For as long as they’ve known each other, Michael Bednar (right) and E. Geoffrey Love have been talking about how to connect their respective research interests in corporate governance and reputation. Their first conversation happened over lunch when Bednar was interviewing for a job as an assistant professor at Gies College of Business at the University of Illinois Urbana-Champaign. They agreed that academics needed to think more about how firms’ governance decisions affect their overall reputation.

The conversation continued after Bednar got the job and came to work at Gies Business. Fast forward 20 years from that first meeting, and Bednar and Love are now colleagues and associate professors of business administration at Gies Business who have written a pair of papers about the impact of controversial governance practices and public perception of the CEO on a firm’s reputation.

“And then a natural follow-up question to that was, ‘Well, what happens when you fire the CEO?’” Bednar says.

The firing of CEOs is the subject of their latest paper, “Unmet expectations: How chief executive officer dismissal affects corporate reputation,” co-authored with Jaegoo Lim of Hang Seng University of Hong Kong and recently published in Strategic Management Journal.

Reputation, Love and Bednar argue, is one of a corporation’s most valuable intangible assets. And, as the most visible member of the firm, the CEO is an important lens through which stakeholders, the media, and other observers view the company and make judgments about it. Therefore, understanding how a firm’s decision to fire a CEO affects its reputation is an important topic for both academics and practitioners.

Why CEO dismissals raise questions

Except in cases of obvious mismanagement or a very public scandal, most firms are vague about their reasons for dismissing their CEOs. “In the media articles we looked at,” Bednar jokes, “it turns out lots of executives want to spend a lot of time with their families.”

The “spending time with family” explanation can obscure what’s really happening at the firm. In fact, says Love (right), it just draws more attention to the fact that often there’s no real explanation or even acknowledgement that there was a firing at all. “This matters,” he continues, “because dismissal is obviously not something you’d like to do. And because of this cloud of ambiguity, people see it as a signal of problems.” Even a hint of a problem can damage a firm’s reputation.

The impact of a CEO’s dismissal on a firm’s reputation remains, even after controlling for financial performance, including short-term stock market reactions. “It’s like it’s moving separately in people’s minds from their assessment of the firm and the firm’s financial future,” Love says.

There’s an inherent challenge in quantifying something like reputation, especially if it operates separately from more tangible measures like stock market reactions.

But, Fortune magazine has published survey results in its World’s Most Admired Companies list annually since 1982. The list ranks the top 50 firms overall and also highlights the top companies in dozens of different industries. Fortune bases its rankings on a poll of more than 3,000 executives, directors, and securities analysts, who are asked to rate the 10 largest companies in their industry across eight attributes on a scale of 0-10. Averaged together, these become the firm’s final reputation score. (Spoiler alert: Apple has topped the list for the past 19 years running.)

“It’s not perfect,” Love says, “but for our purposes it’s pretty good, especially because it comes with a long history.”

Using the Fortune rankings from 1992-2017, along with the results of CEO of the Year competitions from various business publications, plus other media coverage in prominent newspapers, including The Wall Street Journal, The Washington Post, and The New York Times, Bednar, Love, and Lim compared the reputational impact of a CEO firing versus a planned succession and then analyzed the impact of the firing on a firm’s reputation over time.

The results showed that firms tended to drop, on average, almost one ranking position in the industry survey after firing their CEO — suggesting that CEO dismissal does have a real impact on the way people tend to think of a company. As Bednar puts it, “There’s something about making the decision to fire the CEO that catches the attention of evaluators enough to say, ‘Oh, I’m going to think a little bit differently and a little more negatively about the firm than I otherwise would.’”

When a firing violates expectations

A casual observer would expect that, in a firm where everything is under control, the CEO’s departure would be the result of a carefully planned succession, not a firing. This is an example of what’s known as expectancy violation theory: when events violate expectations, they attract attention — in this case, negative attention. Circumstances around the firing that increase the severity of those expectation violations tend to be associated with even more reputational damage. For example, a firm’s reputation post-dismissal can take an even harder hit if the departing CEO has received substantial visibility in the media or has been recognized as a strong manager by winning awards. The researchers found that in such cases, dismissal was associated with more than double the reputational damage. Firings were also associated with more damage if the firm had recently experienced strong financial performance. 

This is also something firms might want to consider when they’re contemplating dismissing their CEOs. Some board members might suggest that the CEO is pulling down the firm’s reputation. Bednar and Love argue that firing the CEO can actually pull the firm’s reputation down further, especially if there are no obvious signs that the company is in trouble. That’s not to say it is never a good idea to fire the CEO, but boards need to be aware of and weigh the reputational costs of doing so.