Does a CEO bring in many new members on his or her top management team after taking charge at a company? Or, does the CEO have a number of key holdovers from a previous administration? Does this key factor in the composition of the top team make a difference? New research by Augustin Landier, Julien Sauvagnat, David Sraer, and David Thesmar (published in the Review of Finance) suggests that having more "independent" executives on the senior team can have positive effects on decision making and financial performance. The scholars define "independent" to mean executives not appointed by the current CEO.
The scholars collected data on over 1,800 American companies over a 17 year period. According to this article in Strategy and Business, here are their results: "Controlling for a variety of factors, they found that even the smallest
uptick in the nonindependence of executives caused a decrease in the
firm’s annual return on assets of between 0.5 and 0.8 percentage points."
What's going on here? They argue that CEOs tend to hire people who think like they do. Moreover, executives hired by the current CEO may feel more beholden to that leader. As a result, they may not be as willing to express dissenting opinions. On the contrary, an executive hired by a previous CEO may be more willing to push back on high-stakes, potentially risky decisions. The authors go on to argue that "independence" of senior executives may matter much more than the independence of board members, since the top team meets much more frequently and is much more directly responsible for strategic choices and performance at most large corporations.
Additional research by these scholars shows that firms with fewer independent executives on the top team also are more likely to make acquisitions that destroy shareholder value. Here is the key finding: "Although acquisitions, on average, led to decreases in shareholder value
for the companies in the study, firms with fewer independent top
subordinates fared much worse, losing about 45 percent four years after
they made an acquisition, almost triple the 16 percent loss posted by
firms with more of those executives."