Do ESG Pillar Scores Affect CEO Turnovers?

Over the last fifty years, chief executive officers (CEOs) have evolved into some of the world’s most influential figures. The topic of CEO turnover (CEOs leaving a firm), and specifically, forced CEO turnover, has long been an important issue in the literature. While company profitability and other financial metrics have been traditional benchmarks for CEO performance, the emergence and rapid growth in the importance of ESG (environmental, social and governance) performance as a complementary measure of firm performance necessitates the need for further study. This research study examines the relationship between ESG component scores and the odds of forced CEO turnover. To the best of our knowledge, this study is the first to examine how the individual components of ESG performance affect the likelihood of a CEO being forced out of their position. Furthermore, due to emerging research on how board characteristics impact corporations, we further examine the moderating effect of board director independence on the aforementioned relationships. Using a sample of 14,717 firm-year observations of U.S. firms between 2000 and 2018, this relationship was modelled using multinomial logistic regression techniques. The results of our study demonstrate that there is no significant relationship between environmental scores and forced CEO turnover with, or without, the moderating effect of board independence. As for social scores, a statistically significant correlation was only found when accounting for board independence, where board independence weakens the inverse relationship between social score and the odds of forced CEO turnover. This suggests that board independence explains much of the relationship between social score and forced CEO turnover, and that the CEO of a firm is better off trying to optimize the number of independent directors on the board based on the strength of the firm’s social score. Finally, the governance score in isolation has an inverse causal effect on the odds of forced CEO turnover, cementing the importance of maintaining firm legitimacy through transparency and accountability with shareholders.