The evolution of boards and CEOs following performance declines

This paper examines the evolution of corporate boards following a large performance decline. Over 40% of the original directors depart the board during the three years following underperformance. Measures of initial CEO influence over the board such as CEO ownership are associated with smaller increases in board independence and less board turnover. The underperforming firms undergo a strong recovery subsequently, with the largest performance improvement occurring among firms that experience no turnover on their boards and among firms that do not change their board independence. We conclude that the large board turnover experienced by underperforming firms presents significant challenges for subsequent recovery. ► We study how poor operating performance affects corporate boards. ► Underperformance is followed by large board turnover and frequent CEO departures. ► Firms with powerful CEOs undergo smaller changes to their board structure. ► Large board turnover impedes subsequent recovery.