Santa Clara University

When the Boss Comes Back

Carrie Pan
Assistant Professor of Finance

When a CEO retires from a company, that’s supposed to be the end of the story. But surprisingly often it isn’t. If the executive remains on the Board of Directors, there’s a fairly good chance he or she will come back if the successor falters.

Carrie H. Pan, Assistant Professor of Finance at SCU’s Leavey School of Business, has been looking into that phenomenon, trying to get a better understanding of when it’s likely to happen and what it’s likely to mean for the company and its market valuation.

Carrie Pan, Assistant Professor of Finance, Leavey School of Business, Santa Clara University“We realized when we started looking into it that there were many more cases than previously realized of CEO’s coming back,” Pan said. “This is consistent with the notion that there’s a short supply of qualified CEO’s, particularly in industries where managerial human capital is essential to the success of a firm.”

Pan has been looking into the issue with two colleagues from The Ohio State University, Rudiger Fahlenbrach and Bernadette A. Minton. Their paper, tentatively titled “The Market for Comeback CEO’s,” is still being revised, but some of the findings seem fairly clear.

One of their key conclusions is that firms rehiring their former CEO’s often hire the best available candidate, given the circumstances.

“Sometimes having the former CEO come back can be a good thing,” Pan said. “It can be a lifesaver to a firm in really deep trouble where a quick turnaround is necessary. In all the cases we study, former CEOs come back when their former employers experience a sharp decline in performance under the management of their successors.”

The research indicated that a company’s stock value tends to take a temporary hit for around two weeks when it’s announced that the former CEO is returning, but that carried out over a slightly longer period, the firm’s stock performs as well as that of a firm in a similar situation that did not rehire a former CEO. The large negative-announcement return could indicate that the real situation is even worse than the market had anticipated.

"Having the former CEO come back can be a lifesaver." 
—Carrie Pan, Assistant Professor of Finance

Using computer databases on publicly traded firms from 1993 to 2005, Pan and her associates looked at 275 companies where the CEO resigned, but remained on the Board of Directors. A surprisingly high number of these businesses — 24 percent — later rehired their CEO for an average period of two and a half years.

It happened most commonly in companies where the CEO had been replaced by an internal candidate, in industries where human capital (as evidenced by high R&D expenses and levels of intangible assets) was high, and in businesses where the CEO had been the founder of the company.

Having the former CEO on the Board and, in effect, waiting in the wings, raises the question of whether the CEO returns to the job owing to his or her entrenched power or whether the decision is simply what was best for the shareholders. Pan and her co-authors concluded that it’s generally the latter. The firm that brings back its former CEO is typically in serious trouble, and the former CEO knows its operations and doesn’t have to spend as much time as an outsider learning the ins and outs of the business.

One of the things the research suggests is that companies that keep a recently departed CEO on the Board of Directors might inadvertently be setting themselves up for that CEO’s return. Having that former CEO on the board might scare off potential outside candidates as successors and could hinder the new CEO in making changes.

“There’s some anecdotal evidence that keeping the former CEO around can have a stifling influence on the successor and put pressure on someone who is trying to implement a new strategy,” Pan said. That subject is grist for further research.

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