turnover equals one if the CEO in current year is a different

person from the CEO in the previous year, zero if otherwise. Firm performance is measured

by industry adjusted return on assets. Family ownership equals one if the firm is controlled

by family, zero if otherwise. Family CEO equals one if CEO is part of the controlling family,

zero if otherwise. Board leadership equals one if CEO chairs the board, zero if otherwise.

Board independence is measured by proportion of independent directors on board. Board

size is measured by the number of directors on board. CEO’s age equal one if CEO is older

than 61 years old, zero if otherwise. Additional explanation for selected variables is as

follows.

3.2.1 Firm performance. In previous studies, both accounting performance and market

performance have been used to identify its effect on CEO turnover and other corporate

governance mechanisms. For example, Weisbach (1988), Volpin (2002), Goyal and Park

(2002), Huson et al. (2001), Brunello et al. (2003), and Hou and Chuang (2008) use both

performances while others, for example, Lausten (2002) and Huson et al. (2004) focus only

on accounting performance. Although both types of firm performance have been frequently

used, market performance approach has some limitations. For example, Weisbach (1988)

argues that market performance will underestimate the effect of board structure on CEO

turnover. Weisbach explains that in general, the stock price of a poorly performing firm will

be trading at a discount. If CEO is a controlling owner and thus is unlikely to be replaced

even when firm performance is very poor, the discount of stock price for poor performance

will be even greater. Additionally, Kaplan (1994) suggests that market performance also

reflects changes in discount rates and therefore accounting performance may be more

informative to measure CEO performance. In the case of Thai firms, we find that most of Thai

stocks are very illiquid. In many firms, their stocks had hardly been traded for several months

and stock prices had hardly changed. Given the drawback of market performance

approach and illiquidity of Thai stocks, stock prices may not be a good measure for firm

performance. Thus, this study employs only accounting performance.

Return on assets (ROA) adjusted by median of the industry is frequently used to represent

firm performance in previous studies of CEO turnover, e.g. Kang and Shivdasani (1995),

Huson et al. (2001), and Goyal and Park (2002) so that it will not be biased by firm size,

industry effects, capital structure, and tax treatment. However, the industry median ROA is

not available in SETSmart database, only industry mean is provided. We assume that if the

board looks at other firms in the same industry when evaluating CEO performance, it should

look at the available measure, which is industry mean. This paper therefore uses such

measure as proxy of the industry’s ROA. The ROA used in this study is estimated by the ratio

PAGE 168 jCORPORATE GOVERNANCEj VOL. 12 NO. 2 2012

of earnings before interests and tax to total book value of total assets following Huson et al.

(2001) and Goyal and Park (2002).

3.2.2 Ownership of the firm. There are different ways to determine whether a firm is controlled

by the family. A firm can be identified as a family firm if it is run by family member(s)

(e.g. Anderson and Reeb, 2003 and Tsai et al., 2006). Alternatively, La Porta et al. (1999),

followed by Claessens et al. (2000) and Wiwattanakantang (2001), define that a firm is

controlled by family if the family has meaningful control of its votes. In this paper, since one of

our primary interests is to investigate whether family ownership has effects on board

effectiveness in CEO monitoring, family firm is to be identified by the control of voting rights.

The cut-off level which is the minimum level of voting rights used to determine whether a firm

is controlled by the family varies in different studies, for example 20 percent in La Porta et al.

(1999) and Claessens et al. (2000), and 25 percent in Wiwattanakantang (2001). Since

ownership of Thai firms is very concentrated, to gain control over the firm, one needs to hold

substantial level of ownership. This study therefore follows Wiwattanakantang (2001) using

the cut-off level of 25 percent. However, to make it comparable with studies in other

countries, the test for 20 percent cut-off level will also be conducted.

Voting right is determined by counting weakest link in the chain of control. For example, if a

family owns 21 percent of the stock of Firm A, which in turn has 25 percent of the stock in

Firm B, we would say that the family controls 21 percent of Firm B, or the weakest link in the

chain of voting rights. Thus, Firm B will be having the controlling owner using 20 percent

cut-off. When the 25 percent cut-off is applied, Firm B has no controlling owner.

3.2.3 Board independence. Most studies measure board independence using the

proportion of non-executive directors or outside directors on board: the larger the

proportion of non-executive/outside directors on board, the higher would be the degree of

board independence. In Thailand, ‘‘independent directors’’ are required by the Securities

and Exchange Commission. Independent director refers to the director with no involvement

in the company management, no relationship with major shareholders and hold less than 0.5

percent ownership of the firm. Since ‘‘independent directors’’ are very similar to ‘‘outside

directors’’ in corporate governance literature, this study therefore uses the proportion of

independent directors on board to represent degree of board independence.

4. Empirical results and discussion

4.1 Descriptive statistics

Table I provides descriptive data of sample firms. There are 67.8 percent and 63.1 percent of

the sample firms controlled by family at the 20 percent and 25 percent cut-off respectively. The

data show that ownership of Thai firms is strongly dominated by family. Minimum number of

independent board directors is two, which is the minimum requirement from Securities and

Exchange Commission while the maximum number reaches 11. The median for the number

and proportion of independent board directors is three and one-third, respectively, which

happens to be equal to the new requirement from SEC implemented in 2008. Board size

Table I Sample firms

Mean Median Max Min

Book value of total assets (Bt million) 13,360 2,869 751,453 270Proportion of firms controlled by family20 percent cut-off 67.8 – – –25 percent cut-off 63.1 – – –Proportion of firms with CEO duality 18.0 – – –Number of board members 10.97 11 25 5Number of independent directors on board 3.77 3 11 2Proportion of independent directors on board 0.36 0.33 0.75 0.09CEO’s age 53.82 54 86 34

VOL. 12 NO. 2 2012 jCORPORATE GOVERNANCEj PAGE 169

ranges from five to 25 with the mean and median of 11 which are higher than the limit size of

nine to ten recommended by Lipton and Lorsch (1992) and Jensen (1993).

Table II presents details of CEO turnover for the sample firms. Average turnover of Thai

non-financial firms during 2004-7 is 8.3 percent. CEO turnover in family firms is significantly

lower than in non-family firms.

Table III shows proportion of family CEO in family firms. At 25 percent cut-off, 60.9 percent of

family firms have family members holding CEO position. This is consistent with the findings

by Wiwattanakantang (2001) and Bertrand et al. (2008) that family members in Thai

companies are actively involved in management of the firm.

Table IV provides comparison between proportion of CEO duality in firms with family CEO

and other firms. Using 25 percent cut-off, family CEO accounts for 68 percent of boards with

CEO duality. A quick look at the data indicates that family CEOs are more likely to chair the

board compared to other CEOs.

4.2 Logistic regression results

Logit model of the likelihood of CEO turnover is conducted at both the 20 percent and 25

percent cut-off levels. Results for both are found to be similar. Therefore, only the results of

25 percent cut-off are presented and discussed.

4.3 CEO turnover and firm performance

4.3.1 Distinction between forced turnover and routine turnover. Previous studies exclude

turnovers around retirement age when examining the relationship between CEO turnover

and firm performance. For example, Weisbach (1988) excludes turnover at the age of 64, 65

and 66 from the sample assuming that those turnovers are planned retirement. In Thailand,

common retirement age is 60 years old. However, there are many cases found in the sample

firms where the CEOs are still working beyond retirement age. For example, in 2006, there

were 56 CEOs (estimated one-fifth of sample firms) with age of 61 and over. In some cases,

Table II CEO turnover

Family firms Non-family firms t-statistics

% turnover rate (whole sample ¼ 8.3 percent)20 percent cut-off 5.5 14.0 24.640*25 percent cut-off 5.4 13.2 24.431*

Notes: n ¼ 1,036; *significant at 1 percent level

Table III Family CEO in family firms

20 percent cut-off 25 percent cut-offNo. of firms % No. of firms %

Family CEO 421 60.1 395 60.9Non-family CEO 279 39.9 254 39.1Total 700 100.0 649 100.0

Table IV CEO duality and family CEOs

20 percent cut-off 25 percent cut-offFamily CEO

%Other firms

%Total

%Family CEO

%Other firms

%Total%

Duality 73 27 100 68 32 100Separation 34 66 100 32 68 100

PAGE 170 jCORPORATE GOVERNANCEj VOL. 12 NO. 2 2012

young CEOs were replaced by older CEOs who were over 60 years of age. In other cases,

some 60 year-old CEOs were replaced by even older CEOs. It is therefore difficult to

determine whether CEO resignation at the age around 60 is a planned retirement. Since

retirement may not be the true reason behind turnover at the age around 60 for the case of

Thai firms, excluding turnover around retirement age might also mean excluding forced

turnover, not only routine turnover.

For better determination whether retirement at the age around 60 is routine or forced

turnover, we therefore run the logit model of CEO turnover and firm performance for two

groups of sample firms, one group of sample firms includes all CEOs while the other

excludes CEOs at retirement age (59, 60 and 61).

The results are shown in Table V. Columns 1 and 2 present the results of CEOs of all age. The

coefficient to the industry adjusted ROA in prior year (ROAt-1) is 23.08 and significant at 5

percent level indicating that for all CEOs, when firm performance declines the likelihood of

CEO turnover increases significantly. When CEOs at the age of 59, 60 and 61 are excluded

from the sample, the results as displayed in columns 3 and 4, the coefficient to industry

adjusted ROA changes from 23.08 to 22.61 and significant at only 10 percent level

indicating that CEO turnover is less sensitive to firm performance. Moreover, the model is

significant at only 10 percent. The lower sensitivity of turnover to firm performance and lower

significance of the model suggest that excluding CEO at retirement age could possibly

mean excluding forced turnovers. Therefore, further test is conducted for the sample firms

that include only CEOs at retirement age. If turnovers for CEOs at the age around retirement

age are generally planned retirement, then there should be no relationship between turnover

and firm performance for such sample. The results are presented in columns 5 and 6.

Columns 5 and 6 show that the coefficient to industry adjusted ROA is 25.73 at 10 percent

significant level compared to 22.61 significant at 10 percent in column 2, indicating that

when CEOs are at retirement age, the probability of turnover (or retirement) is even more

sensitive to firm performance. The results suggest that turnover at the age of 59, 60 and 61

are not entirely planned retirement. Hence, we could not say that these turnovers are routine.

We therefore move on to examine the relationship between CEO turnover and firm

performance for the sample of Thai firms without exclusion of turnover around the retirement

age assuming that all turnovers are forced.

Table VI displays the results of logit model for all CEOs. Model 1 presents the results of all

sample firms, which is the same as column 1 in Table V. The results in Model 1 show that the

coefficient to the industry adjusted ROA is negative and significant at 5 percent level

indicating that when firm performance declines, the likelihood of CEO turnover increases

significantly. Therefore, H1 is supported. ROA in t 2 2 and t 2 3 is also tested but no

significant relationship with CEO turnover is found. The negative relationship between CEO

turnover and firm performance is consistent with previous empirical studies suggesting that

the board fulfills its monitoring task by replacing CEO when firm performs poorly.

Table V Results of logit model

All CEOsExclude retirement age

CEOsaInclude only CEOs at

retirement ageb

n p-value n p-value n p-value

Intercept 22.46 0.000 22.52 0.000 22.18 0.000Industry adjusted ROAt 21 23.08 0.018 22.61 0.068 25.73 0.092Number of observations 1,036 909 126Number of turnover 86 70 15Turnover rate (%) 8.3 7.7 11.922 log Likelihood 587.18 490.09 89.16Model p-value 0.019 0.069 0.093R 2 0.01 0.01 0.04

Notes: t 21 refers to the year preceding to CEO turnover; aexclude CEOs at the age of 59, 60 and 61; binclude only CEOs at the age of 59,60 and 61

VOL. 12 NO. 2 2012 jCORPORATE GOVERNANCEj PAGE 171

4.3.2 Ownership structure. When family ownership is taken into account by adding a dummy

variable as shown in Model 2, the coefficient to the industry adjusted ROA remains negative

but only significant at 10 percent level. The coefficient to the dummy for family ownership is

negative and significant at 1 percent level indicating that when the firm is controlled by

family, the probability of CEO turnover declines. Thus, H2 is supported.

To test H3, Model 3 is introduced, and it is the re-run of Model 2 by replacing the dummy

variable for family ownership with the dummy variable for family CEO. Model 3 shows that the

coefficient to industry adjusted ROA remains negative and significant at 5 percent. The

coefficient to the dummy for family CEO is negative and significant at 1 percent level

indicating that when CEO is part of the controlling family, the probability of CEO turnover

declines very significantly. H3 is therefore supported.

The results of effects of family ownership and family CEO on likelihood of CEO turnover

in Thai firms are consistent with the case of European firms (Lausten, 2002 and Volpin, 2002).

This study therefore provides support for management entrenchment in family firms as

hypothesized by Furtado and Karan (1990) that ownership and family ties should weaken the

likelihood of disciplinary CEO turnover in family firm. The results, however, are inconsistent

with the case of Taiwanese firms (Tsai et al., 2006). This seems to imply that Taiwanese family

is more effective in CEO monitoring and Taiwanese family CEO is relatively more

accountable to firm performance than those in Thailand and Europe. This is surprising

because Thailand’s cultural environment and family value is expected to be closer to those of

Taiwan as both are East Asian countries. However, it should be noted that the differences of

the effects of family ownership may be the result of different method of identifying family

firms. Our study uses level of ownership to identify family firms while according to Tsai et al.

(2006), the firm is said to be family firm if it fulfils one of the two criteria:

1. CEO is either the founder or a member of the founder’s family; or

2. more than half of the board seats are occupied by family members.

Therefore, in the case that CEO is just a founder or a family member of the founder, the family

may not have ultimate control over the firm’s voting rights and the board’s decision. It is

possible then that if a study on Taiwanese family defines family firm by level of ownership, the

results could be similar to the Thai and European studies.

4.3.3 Board structure and CEO’s age. As shown in Table VI, Model 4, the dummy variable for

CEO’s age and CEO duality, and variable of board independence and board size are added.

The coefficient to industry adjusted ROA remains negative and significant at 5 percent level

while only the coefficients to the dummy variable for age is positive and significant at 10

percent. Therefore, results in Model 4 indicate that H4-H7 are not supported.

Table VI Results of logit model

Model 1 Model 2 Model 3 Model 4n p-value n p-value n p-value n p-value

Intercept 22.46 0.000 21.95 0.000 22.11 0.000 22.93 0.076Industry adjusted ROAt21 23.08 0.018 22.58 0.051 22.71 0.037 22.74 0.041Dummy for family ownership in t 2 1 20.94 0.000 20.91 0.000Dummy for family CEO in t 2 1 21.30 0.000Dummy if age . 61 0.54 0.058Dummy for CEO duality in t 2 1 20.26 0.451Board independence in t 2 1 0.38 0.759log board size in t 2 1 0.72 0.579Number of observations 1,036 1,036 1,036 1,035Number of turnover 86 86 86 8522 log Likelihood 587.18 570.39 564.54 561.73Model p-value 0.019 0.000 0.000 0.000R 2 0.01 0.05 0.06 0.06

Notes: t21 refers to the year preceding to CEO turnover. Dummy for family ownership and family CEO is at 25 percent cut-off level

PAGE 172 jCORPORATE GOVERNANCEj VOL. 12 NO. 2 2012

From the results of Model 4, we cannot find evidence that board structure and CEO’s age

have influence on probability of CEO turnover in Thai firms despite empirical support in

several other studies. We therefore look further for different ways to test the hypotheses.

Lausten (2002) also found inconclusive results when using the same method to examine the

effect of CEO’s age on the likelihood of turnover. He conducted further test by splitting the

sample into two groups; younger and older CEO. We follow Lausten’s method to conduct

further test for H7. When the sample is divided into two groups: older CEOs and younger

CEOs, the results come out differently. In Table VII, columns 1 and 2 present the results of all

sample firms, which is the same as Model 1 in Table VI. Columns 3 and 4 show the results of

the sample for younger CEO. The coefficient to industry adjusted ROA is negative and

significant at 1 percent level indicating that the probability of CEO turnover at the age of 61

and lower is higher when firm performance declines. In column 3, despite the higher

turnover rate for older CEO, the coefficient of industry adjusted ROA is positive but

insignificant. The results indicate that when CEO is older than 61 years old, the likelihood of

being replaced is not associated with firm performance. The results are consistent with

previous studies indicating that younger CEO is more likely to be replaced with the decline of

performance than older CEO (Parrino, 1997; and Hou and Chuang, 2008).

The argument made by Chevalier and Ellison (1999) that the long success history of the

older CEO who continues to work beyond retirement age makes it difficult for the firm to find

equally qualified younger replacement seems to apply for Thailand. Further, this argument

can be strengthened by the suggestion made by Peng et al. (2001) that there is lack of

qualified personnel to fill top management positions in Thai firms. The estimated 17 percent

(176 out of 1,036 in Table V) of CEOs in the Thai sample firms remain working beyond

retirement age is not a small number, suggesting that experience and expertise are valuable

for Thai firms.

Similar method of splitting the data into subgroups is conducted to examine influence of

leadership of the board on likelihood of CEO turnover. The results are shown in Table VIII.

Table VIII Results of logit model, sample split by leadership of the board

All CEO CEO duality Separationn p-value n p-value n p-value

Intercept 22.46 0.000 22.92 0.000 22.39 0.000Industry adjusted ROAt 21 23.08 0.018 28.62 0.029 22.29 0.103n 1,036 186 850Number of turnover 86 12 7422 log Likelihood 587.18 83.80 500.02Model p-value 0.019 0.023 0.105R 2 0.01 0.07 0.01

Note: t 21 refers to the year preceding to CEO turnover

Table VII Results of logit model, sample split at 61 years of age

All CEO Younger CEOa Older CEOb

n p-value n p-value n p-value

Intercept 22.46 0.000 22.60 0.000 22.04 0.000Industry adjusted ROAt 21 23.08 0.018 24.58 0.002 2.92 0.31n 1,036 859 176Number of turnover 86 65 20Turnover rate (%) 8.3 7.5 11.3722 log Likelihood 587.18 450.76 123.62Model p-value 0.019 0.002 0.316R 2 0.01 0.03 0.01

Notes: t 21 refers to the year preceding to CEO turnover; athe sample size of younger and older CEOs add up to 1,035; bthe missing dataare due to one firm which did not report its CEO’s age

VOL. 12 NO. 2 2012 jCORPORATE GOVERNANCEj PAGE 173

Columns 1 and 2 in Table VIII present the results of all sample firms, which is the same as

Model 1 in Table VI. In columns 3 and 4, with the sample of firms with CEO duality, the

coefficient to industry adjusted ROA is negative and significant at 5 percent level indicating

that with CEO duality, the likelihood of turnover increases when firm performance declines.

Columns 5 and 6 show that the coefficient to industry adjusted ROA remains negative but not

significant, indicating that when CEO does not chair the board, the likelihood of being

replaced is not associated with firm performance. Therefore, H4 is not supported. This is

inconsistent with earlier studies made by Renneboog (2000), Goyal and Park (2002), and

Hou and Chuang (2008) that CEO duality decreases likelihood of CEO turnover. It makes the

results even more surprising given that the majority of CEO/chair are family CEOs. The

results in Model 3, Table VI, indicate that the probability of CEO turnover decreases when

CEO is part of the controlling family while the results in Table VIII imply that when the family

CEOs chair the board, they probably have motivation to display integrity as being

accountable for the firm performance, both as a CEO and as chairperson; supporting the

argument made by Lorsch and Zelleke (2005). Therefore, the results suggest that CEO

duality is not necessarily a bad corporate governance practice for Thai family firms.

Weisbach (1988) divides board into three types according to degree of independence:

1. insider-dominated;

2. outsider-dominated; and

3. mixed board.

We follow the method by splitting the sample into three groups to conduct further test for H5.

Less independent board has independent directors accounting for no more than 30 percent

of the board. More independent board has more than 33 percent independent directors on

board. Mixed board is in between. The 33 percent split off point used by this study takes into

account the new target required by the Securities and Exchange Commission regarding

proportion of independent directors on board. The results in Table IX show that an estimated

40 percent (416 out of 1,036) of the firms have reached SEC’s new target of having a

minimum of 33 percent independent directors on board. The coefficient to industry adjusted

ROA for less independent board and more independent board is negative and significant at

5 and 10 percent level respectively. For mixed board, the coefficient to industry adjusted

ROA is positive but not significant. In other word, the results show that only board consisting

of less than 30 percent and more than 33 percent independent directors tends to replace

CEO following the decline of firm performance. The results suggest that the less

independent board is equally effective in monitoring CEO as the more independent board

while mixed board is less likely to replace CEOwhen firm performance declines. An increase

in likelihood of CEO turnover of the more independent board supports previous studies,

which encourage board independence. However, it is surprising that the less independent

board is as effective in CEO monitoring as the more independent board. According to SEC’s

Table IX Results of logit model, sample split by independence of the board

All CEO Less independenta Mixedb More independentc

n p-value n p-value n p-value n p-value

Intercept 22.46 0.000 22.60 0.000 22.22 0.000 22.51 0.000Industry adjusted ROAt 21 23.08 0.018 25.17 0.024 1.09 0.701 23.69 0.058n 1,036 406 214 416Number of turnover 86 31 21 34Turnover rate (%) 8.3 7.6 9.8 8.222 log Likelihood 587.18 213.96 137.22 231.88Model p-value 0.019 0.024 0.700 0.059R 2 0.01 0.03 0.00 0.02

Notes: t 21 refers to the year preceding to CEO turnover; aboard with proportion of independent directors on board not exceed 30percent; bboard with proportion of independent directors on board of 31-33 percent; cboard with proportion of independent directors onboard over 33 percent

PAGE 174 jCORPORATE GOVERNANCEj VOL. 12 NO. 2 2012

requirement, independent directors should have no relationship with major shareholders

and hold no position in company management. Hence, non-independent directors should

generally include major shareholders, major shareholder representatives, and executive

directors. When board independence is lower, it should imply that the board has higher

proportion of executive directors and shareholders/shareholder representatives. Since

executive directors are more likely to protect the CEO, one plausible explanation for the

higher likelihood of CEO turnover following poor performance in the less independent board

is that the turnover may be initiated by shareholders and/or their representatives. Even

though we do not have an explanation why mixed board is not as effective in CEOmonitoring

as other types of board, from the results, it can be argued that non-independent directors

are as accountable as independent directors for the case of Thailand.

We also use the method of splitting sample into sub groups to run further test for H6. The

sample data are split into two sub samples. Smaller board refers to board with ten or less

directors while larger board refers to board with eleven or more directors. The split point of

ten follows the widely cited recommendation made by Lipton and Lorsch (1992) and Jensen

(1993) to limit board size to a maximum of ten directors. The results are shown in Table X. For

smaller boards, the coefficient to industry adjusted ROA is negative and significant at 5

percent level. For larger boards, the coefficient to industry adjusted ROA remains negative

but not significant. H6 is therefore supported. The results are consistent with previous

studies, for example Yermack (1996), indicating that a smaller board is more likely to replace

CEO when firm performance declines.

5. Conclusion

The findings of this study reveal that there is negative relationship between likelihood of CEO

turnover and firm performance in Thai listed non-finance companies. Both ownership

structure and board structure have effects on CEO turnover in Thai firms.

In the case of ownership structure, the likelihood of CEO turnover is lower when the firm is

controlled by family and when CEO is part of the controlling family. The results indicate that

family control negatively affects the board’s efficiency in CEO monitoring. This is not good

news for corporate governance in Thailand since more than 60 percent of Thai public firms

are controlled by family.

In the case of board structure, this study produces some surprising results:

B less independent board is as efficient in CEO monitoring as more independent board;

and

B CEO is more accountable to firm performance when he also serves as chairman of the

board.

It is worth noting that even though the results show that family CEOs are generally

entrenched, our findings also reveal that when family CEOs chair the board, instead of being

entrenched, they are evenmore accountable to firm performance. Another finding regarding

Table X Results of logit model, sample split by board size

All CEO Smaller boarda Larger boardb

n p-value n p-value n p-value

Intercept 22.46 0.000 22.52 0.000 22.41 0.000Industry adjusted ROAt 21 23.08 0.018 23.90 0.027 22.15 0.269n 1,036 464 572Number of turnover 86 38 4822 log Likelihood 587.18 258.17 328.51Model p-value 0.019 0.028 0.268R 2 0.01 0.02 0.01

Notes: t 21 refers to the year preceding to CEO turnover; aboard with total number of directors of ten or less; bboard with total number ofdirectors of more than ten

VOL. 12 NO. 2 2012 jCORPORATE GOVERNANCEj PAGE 175

board structure is that smaller board is more effective in replacing the CEO when firm

performance declines. It has been widely recommended in corporate governance literature

that the board should be small, independent, and separating the role of CEO and chairman.

The results suggest that the conventional wisdom that smaller board is a better board seems

to apply in the case of Thailand, while low independent board and CEO duality is not

necessary a bad corporate governance practice for Thai firms.

The results of the study also suggest that family ownership can weaken the board’s

effectiveness in CEO monitoring. However, effectiveness of the board in family firms can be

improved if proper arrangement of board structure is introduced. The board structure to be

implemented for Thai firms may not have to follow the same structure that works well in

western countries. Smaller board can be promoted while the proportion of independent

directors on the board and CEO duality need not be restricted. The new insights into board

structure effects on CEO monitoring efficiency for public companies in Thailand from this

study may also be relevant to public companies in other countries with similar family

ownership dominated environment.

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Corresponding author

Professor John C.S. Tang can be contacted at: tang@ait.ac.th

PAGE 178 jCORPORATE GOVERNANCEj VOL. 12 NO. 2 2012

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