Determinants and Consequences of CEO Succession in Malaysian Public Listed Companies

This study investigates the key determinants that influence Chief Executive Officer's (CEO) succession amongst Malaysian Public Listed Companies (PLCs). The succession of CEO is divided into two parts, turnover of CEO and the selection of a successor. This study also investigates the consequences of CEO succession on changes in firm's post succession performance. Due to the scarcity of studies on CEO succession, and given a unique environment of concentrated ownership in Malaysia, this study seeks to examine whether firm's performance, firm's governance, the power of CEO and firm characteristic influence the succession of Malaysian PLCs' CEO as was examined on developed countries. Firms' ROA and Tobin's Q are used to
measure corporate performance. As far as corporate governance is concerned, this study focuses on how board of directors and ownership structures influence CEO succession. Meanwhile, the CEO power is proxied by CEO's
age, tenure, educational background, skills and functional background, share ownership and the disposition of the predecessor in the same company. Unit analysis of this study is the CEO succession in Malaysian PLCs for the
period 2002 to 2005. Data of CEO succession is then classified into turnover and the origin of the successor. A logistic regression is employed to identify factors that influence the propensity of CEO turnover. The dependent
variables are coded as turnover and no turnover. Analysis on 145 turnover events over a four-year period indicates that firms that experience low performance, have highly educated CEO, have older CEO, have shorter tenure CEO and have high leverage are more likely to change their CEOs. However, firms that exercise CEO/Chairman duality, have many board members with multiple directorships, controlled by family or management, have CEO ownership and have many business segments are less likely to change their CEOs.
For the selection part, a separate logistic regression is employed with outside succession as the dependent variable. Results reveal that ownership structure, predecessor disposition and turnover type significantly influence CEO
selection choice. Firms that are controlled by families or management are more likely to select inside successors while firms that are controlled by institutional investors are more likely to select outsiders as new CEOs. Firms
that dispose their CEO are also less likely to invite outsiders to become successors, while firms that are involved with forced turnover choose outsiders as successors. Other variables i.e firm performance, board attributes and firm characteristic do not influence CEO selection choice. This study finds that on average, firms' post-succession performance improves following CEO succession. The improvement in firm performance becomes significant for firms involve with forced turnover and select outsiders as successors. This study implicates that the application of human capital theory and social
network theory along with agency theory provide better understanding of CEO succession study in Malaysian context. This study suggests that the regulators especially Bursa Malaysia should enforce companies to disclose all relevant information related with CEO succession on a transparent and timely manner. Besides that, Bursa Malaysia should increase the law enforcement to enhance good corporate governance practices. For companies, this study proposes that they should put more emphasis on enhancing the role and the quality of board nominating committee members as this committee is directly involved in selecting new CEOs.