Are boards and institutional investors active monitors? Evidence from CEO dismissal

Purpose – The purpose of this paper is to investigate how the turnover-performance relation depends on the proportion of outside directors and institutional ownership concentration and to explore the relative roles of accounting- and stock-based performance measures in the process of CEO dismissals. Design/methodology/approach – Probit analysis using an unbalanced panel of the top 460 UK listed companies from 1990 to 1998 was employed. Findings – No evidence of effective board monitoring was found. On the other hand, evidence of institutional shareholder activism was found. In particular, when institutional concentration is high, the turnover-performance link is more negative in relation to stock returns but less negative in relation to accounting performance. This is consistent with institutional investors using a richer set of information than that contained in reported accounting earnings. Research limitations/implications – Further research may examine the effect of board monitoring on the turnover-performance relation after considering the endogeneity of board structure and membership. Moreover, further research may examine the complementarity of the two governance mechanisms considered, i.e. the board of directors and institutional investors. Originality/value – In the aftermath of Enron and other corporate frauds world-wide, the paper exploits a unique dataset of institutional ownership and provides additional evidence on the controversial role of boards and institutional investors in replacing inefficient CEOs, as well as on the role of accounting information in the effectiveness of governance processes.