Dismissing a CEO has an obvious potential to disrupt any organization, so it’s generally not a decision that’s taken lightly. Research from Rutgers University highlights how the opinion of the workforce tends to be pretty influential in whether the CEO stays or goes.

“Using financial performance and security analyst recommendations as assessment criteria for a CEO’s leadership has limitations,” the researchers explain. “Firm performance does not fully reflect a CEO’s leadership as it can be influenced by factors beyond the CEO’s control, and security analyst recommendations may be biased or based on an external perspective.”

Important stakeholders

The researchers found that employees are crucial internal stakeholders and therefore prove to be highly influential when boards come to decide whether to dismiss or retain the CEO.

“Employees possess crucial inside information about the CEO based on their experiences, and as implementers of the CEO’s strategies in the firm, their opinion of the CEO’s leadership has important consequences,” the researchers explain. “Moreover, because their job security is directly associated with the firm’s success or failure, they have an incentive to monitor the CEO’s leadership and strategies.”

What’s more, the opinions of employees were found to be especially influential during periods when the financial performance of the firm was strong and analyst recommendations were generally positive. Their input was also valuable when the CEO was less powerful.

“We observed that employee approvals negatively influence CEO dismissal, that is, higher employee approval lowers the chances of CEO dismissal by the board,” the researchers say.

“Moreover, we found that the negative relationship of employee approval on CEO dismissal is stronger when firm performance is more positive and analyst recommendation is less negative, and vice versa.”

The research provides a telling addition to our understanding of stakeholder theory, as it shows the boundary conditions under which employee voice becomes a major factor in CEO retention.

“Employees are gaining importance as internal stakeholders, and their views on CEO approval cannot be ignored,” the researchers conclude. “CEOs could do well by building a good reputation among employees. Employees should also realize their meaningful role as internal stakeholders and voice their opinion when asked to do so.”