Founder‐CEOs and corporate turnaround among declining firms

Abstract

Manuscript Type: EmpiricalResearch Question/Issue: Despite the growing interest in leaders' role in the turnaround process, there is a paucity of research on founder-CEOs' role in achieving successful turnaround among declining firms. In this study, using insights from the organizational identification literature, we argue that founder-CEOs play an important role in turnaround attempts due to their strong organizational commitment and psychological attachment to the declining firm as well as the relative absence of agency problem issues common among their non-founder counterparts.Research Findings/Insights: Using data from a matched pair sample of 142 US firms that experienced performance decline, we found that founder-CEO leadership significantly increases turnaround success in declining firms. We also found that, among turnaround firms, those led by founder-CEOs tend to put more emphasis on market-based turnaround strategies, such as new product introductions, and less emphasis on retrenchment actions, such as divestments.Theoretical/Academic Implications: Our findings contribute to corporate turnaround research by providing a more nuanced view of leaders' role in the turnaround process by specifically exploring the effect of founder CEO leadership. Furthermore, this study contributes to the turnaround literature by highlighting the strategic choices of founder-CEO-led firms and how these choices influence successful turnaround. Finally, by introducing organizational identification perspective, this study provides additional theoretical explanation of leadership antecedents of successful turnarounds.Practitioner/Policy Implications: The findings of this study suggest that boards of directors, shareholders, and consultants who often participate in turnaround management should carefully consider retaining founder-CEOs and endorsing their leadership during the turnaround process. Further, the findings provide turnaround specialists and other stakeholders with further understanding of not only the importance of product market strategies in the turnaround process but also founder-CEOs' role in fostering such strategies.

The founder chief executive officer: A review of current insights and directions for future research

“…Similarly, the founder‐CEO role is especially ambiguous in times of strategic change. Whereas some argue that their deep expertise and identification facilitate strategic change (e.g., Abebe & Tangpong, 2018), others contend that founder CEOs are simply incapable, or less effective, in successfully implementing strategic change, citing the different managerial skill sets and expertise required for sizeable change in the firm's strategic direction (Boeker & Karichalil, 2002; Souder et al, 2012; Willard et al, 1992).…”

Should Declining Firms Be Aggressive During the Retrenchment Process?

“…In sum, despite our efforts to validate this research with an event study, we find that this methodology is less suited to the study of retrenchment. Our initial methodological approach, validated by traditional and recent research (Abebe & Tangpong, 2018; Barker & Duhaime, 1997; Mueller & Barker; Tangpong et al, 2015; Trahms et al, 2013), is best suited to our central topic of study. This methodology confirms our hypotheses.…”

“…From a pool of 756 declining firms, we identified candidate firms from industry and firm size by using Mergent Online and Compustat (Abebe & Tangpong, 2018; Tangpong et al, 2015). Similar to other studies (Abebe & Tangpong; Tangpong et al, 2015), we chose for our successful firms a counterfactual case that appeared in Mergent Online as a direct competitor and had an identical two-digit SIC code.…”

“…In contrast, other continuous variables have been subject to criticism (Barker & Mone, 1994; Trahms et al, 2013). Second, most recent leading research studying the value of retrenchment has successfully used this type of variable as its only or main dependent variable (Abebe & Tangpong, 2018; Ndofor et al, 2013; Tangpong et al, 2015). Future researchers will be able to compare our research with prior leading research on the value of retrenchment.…”

Theoretical Review of Turnaround Strategy and Its Organizational Outcomes

“…According to Barker III, Vincent L.;Mone, Mark A., (1998), there are indications that firm size influences the ability of the firm to change its strategic orientation based on the factors of complexity of the internal procedures, power structure extensions and existing relationship with external stakeholders that have the effect of blocking the firm's ability to bring changes that are anticipated. Studies by Abebe and Tangpong (2017) posit that firm's size as a control variable of the organization positively and significantly influence the relationship among turnaround firms with respect to turnaround practices involving lay offs, acquisitions and divestments whereas Pant (1991) notes that, size as one of the structural factors of the firm is a charactreristic that influences the organization's nature of competition in the industry and hence, determines the strategic implementation success.…”