Corporate governance: Employees’ views matter

As sociopolitical change reshapes the corporate landscape, businesses are paying more attention to their employees.

While employee opinions are gaining greater importance in the corporate world, they have not been specifically considered when weighing in on their CEOs’ performance.

W. P. Carey Professor and Chair of Management and Entrepreneurship Wei Shen thinks that those times are changing — especially with social media platforms, such as glassdoor.com and comparably.com, that allow current and former employees to share information about their employers anonymously.

Shen, along with Danni Wang (PhD Organizational Behavior '16), Qi Zhu (PhD Strategic Management '19), Bruce Avolio of the University of Washington, and W. P. Carey Professor of Management and Dean’s Council Distinguished Scholar David Waldman, wanted to understand just how great an impact employee evaluations might have in corporate governance — what influence might employees have on boards’ decisions to terminate a CEO?

“We think employees may become quite important for the board to consider,” says Shen. “The relationship between employee evaluation and CEO dismissal seems stronger in recent years than in the past.”

In their paper, “Do Employees’ Views Matter in Corporate Governance? The Relationship between Employee Approval and CEO Dismissal,” Shen, Waldman, and their research team analyzed 338 firms through glassdoor.com surveys and focused on those businesses receiving 60 or more annual evaluations from 2010 to 2018.

Indicators of CEO success

Given that CEOs are ultimately responsible for their company’s financial performance, boards historically have relied on operational and stock market performance when deciding to retain or dismiss a CEO.

They’ve also paid close attention to security analyst recommendations. Because analysts are widely recognized as qualified external assessment experts, their opinions often significantly impact investors’ decisions; harmful recommendations and pessimistic performance forecasts usually set off alarm bells to investors that could affect the company’s stock prices.

“If the firm’s financial performance is poor and the board is under pressure from investors, they will likely decide to dismiss a CEO,” says Shen.

CEO assessment pitfalls

The problem with boards evaluating a CEO based solely on firm financial performance is that those numbers don’t necessarily reflect leadership abilities. Macroeconomic conditions and industry trends over which the CEO has no control may also negatively affect a firm’s bottom line.

What’s more, analysts may develop lopsided relationships with firm leaders. As they attempt to gather firm-specific information for analysis, they interact with senior executives and the CEO, developing favorable relationships that might impact objectivity. Additionally, research indicates that security analysts provide more favorable recommendations if the firm that they’re assessing is their employer's client.

Then there is the board’s direct interaction with the CEO. When CEOs have significant ownership in a firm or hold a board chair position, they substantially influence the board’s decisions, including termination decisions.

This is where employees enter the picture. Shen, Waldman, and their team proposed that employees can serve as a valuable additional source of information to a board’s assessment of the CEO’s leadership.

New assessment tool: Employee evaluations

“Because employees implement the CEO’s strategies and are the common insiders, they have beneficial insight,” says Shen. His team theorized and confirmed with its analytical models that positive employee evaluations of CEOs would have a more significant impact when firms were financially performing well, when analyst recommendations were positive, and when CEOs had less executive power.

When firm financial performance is poor and analyst recommendations are harmful, employee approval of the CEO is not likely to impact the board’s decision. “In that context, the CEO is already at high risk for dismissal,” explains Shen. Conversely, suppose a firm performs relatively well, and investors do not pressure the board to make a leadership change. In that case, they are more likely to consider employee approval in assessing the CEO’s leadership, which can guide future firm performance.

“Likewise, if the CEO is especially powerful,” adds Waldman, “employee evaluations will not matter as much because the CEO will already have a captive board.”

The future of corporate governance

“Employees have collective power when they voice their opinions — through social media or even letting their leaders know what they think of company strategy and performance,” says Shen. “Our research shows that employee approval of CEO leadership is predictive of CEO dismissal.”

That means that corporate leaders might be well-advised to consider employee feedback, since such insider insight can substantially affect whether their boards retain or dismiss them.

“We hope that boards will continue to pay attention to this issue,” adds Waldman. “To further validate our study, future research can directly survey how exactly boards use employee evaluation information.”