Attributions and Efcacy Beliefs Jerayr Haleblian and Nandini Rajagopalan University of California, Riverside; University of Southern California, Los Angeles Extant literature that examines the role of boards in the CEO dismissal process has focused on the impact of board composition. However, it has rarely considered the inuence of sense making and interpretation on CEO dismissal. This paper draws on the strategic change literature, which demonstrates a link between cognitions and action, to develop a three-stage framework in which we articulate how sense making (stage 1) and interpretation (stage 2) impact the decision to dismiss a CEO (stage 3). More specically, the boards perception of performance, its attributions of performance and efcacy assessment of the CEO, and the boards composition impact the decision to dismiss the CEO. The resulting model illuminates the domain of board cognitions and board composition within CEO dismissal decisions and facilitates future empirical research. INTRODUCTION The rash of corporate scandals over the past few years (e.g. Enron, WorldCom) has produced outrage at the misdeeds of top executives. The boards role in such outcomes is not always clear. Were they aligned with the CEO? Did independent directors lack sufcient power to oust top managers? Clearly, in recent years the behaviour of boards has begun to change in important ways as a greater number of non-executive directors have joined boards ( Westphal, 1998), which in turn are demanding better information from the rms they monitor and are harder working than before (Economist, 2004). However, boards still appear to vary in their effec- tiveness in assessing performance problems and making appropriate managerial changes (Useem, 2003; Westphal and Fredrickson, 2001). Replacing a poorly performing CEO is among the most important actions a board of directors may take because it has long-term implications for a rms Address for reprints: Jerayr Haleblian, Anderson Graduate School of Management, University of California, Riverside, Riverside, CA 92521, USA ( john.haleblian@ucr.edu). Blackwell Publishing Ltd 2006. Published by Blackwell Publishing, 9600 Garsington Road, Oxford, OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA. Journal of Management Studies 43:5 July 2006 0022-2380 investment, operation, and nancing decisions (Huson et al., 2001). When there is a greater incidence of management changes in poorly performing rms, boards are thought to act as effective control mechanisms. Consistent with this notion, it has been well documented that there is a negative relationship between rm perfor- mance and the likelihood of CEO turnover (e.g. Brunello et al., 2003; Denis and Denis, 1995; Jensen and Murphy, 1990). However, research has shown that much less than half the variance in CEO turnover is explained by rm performance alone (Furtado and Karan, 1990). For instance, when comparing the top and bottom deciles of rms ranked by performance, the probability of turnover for the bottom 10 per cent of rms has been shown to be only 1.5 times larger than that for the top 10 per cent ( Warner et al., 1988). Predictions of CEO dismissal improve when the inuence of board composition is assessed. In effect, board composition has an impact on a boards ability to dismiss the CEO. Under conditions of poor performance, outsider-dominated boards are more likely than CEO-dominated ones to dismiss a CEO (e.g. Boeker, 1992; Cannella and Lubatkin, 1993; Weisbach, 1988), which suggests that outsider-dominated boards have a greater ability than CEO-dominated boards to dismiss a CEO, because they act in the interests of shareholders rather than in the interest of management. Additional research on board composition also supports this contention. For example, outside directors have been shown to have a positive impact on rm performance (Peng, 2004) because they are more likely than inside directors to align CEO compensation with shareholder objectives (Ryan and Wiggins, 2004) and less likely to provide golden parachutes and allow green- mail [1] transactions (Kosnik, 1990; Wade et al., 1990). However, in addition to board composition, accurately predicting when a CEO will be dismissed requires an assessment rst of the boards sense-making of performance and then its interpretation of performance. Board sense making reects its perceptions of the rms performance, and if rm performance is perceived as strong the dismissal of the CEO is unlikely. But if rm performance is perceived as weak, the board then makes interpretations about the rms perfor- mance, which include attributions to the causes of performance problems, along with an assessment of the CEOs efcacy. Interestingly, while board composition has been linked to CEO dismissal (e.g. Weisbach, 1988), board sense making and interpretation have only rarely been explored, and the full range of the cognitions that likely impact dismissal decisions have not been elaborated. In prior work, Fredrickson et al. (1988) argued that more variance in CEO dismissal decisions could be explained by examining the role of various board cognitions. These authors took a socio-political approach to CEO dismissal and hence, focused mainly on the effect of board composition, but only briey touched upon cognitive expectations and attributions in their theoretical model. Consistent with their model, we explicate how board composition inu- ences board cognitions. However, in order to better understand the boards moti- J. Haleblian and N. Rajagopalan 1010 Blackwell Publishing Ltd 2006 vation to dismiss a CEO, we provide a more in-depth treatment of the causal mechanisms through which board interpretations impact CEO dismissal actions. Drawing upon work in cognitive psychology, our model of CEO dismissal incor- porates the boards perceptions and attributions of rm performance and its assessment of CEO efcacy, which leads to an improved understanding of the boards motivation to retain or dismiss the CEO. In addition to providing increased descriptive accuracy in predicting CEO dismissal, a better understanding of board cognitions may also have practical applications. Recent work argues that boards may sometimes make poor dismissal decisions that do not result in improved rm performance (Wiersema, 2002). The domain of board cognitions has remained virtually a black box in prior empirical research, as most prior studies have assumed the existence of board cognitions but have not examined them. Hence, an understanding of the cognitive motivations behind CEO dismissal decisions may offer greater insight into the appropriateness of dismissal decisions. THEORETICAL FRAMEWORK AND RESEARCH PROPOSITIONS CEO rings are unique forms of involuntary turnover, the impact of which differ from other forms of voluntary or unexpected CEO separations such as retirement and death (Worrell et al., 1993). We focus on CEO dismissals in for-prot rms because the decision to replace a CEO is arguably among the most important decisions made by a board of directors (Huson et al., 2001) and represents the form of CEO turnover in which boards have the most direct inuence (Fredrickson et al., 1988). Our theoretical framework is presented in Figure 1 as a three-stage model of CEO dismissal. This model is consistent with work on strategic change that has shown a link between managerial cognitions and strategic actions (e.g. Barker and Barr, 2002; Ensley and Pearce, 2001; Gioia and Chittipeddi, 1991; Lant et al., 1992; McCormick and Martinko, 2004; Walsh, 1995). A core assumption of this model is that certain requirements must be met for the model to proceed from one stage to the next. In the rst stage, boards make performance perceptions in which current rm performance is assessed. To proceed from the rst (sense-making) to the second stage (interpretation), performance must be perceived as not meeting expectations. Moreover, for the process to proceed from the second stage (inter- pretation) to the third stage (CEO dismissal), the CEO must either be seen as inefcacious or performance problems must be attributed to certain causes internal, permanent, and/or pervasive. In addition, since CEO-dominated boards are less likely than outsider-dominated ones to dismiss the CEO, the boards composition needs to be considered to make predictions about CEO dismissal. Theoretical links and research propositions based on this gure are discussed in the next section. A Model of CEO Dismissal 1011 Blackwell Publishing Ltd 2006 Key Theoretical Concepts To show how corporate directors impact strategic actions (e.g. Rindova, 1999), the following central cognitive concepts are developed: (a) board perceptions of per- formance, (b) board attributions of performance, and (c) board efcacy beliefs about the CEO. These concepts are dened before propositions are developed. Board perceptions of performance. A boards perceptions of past performance result from the process by which the board obtains information to understand how effective the rm has been in its environment. Boards typically use measures of prior rm performance or the performance of other industry competitors as bench- marks against which to evaluate a rms recent performance (Greve, 1998). Board attributions of performance. Attribution theory assumes that people are moti- vated to understand and predict activities in their environment and are thus concerned with perceived causes of prior events (Kelly, 1955). In the case of boards, they are particularly interested in understanding the causes of poor rm performance. Causal attributions for past performance may vary based on the dimensions of controllability, permanence, and pervasiveness (Abrahamson et al., 1978). Controllability is concerned with the source of the cause (i.e. personal or environmental), permanence with its length, and pervasiveness with its breadth (Seligman, 1990). Board assessment of CEO efcacy. The boards assessment of CEO efcacy consists of its belief in the ability of the CEO to mobilize the motivation, cognitive resources, Board Composition CEO Dismissal Likelihood Perception of Performance CEO Efficacy Assessment Attributions for Performance P1a P3a Performance History P1b P2b, P2c P3c P3b Sense making Stage 1 Interpretation Stage 2 Action Stage 3 P2a P2e P2d Figure 1. Three stage CEO dismissal framework J. Haleblian and N. Rajagopalan 1012 Blackwell Publishing Ltd 2006 and courses of action needed to exercise control over environmental events (Bandura and Jourden, 1991). In contrast to effort, efcacy is a broader concept that is concerned with the ability to produce a certain level of performance that is based on skills, knowledge, resources, and capabilities, rather than on effort alone ( Wood and Bandura, 1989). When boards believe their CEOs are capable of running their rms and believe their change actions will be effective, they are more likely to retain the incumbent CEO. These three cognitive constructs impact CEO dismissal. Perceptions of perfor- mance are made during the rst stage of the CEO dismissal process (sense-making), while performance attributions and efcacy assessments of the CEO are made during the second stage (interpretations). In addition, board structural factors impact each of the three stages of CEO dismissal. Board Sense Making: The Inuence of Firm Performance History and Board Composition on Performance Perceptions Board perceptions of current performance are inuenced by past aspiration levels (Grinyer and McKiernan, 1990). Boards set aspiration levels and then judge recent performance as poor when it does not meet these aspirations. This inevitably leads to different thresholds across rms with regard to what constitutes poor perfor- mance. In addition, aspiration levels may be set relative to a rms prior perfor- mance (Cyert and March, 1963; Greve, 1998), which means that they tend to be raised after a period of strong performance (Bandura, 1997). Alternatively, aspira- tion levels may be set relative to other, similar rms (Defond and Park, 1999; Lant et al., 1992), particularly those with high performance levels (Bandura, 1986). Performance is perceived relative to aspiration levels because decision makers use aspiration levels to simplify a continuous performance measurement process into a discrete assessment of success/reward or failure/punishment (March, 1988). If a performance downturn is perceived as signicant, it is likely that this perception will act as a cognitive motivator to drive board members toward CEO dismissal to improve performance. The greater the gap between past aspirations and current performance, the greater the likelihood performance will be perceived as poor. In addition to rm performance history, the composition of the board also inuences board performance perceptions. In order to govern effectively, outside board members need to have appropriate and sufcient information to assess a CEOs performance in all its aspects, as outside directors rely on the CEO to learn about the organization. However, CEOs generally have knowledge about the company that outside directors do not have, and such superior knowledge may give them a power advantage (Lorsch, 1995). For example, CEOs may limit the amount and type of information that outside directors see, or they may use their knowledge advantage to present information to outside directors in such a way as to enhance A Model of CEO Dismissal 1013 Blackwell Publishing Ltd 2006 perceptions of rm performance. CEO-dominated boards have been found to be more likely than outsider-dominated boards to withhold critical information from outside directors (Lorsch and MacIver, 1989). Given a lack of critical information, outside board members on CEO-dominated boards may be less likely to perceive rm performance as poor. These arguments lead to the following two research propositions: Research Proposition 1a: The greater the gap between past aspirations and current performance, the greater the likelihood performance will be perceived as poor. Research Proposition 1b: CEO-dominated boards will be more likely to view rm performance positively (based on inated performance perceptions) than outsider-dominated boards. Board Interpretation: The Inuence of Board Perceptions and Board Composition on Board Attributions If board members perceive that the rm has been performing well, then CEO dismissal is unlikely, as research has shown that the higher a rms performance, the lower the likelihood of CEO dismissal (e.g. Denis and Denis, 1995; Jensen and Murphy, 1990). However, if rm performance is perceived as poor, attributions are made to understand the causes of poor performance. Attributions give events meaning and help individuals anticipate future events ( Weiner, 1986). However, meaning depends on how events are construed ( Weiner, 1986). Causality is not inherent in environmental events, and people do not observe causes rather, perceivers of events construct causes in order to make their environments more meaningful (Hume, 1739). The inuence of performance attributions on subsequent action has a long tradition in Western thought. The Roman philosopher Epictetus stated that Men are disturbed not by things, but by the view they take of things. There is also a long tradition in psychology on the subjective meaning of any situation (e.g. Lewin, 1936; Rotter, 1971). In addition, the strategic management literature has acknowledged the important role of attri- butions in inuencing actions (e.g. Barr, 1998; Ford, 1985). Importantly, though, poor performance perceptions alone do not lead to CEO dismissal. Rather, poor performance perceptions lead to attributions for the poor performance as the board searches for the causes of poor performance. There is a direct relationship between poor performance perceptions and the attributions made for poor performance. The intensity of poor performance impacts directly on permanent and pervasive attributions, because the worse the current performance, the more likely it is that board members will be convinced that the causes are broad and that they will continue into the future (Ford and Baucus, 1987). Hence, the poorer the performance perceptions of the board, the J. Haleblian and N. Rajagopalan 1014 Blackwell Publishing Ltd 2006 more likely the board will be to make permanent and pervasive, as opposed to temporary and contained, attributions for the poor performance. This leads to the following proposition: Research Proposition 2a: The poorer the boards perception of the rms perfor- mance, the more likely it will be to make permanent and pervasive attributions. The boards composition also inuences the attributions it makes for poor perfor- mance. A self-serving attribution is one in which success is attributed to internal causes, but failure is blamed on external causes (e.g. Mezulis et al., 2004). Since CEOs and inside directors have more knowledge about the company than do outside directors, CEOs may use this knowledge advantage to present performance information to outside directors that is self-serving and that enhances the reputa- tion of the CEO. Consistent with these arguments, management research has shown self-serving attribution patterns where top managers make attributions for organizational outcomes such that they have a tendency to attribute positive outcomes to their own actions, and negative outcomes to external factors and chance. Indirect support has been found in published annual reports (e.g. Bettman and Weitz, 1983; Clapham and Schwenk, 1991; Tsang, 2002), while direct evi- dence has been found in responses to surveys ( Wagner and Gooding, 1997), and in a sample of publicly traded rms, which showed that when successful organizations initially encounter performance problems, their managers usually attribute the problems to causes that are beyond managements control (e.g. Barker and Patter- son, 1996). In contrast, outside board members are thought to contribute objectivity in evaluating managerial decisions (Byrd and Hickman, 1992), and they may ask the difcult questions, which management may not face because of an unconscious pride of authorship ( Winter, 1977, p. 285). Outsiders quite likely provide a fresh perspective or stronger monitoring, which explains why a board vacancy following poor performance is more likely to be lled by an outsider than by an insider (Hermalin and Weisbach, 1988). Moreover, the sensitivity of CEO turnover to performance is greater for rms with a higher proportion of outside directors, presumably because these rms boards are more independent of management than boards dominated by inside directors ( Weisbach, 1988). This objectivity is particularly relevant when managers empire-building ambitions (e.g. Rhoades, 1985) or excessive pride (Roll, 1986) conict with shareholder interests. In cases where rm performance is poor, CEO dismissal likelihood is lower when attributions for failure are inaccurately made to external factors rather than internal ones. Self-serving attributions are most likely to be offered for the causes of events when the outcomes of such events can impact the self-concept of the individual making the attributions, and a substantial performance decline is likely to threaten the self-concept of the CEO, who often has a robust self-image based A Model of CEO Dismissal 1015 Blackwell Publishing Ltd 2006 on past career success. Thus, strong CEOs who dominate a board may display a tendency to cognitively distance themselves from poor performance by attributing it to factors that preserve their positive self-concept (e.g. Barker and Patterson, 1996). This idea is also supported by case research, which reports that long-tenured top managers tend to attribute poor performance to such factors as economic cycles that are uncontrollable by the rm and are beyond managements control (e.g. Nystrom and Starbuck, 1984), while newly appointed top managers from outside the industry are more likely to attribute poor performance to internal causes (e.g. Barr et al., 1992). By extension, then, it may follow that CEO- dominated boards are more likely than outsider-dominated boards to have self- serving performance attributions with regard to the rm and those managing it. Interestingly, empirical research also suggests that boards with strong indepen- dent outsiders may make internal attributions for poor performance and blame CEOs for performance problems beyond their control in order to placate powerful stakeholders. For instance, Barker et al. (2001) found that when a rm began to lose market share in its core business the founder, who was still on the board, stepped in and convinced the board to re the CEO, and many of the rms problems were attributed to the CEO after he departed, which the authors sug- gested may have been designed to create an environment more conducive to change. Thus, in the event that the outside board members are strong, ignore information suggesting that the CEO is not at fault, and make internal attributions to the CEO for poor rm performance that may, in fact, have more external causes, the CEO may become a scapegoat. Hence: Research Proposition 2b: CEO-dominated boards will be more likely to make self-serving attributions (i.e. attributions inaccurately made to uncontrollable factors for poor performance) than outsider-dominated boards. Research Proposition 2c: Outsider-dominated boards will be more likely to make scapegoat attributions (i.e. attributions inaccurately made to controllable factors for poor performance) than CEO-dominated boards. Board Interpretation: The Inuence of Past Performance and Board Composition on the Efcacy Assessment of the CEO In addition to attributions, the other interpretation a board makes that has an impact on the CEO dismissal decision is its assessment of CEO efcacy. Boards with a strong belief in the efcacy of their CEO are condent in difcult circum- stances and believe the CEO can exercise control over events (Bandura, 1997). However, boards with a weak belief in the efcacy of the CEO tend to discourage difcult tasks (such as large acquisitions), and in the face of rm difculties and obstacles they tend to give up on the CEO. In addition, their expectations for J. Haleblian and N. Rajagopalan 1016 Blackwell Publishing Ltd 2006 future CEO performance are low, and their commitment to his or her strategy and goals are weak, because they focus more on the CEOs deciencies and attribute failure to a lack of CEO ability (Bandura and Wood, 1989). In contrast, boards that have a strong efcacy belief in their CEO are much more likely to allow the CEO to persevere and show ingenuity as he or she attempts to control environments even those that have many constraints. In other words, the more a board believes in the efcacy of the CEOs skills (strategic, political, and otherwise), the more likely it will be to retain the CEO despite current poor rm performance. [2] Past rm performance inuences the boards beliefs regarding CEO efcacy, as board members estimate the CEOs ability to positively inuence rm outcomes. In particular, performance success increases a boards efcacy beliefs with regard to the CEO, with the most enduring efcacy beliefs resulting when CEOs over- come obstacles through innovation and strong effort. On the other hand, perfor- mance failure decreases a boards efcacy beliefs in the CEO, especially if failures occur early and often and attributions of controllability are made for the failures (Bandura, 1997). Research Proposition 2d: A rms past performance history will be positively related to the boards efcacy assessment of the CEO. CEOs who dominate boards are more likely to inuence the boards perceptions through sources within their control. In extensive interviews with boards of direc- tors, Lorsch and MacIver (1989) found that the CEO is the formal leader in the vast majority of boardrooms and that the CEO may often inuence the perception of his or her performance through many channels. For example, CEOs have been found to identify and nominate potential board candidates that may be sympa- thetic to them (e.g. Shivdasani and Yermack, 1999). They also tend to place management-friendly directors on key committees (e.g. nominating and compen- sation) ( Vafeas, 2003) and to otherwise collude with board members (Beetsma et al., 2000). Hence, CEOs may use such methods to present themselves in a manner that enhances perceptions of their own efcacy. This leads to the following proposition: Research Proposition 2e: CEO-dominated boards will be more likely to have higher levels of assessed CEO efcacy than outsider-dominated boards. Board Action: The Inuence of Board Attributions and CEO Efcacy on CEO Dismissal As previously developed, causal attributions for past performance vary based on the dimensions of controllability, permanence, and pervasiveness. These three A Model of CEO Dismissal 1017 Blackwell Publishing Ltd 2006 dimensions of attributions will be expanded upon, and then predictions will be made on how these attribution dimensions inuence CEO dismissal. Controllability. The founder of attribution thinking is Fritz Heider (1958), who argued that people ascribe causal factors either to a person or to the environment. An assumption underlying this characterization is that person-related causes are more controllable than environment-related causes. Subsequent research has shown that individuals are more likely to respond to poor performance with behavioural change when the cause is attributed to person-related factors rather than environment-related factors (Rotter, 1971). [3] Similarly, strategy research has found that when managers attribute poor performance to external factors, they are less likely to change rm strategies (Lant et al., 1992). When performance downturns are attributed to external causes such as com- petitors actions, changes in regulatory rules, shifts in technological standards, and changes in consumer preferences, they are more likely to be viewed as uncontrol- lable rather than controllable. In contrast, when causes are attributed to internal factors such as an outdated product line, poor manufacturing facilities, or poor customer service, they are more likely to be viewed as controllable rather than uncontrollable. Attributions of controllability give boards some degree of con- dence in the CEOs ability to respond to poor performance. Board attributions of poor performance to more uncontrollable factors are less likely to result in CEO dismissal than the attribution to more controllable factors. Permanence. As work on attributions developed, it became apparent that some causes are more permanent than others and more likely to continue into the future (Weiner, 1986). For instance, a more permanent attribution might be a lack of rm competencies, whereas a lack of rm-wide effort could be classied as a more temporary attribution. Similarly, if board members attribute poor performance to an economic recession, this cause is classied as temporary, while a technological change making our industry irrelevant is as an example of a permanent attribution. Hence, the permanence dimension is concerned with time with the underlying causes of poor performance over a range from tem- porary to permanent. The more that events are attributed permanent causes, the more likely board members will be to change future actions based on these attributions (Ford and Baucus, 1987). In other words, when board members see performance as caused by enduring problems within or outside the organization they will be more likely to dismiss the CEO. Thus, causal attributions of permanence impact the likelihood of CEO dismissal. Pervasiveness. After the dimensions of controllability and permanence, a third dimension pervasiveness was later offered (Abrahamson et al., 1978) that dealt J. Haleblian and N. Rajagopalan 1018 Blackwell Publishing Ltd 2006 with the extent to which the cause of poor performance was limited or generaliz- able across a wider context. That is, while permanence is concerned with time, pervasiveness is concerned with space. Some causes are specic to a narrow area, while others affect multiple domains of performance. Thus, board members may view poor rm performance as being caused by a particular function (e.g. a weak marketing function) or an overarching problem that involves numerous functions (e.g. poor R&D, manufacturing, marketing, and human resources). When the cause of poor performance is seen as pervasive, they will be more likely to consider CEO dismissal. In addition to a boards attributions for poor performance, a boards efcacy beliefs about the CEO also inuence the likelihood of CEO dismissal. Boards develop positive efcacy beliefs regarding the CEO when they are convinced that the CEOs abilities can affect the rm and its environment, and this increases the likelihood of CEO retention. In contrast, when a board believes that the rm and its environment cannot be positively impacted by a CEOs abilities, they are more likely to have low efcacy beliefs relative to the CEO (Bandura and Wood, 1989), which increases the likelihood of dismissal. In particular, performance success increases a boards positive efcacy beliefs with regard to the CEO, with the most resilient forms of efcacy beliefs resulting when CEOs overcome obstacles through innovation and strong effort. On the other hand, performance failure decreases a boards efcacy beliefs in the CEO, especially if failures occur early and often and attributions of controllability are made for the failures (Bandura, 1997). The result is that board members assess efcacy based on past performance and then develop probabilistic causal expectations about future out- comes of a CEOs strategic actions based on assessed capability. Boards are more likely to make retention decisions when they hold enduring beliefs that the CEO is efcacious. Also, when a CEO is seen as efcacious boards are more likely to view strong rm performance as caused by the CEO and weak rm performance as caused by external causes. In summary, board attributions of controllability, permanence, and pervasive- ness, [4] as well as the boards assessment of CEO efcacy, will inuence CEO dismissal, which leads to the following propositions: Research Proposition 3a: The higher the attributed level of the underlying cause(s) of poor performance (i.e. controllability, permanence, pervasiveness), the greater will be the likelihood of a CEO dismissal decision. Research Proposition 3b: Board efcacy beliefs with regard to the CEO will directly inuence CEO dismissal decisions. Specically, the stronger the boards efcacy beliefs about the CEO, the lower will be the likelihood of CEO dismissal. A Model of CEO Dismissal 1019 Blackwell Publishing Ltd 2006 Board Action: The Inuence of Board Composition on CEO Dismissal The composition of a board will directly impact the likelihood of CEO dismissal. CEOs tend to act in ways that minimize their own likelihood of dismissal. In doing so, CEOs identify and nominate potential board candidates that may be sympa- thetic to them, and they weaken less management-friendly directors by placing them on weaker committees (Lorsch and MacIver, 1989). Moreover, they may determine what information the directors receive in advance and control the agenda at meetings through choosing which issues to open and when to close them to further consideration (Alderfer, 1985). They also tend to have extra-meeting contact with directors to build rapport and reduce the likelihood of conict at meetings. Finally, many boards tend to have norms with regard to not criticizing CEO activities. CEO turnover has been shown to be more sensitive to performance when the board is more independent (Hermalin and Weisbach, 1998). The sensitivity of CEO turnover to performance is greater for rms with a higher proportion of outside directors, presumably because these rms boards are more independent of management than boards dominated by inside directors ( Weisbach, 1988). In contrast, the CEO sometimes dominates the board and has a disproportionately strong inuence on board decisions relative to other board members (Lorsch and MacIver, 1989). Whether a board is dominated by the CEO or consists primarily of indepen- dent outsiders inuences not only the nature of the decision to dismiss but also when such a decision is made the likelihood that it will be carried out. Each board member interprets the rms performance and its CEOs strategic capa- bility, and these cognitions may vary among board members within a rm. The dispersion of cognitions around the group average varies from (1) small in homo- geneous boards in which members have shared history, accomplishments, norms (Fischer and Ellis, 1990), or similar demographics (Knight et al., 1999), to (2) large in groups with heterogeneous beliefs. On boards in which power is rela- tively evenly balanced, differences are resolved as the group process unfolds (Knight et al., 1999), which involves the exchanging of multiple views, after the team has accumulated and examined information, and the integration of indi- vidual beliefs into a consensus (Gibson, 2001). In contrast, when the board is dominated either by the CEO or by outsiders the attributions of the powerful stand out and have a greater likelihood of becoming the consensus view (Bales and Cohen, 1979). Thus, while there are gradations in the compositions of boards, from CEO-dominated to outsider-dominated, when a board largely dominated by outsiders reaches a dismissal decision it is more likely to be imple- mented than it is with a board containing a more equal mix of power. This leads us to the following proposition: J. Haleblian and N. Rajagopalan 1020 Blackwell Publishing Ltd 2006 Research Proposition 3c: Outsider-dominated boards will be more likely to dismiss a CEO than CEO-dominated boards, or boards that are evenly balanced. IMPLICATIONS AND CONCLUSIONS Implications for Theory and Methods From a theoretical standpoint, our framework and related arguments provide a more complete specication of the inuence of board interpretations and board composition on the likelihood of CEO dismissal. The strategic management lit- erature has identied the crucial role of sense making and interpretations in strategic change. However, this work has not been reected in the CEO dismissal literature. In addition, the causal mechanisms through which board interpretations inuence CEO dismissal are under-specied. In examining the effects of board sense making and interpretation, we postulate that the following board cognitions play crucial roles in the CEO dismissal actions: (1) performance perceptions rela- tive to aspirations; (2) attributions along three distinct constructs controllability, permanence, and pervasiveness; and (3) assessments of CEO efcacy. Thereby, we provide a more complete specication of the domain of board sense making and interpretations, which should explain greater variance in CEO dismissal than prior work (e.g. Puffer and Weintrop, 1991). Although prior literature has assessed a boards monitoring role based on the boards structural characteristics, these struc- tural characteristics may not effectively capture the underlying interpretations that are more likely to directly predict board decisions (Forbes and Milliken, 1999). In addition, while our models main contribution lies in specifying the domain of board cognitions in the dismissal process, we also incorporate traditional board composition arguments by identifying the differential effects of CEO- and outsider- dominated boards on these cognitions as well as on the CEO dismissal action. From a methodological standpoint, our theoretical framework and research propositions have several implications for future research. First, while most prior studies of CEO dismissal have relied upon archival or published data sources to examine the antecedents of CEO dismissal, such sources are typically of limited use when it comes to measuring perceptions, attributions, and efcacy assessments, the main theoretical concepts in our framework. Survey questionnaires and interviews with board members will be key to obtaining reliable, valid measures of cognitions. Second, studies that use archival data on rm performance, board composition, and dismissal outcomes typically use the rm as the level of analysis. However, cognitions operate at the individual level, and data collected at the level of the individual board member will need to be aggregated to obtain an overall measure of board cognition that can then be related to the rm-level outcome of dismissal. Issues of heterogeneity in perceptions and attributions will need to be addressed as A Model of CEO Dismissal 1021 Blackwell Publishing Ltd 2006 well (for instance, the more heterogeneous the perception, the less likely that a consensus will be reached in terms of a decision to dismiss a CEO, notwithstanding his or her poor performance). Coming to an understanding of the effects of homogenous and heterogeneous perceptions and attributions on the dismissal outcome would be a useful way to extend our theoretical framework. Third, in order to test our research propositions a longitudinal research design that tracks CEO dismissal or retention decisions through all three stages of the process will be required. This implies an important difference vis--vis prior research on CEO dismissal. Because prior empirical research has primarily examined the structural attributes of board composition and rm performance as the major antecedents to the dismissal outcome, cross-sectional research designs that sample on the dismissal outcome and use lagged measures of performance and board composition have thus far been adequate. In contrast, our model emphasizes the crucial intervening role of board perceptions and cognitions and, further, allows for the termination of the process at any of the rst two stages the perception or the attribution stage. Hence, the starting point for testing our model would more appropriately be the point at which a signicant gap between a boards performance aspirations and rm performance is rst acknowledged. Such performance signals can be mean- ingfully obtained not only from board members but also from knowledgeable outsiders like industry experts. Once the performance gap is identied, the researcher needs to obtain primary data on board member perceptions and if perceptions of poor performance are acknowledged then proceed to the next step of assessing attributions. Our three-stage model of CEO dismissal mandates the longitudinal nature of the data collection process in which actions follow attribu- tions that follow perceptions. Research methods that appear to be particularly promising from this standpoint include retrospective case histories (Glick et al., 1990) and developmental event sequence methods (Van de Ven and Poole, 1990). Implications for Practice From a practical standpoint, it would be useful to examine the normative impli- cations of board interpretations that result in either appropriate or inappropriate CEO dismissal decisions ( Wiersema, 2002). An appropriate dismissal based on accurate performance perceptions, performance attributions, and efcacy assess- ments of the CEO may presumably lead to improved rm performance (e.g. Denis and Denis, 1995), assuming that a more appropriate replacement CEO is found. However, there are also instances in which interpretations are inaccurate and may negatively impact the outcome of the CEO dismissal decision process. By drawing upon our framework, an improved prediction of the outcomes of dismissal or retention decisions may follow. For instance, board members will be more likely to inappropriately dismiss the CEO when they assess the rms poor performance as due to the CEO, when in fact it is due to external causes (e.g. scapegoating), and J. Haleblian and N. Rajagopalan 1022 Blackwell Publishing Ltd 2006 they will be more likely to inappropriately retain the CEO when they attribute rm performance to external causes when it is actually due to the CEO (i.e. self-serving attributions). In addition, however, both inappropriate dismissal and inappropriate retention are likely to negatively affect subsequent rm performance. Thus, fruitful extensions and renements of our framework include examining the inuence of board interpretations on the subsequent rm performance that follows from these decisions. In conclusion, inappropriate dismissal decisions appear to be common (Wiersema, 2002), and hence organizations have much to gain by understanding the factors that affect these decisions. In this paper we went beyond an analysis of board composition to develop a framework that explicates the causal processes through which board cognitions inuence CEO dismissal. We encourage fruitful renements and extensions of the model developed in this paper to other critical board decisions such as CEO compensation and new CEO selection. NOTES [1] Greenmail is an unfriendly move by a buyer who purchases enough stock in a company to threaten a hostile takeover but then agrees to sell the stock back to the company at a higher price. [2] When board members make internal attributions for poor performance, they are typically more likely to also hold a low efcacy assessment of the CEO. However, this is not always the case. Boards may also hold a low efcacy belief of the CEO while favouring an external attribution of rm performance. For example, as an industry contracts (external cause), the CEO may be unable to bring him- or herself to lay off employees in response to decreasing demand. Hence, attributions and efcacy assessments of the CEO are distinct concepts. [3] An extension of Heiders work is Rotters more commonly known work on locus of control, which was an attempt to account for individual differences in the attributions of reinforcement, either internal or external. Subsequent work has been conducted to contextualize the locus of control construct to organizations (Hodgkinson, 1992). [4] This proposition implies that the strongest effect would be under conditions in which two or more attributions operate simultaneously (e.g. when underlying causes are attributed as (1) controllable and permanent, (2) permanent and pervasive, (3) controllable and pervasive, or (4) controllable, permanent, and pervasive). REFERENCES Abrahamson, L.Y., Seligman, M. E. P. and Teasdale, J. (1978). Learned helplessness in humans: critique and reformulation. Journal of Abnormal Psychology, 87, 4974. Alderfer, C. (1985). From the boardroom: the invisible director on corporate boards. Harvard Business Review, 64, NovemberDecember, 3851. Bales, R. F. and Cohen, S. P. (1979). Symlog: A System for the Multiple-Level Observation of Groups. New York: The Free Press. Bandura, A. (1986). Social Foundations of Thought and Action: A Social Cognitive Perspective. Englewood Cliffs, NJ: Prentice-Hall. Bandura, A. (1997). Self-Efcacy: The Exercise of Control. New York: W. H. Freeman and Company. Bandura, A. and Jourden, F. (1991). Self-regulatory mechanisms governing the impact of social comparison on complex decision-making. Journal of Personality and Social Psychology, 60, 94151. Bandura, A. and Wood, R. E. (1989). Effect of perceived controllability and performance standards on self-regulation of complex decision-making. Journal of Personality and Social Psychology, 56, 80514. A Model of CEO Dismissal 1023 Blackwell Publishing Ltd 2006 Barker, V. and Barr, P. (2002). Linking top manager attributions to strategic reorientation in declining rms attempting turnarounds. Journal of Business Research, 55, 96397. Barker, V. and Patterson, P. (1996). Top management team tenure and top manager causal attributions at declining rms attempting turnarounds. Group and Organization Management, 21, 30436. Barker, V., Patterson, P. and Mueller, G. (2001). Organizational causes and strategic consequences of the extent of top management team replacement during turnaround attempts. Journal of Management Studies, 38, 23569. Barr, P. S. (1998). Adapting to unfamiliar environmental events: a look at the evolution of interpre- tation and its role in strategic change. Organization Science, 9, 64469. Barr, P. S., Stimpert, J. L. and Huff, A. S. (1992). Cognitive change, strategic action, and organi- zational renewal. Strategic Management Journal, 113, 1536. Beetsma, R., Peters, H. and Rebers, E. (2000). When to re bad managers: the role of collusion between management and board directors. Journal of Economic Behavior and Organization, 4, 42749. Bettman, J. R. and Weitz, B. A. (1983). Attributions in the boardroom: causal reasoning in corporate annual reports. Administrative Science Quarterly, 28, 16583. Boeker, W. (1992). Power and managerial dismissal: scapegoating at the top. Administrative Science Quarterly, 37, 40021. Brunello, G., Graziano, C. and Parigi, B. (2003). CEO turnover in insider dominated boards: the Italian case. Journal of Banking and Finance, 27, 102749. Byrd, J. W. and Hickman, K. A. (1992). Do outside directors monitor managers? Evidence from tender offer bids. Journal of Financial Economics, 32, 195221. Cannella, A. and Lubatkin, M. (1993). Succession as a sociopolitical process: internal impediments to outsider selection. Academy of Management Journal, 36, 76393. Clapham, S. and Schwenk, C. (1991). Self-serving attributions, managerial cognition,and company performance. Strategic Management Journal, 12, 21929. Cyert, R. M. and March, J. G. (1963). A Behavioral Theory of a Firm. Englewood Cliffs, NJ: Prentice-Hall. Defond, M. L. and Park, C. W. (1999). The effects of competition on CEO turnover. Journal of Accounting and Economics, 27, 3556. Denis, D. J. and Denis, D. K. (1995). Performance changes following top management dismissals. Journal of Finance, 50, 102958. Economist (2004). Special report: Non-executive directors. Economist, 370, 28 March, 757. Ensley, M. D. and Pearce, C. L. (2001). Shared cognition in top management teams: implications for new venture performance. Journal of Organizational Behavior, 22, 14560. Fischer, A. B. and Ellis, D. G. (1990). Small Group Decision-Making. New York: McGraw-Hill. Forbes, D. and Milliken, F. (1999). Cognition and corporate governance: understanding boards of directors as strategic decision-making groups. Academy of Management Review, 24, 489505. Ford, J. D. (1985). The effects of causal attributions on decision makers responses to performance downturns. Academy of Management Review, 10, 77086. Ford, J. D. and Baucus, D. A. (1987). Organizational adaptation to performance downturns: an interpretation-based perspective. Academy of Management Review, 12, 36680. Fredrickson, J., Hambrick, D. and Baumrin S. (1988). A model of CEO dismissal. The Academy of Management Review, 13, 25570. Furtado, E. and Karan, V. (1990). Causes, consequences and shareholder wealth effects of manage- ment turnover: a review of the empirical evidence. Financial Management, 19, Summer, 6075. Gibson, C. B. (2001). From knowledge accumulation to accommodation: cycles of collective cogni- tions in work groups. Journal of Organizational Behavior, 22, 12134. Gioia, D. A. and Chittipeddi, K. (1991). Sensemaking and sensegiving in strategic change initiation. Strategic Management Journal, 12, 43348. Glick, W. H., Huber, G. P., Miller, C. C., Doty, D. H. and Sutcliffe, K. M. (1990). Studying changes in organizational design and effectiveness: retrospective event histories and periodic assess- ments. Organization Science, 1, 293312. Greve, H. R. (1998). Performance, aspirations, and risky organizational change. Administrative Science Quarterly, 43, 5886. Grinyer, P. and McKiernan, P. (1990). Generating major change in stagnating companies. Strategic Management Journal, 11, 13147. Heider, F. (1958). The Psychology of Interpersonal Relations. New York: Wiley. J. Haleblian and N. Rajagopalan 1024 Blackwell Publishing Ltd 2006 Hermalin, B. and Weisbach, M. (1998). Endogenously chosen boards of directors and their moni- toring of the CEO. American Economic Review, 88, 92118. Hodgkinson, G. P. (1992). Development and validation of the strategic locus of control scale. Strategic Management Journal, 13, 31117. Hume, D. (1739). A Treatise of Human Nature. London: Clarendon. Huson, M. R., Parrino, R. and Starks, L. T. (2001). Internal monitoring mechanisms and CEO turnover: a long-term perspective. Journal of Finance, 56, 226597. Jensen M. C. and Murphy, K. J. (1990). Performance pay and top-management incentives. Journal of Political Economy, 98, 22564. Kelly, G. A. (1955). The Psychology of Personal Constructs. New York: W. W. Norton. Knight, D., Pearce, C. L., Smith, K. G., Olian, J. D., Sims, H. P., Smith, K. A. and Flood, P. (1999). Top management team diversity, group process, and strategic consensus. Strategic Management Journal, 20, 44565. Kosnik, R. D. (1990). Effects of board demography and directors incentives on corporate greenmail decisions. Academy of Management Journal, 33, 12950. Lant, T. K., Milliken, F. J. and Batra, B. (1992). The role of managerial learning and interpretation in strategic persistence and reorientation: an empirical exploration. Strategic Management Journal, 13, 585608. Lewin, K. (1936). Principles of Topological Psychology. New York: McGraw-Hill. Lorsch, J. (1995). Empowering the board. Harvard Business Review, 73, JanuaryFebruary, 10717. Lorsch, J. and MacIver, E. (1989). Pawns or Potentates: The Reality of Americas Corporate Boards. Boston, MA: Harvard Business School Press. March, J. G. (1988). Variable risk preferences and adaptive aspirations. Journal of Economic Behavior and Organizations, 9, 524. McCormick, M. and Martinko, M. (2004). Identifying leader social cognitions: integrating the causal reasoning perspective into social cognitive theory. Journal of Leadership and Organization Studies, 10, 211. Mezulis, L., Abramson, J., Hyde, B. and Hankin, L. (2004). Is there a universal positivity bias in attributions? A meta-analytic review of individual, developmental, and cultural differences in the self-serving attributional bias?. Psychological Bulletin, 130, 71123. Nystrom, P. and Starbuck, W. (1984). To avoid organizational crises, unlearn. Organizational Dynam- ics, 12, 5365. Peng, M. W. (2004). Outside directors and rm performance during organizational transitions. Strategic Management Journal, 25, 45370. Puffer, S. M. and Weintrop, J. (1991). Corporate performance: the role of performance expecta- tions. Administrative Science Quarterly, 36, 119. Rhoades, S. (1985). Power, Empire-Building, and Mergers. Lexington, MA: Heath. Rindova, V. (1999). What corporate boards have to do with strategy: a cognitive perspective. Journal of Management Studies, 36, 95375. Roll, R. (1986). The hubris hypothesis of corporate takeovers. Journal of Business, 59, 197216. Rotter, J. B. (1971). External control and internal control. Psychology Today, 5, 3742. Ryan, H. and Wiggins, R. (2004). Who is in whose pocket? Director compensation, board indepen- dence, and barriers to effective monitoring. Journal of Financial Economics, 73, 497520. Seligman, M. (1990). Learned Optimism. New York: Knopf. Shivdasani, A. and Yermack, D. (1999). CEO involvement in the selection of new board members: an empirical analysis. Journal of Finance, 54, 182953. Tsang, E. (2002). Self-serving attributions in corporate annual reports: a replicated study. Journal of Management Studies, 39, 5171. Useem, M. (2003). Corporate governance is directors making decisions: reforming the outward foundations for inside decision making. Journal of Management and Governance, 7, 24157. Vafeas, N. (2003). Length of board tenure and outside director independence. Journal of Business Finance and Accounting, 30, 104365. Van de Ven, A. H. and Poole, M. S. (1990). Methods for studying innovation development in the Minnesota Innovation Research Program. Organization Science, 1, 31325. Wade, J., OReilly, C. and Chandratat, I. (1990). Golden parachutes: CEOs and the exercise of social inuence. Administrative Science Quarterly, 35, 587603. Wagner, J. A. and Gooding, R. Z. (1997). Equivocal information and attribution: an investigation of patterns of managerial sensemaking. Strategic Management Journal, 18, 27586. A Model of CEO Dismissal 1025 Blackwell Publishing Ltd 2006 Walsh, J. P. (1995). Managerial and organizational cognition: notes from a trip down memory lane. Organization Science, 6, 280321. Warner, J. B., Watts, R. and Wruck, K. (1988). Stock prices, event prediction and event studies: an examination of top management changes. Journal of Financial Economics, 20, 46192. Weiner, B. (1986). An Attributional Theory of Motivation and Emotion. New York: Springer-Verlag. Weisbach, A. (1988). Outside directors and CEO turnover. Journal of Financial Economics, 20, 43160. Westphal, J. (1998). Board games: how CEOs adapt to increases in structural board independence from management. Administrative Science Quarterly, 43, 51138. Westphal, J. and Fredrickson, J. (2001). Who directs strategic change? Director experience, the selection of new CEOs, and change in corporate strategy. Strategic Management Journal, 22, 111327. Wiersema, M. (2002). Holes at the top: why CEO rings backre. Harvard Business Review, 80, December, 707. Winter, R. (1977). State law, shareholder protection, and the theory of the corporation. Journal of Legal Studies, 6, 25192. Wood, R. E. and Bandura, A. (1989). Social cognitive theory of organizational management. Academy of Management Review, 14, 36184. Worrell, D. L., Davidson, W. N. and Glascock, J. L. (1993). Stockholder reactions to departures and appointments of key executives attributable to rings. Academy of Management Journal, 36, 387 401. J. Haleblian and N. Rajagopalan 1026 Blackwell Publishing Ltd 2006