CEO dismissals are often shrouded in secrecy, controversy, and confusion. And while a company’s profits constitute a fundamental measure of CEO success, poor financial performance can explain CEO firings only about half the time. A new study in the Global Strategy Journal finds that one of the reasons why has to do with how corporate boards attribute blame for a company’s underperformance. Interpretations can be subject to bias, and, the study shows that bias manifests as a three times greater chance of dismissal for immigrant CEOs during company underperformance.
Do Immigrant CEOs Face the Same Discrimination as Women and Racial Minorities?
In a word, no. Foreign-born CEOs currently manage several global corporations in the U.S., including Google, Microsoft, and Pepsi. In fact, almost 80% of America’s privately held, billion-dollar companies have an immigrant founder or immigrant in a top role such as CEO or CTO. Among Fortune 500 companies, representation for immigrants in C-suite positions mirrors the composition of the U.S. population. But representation in hiring is only one part of the diversity ladder.
The study, authored by Yannick Thams, an associate professor of management at Florida Atlantic University, and Marketa Rickley, an assistant professor of management at UNC Greensboro, found that foreign-born CEOs were more likely to be dismissed than native-born CEOs when their company performance was poor. In contrast, women and racial minorities in leadership positions have been found to face a constantly heightened risk of dismissal.
If CEOs are Getting Fired for Poor Performance, Where’s the Discrimination?
While poor company performance may seem like fertile ground for a CEO’s dismissal, boards are surprisingly inconsistent about resorting to firings. Poor financial performance alone does not immediately result in CEO dismissals. It results in the board making sense of the causes and interpreting where to place blame: either as outside the company’s control or a result of poor leadership.
To test how often the blame broke against immigrant CEOs, the authors used a sample of 1,739 CEO turnovers from the S&P 1500 from 2000 to 2018 and found 364 dismissals. Comparing the likelihood of those dismissals for foreign-born and native-born CEOs, the study found that at low levels of company performance foreign-born CEOs had a 15.96% probability of dismissal, compared to 4.02% for native-born CEOs.
That makes immigrant CEOs three times more likely to get fired than U.S. natives when their company is underperforming. The results held up against a dizzying array of controls for variables in industry, company, board composition, and CEO demographics.
Why Do Boards Discriminate Against Foreign-Born CEOs Only During Company Crises?
The authors speculate that board interpretation of poor financial performance leaves foreign-born CEOs vulnerable because of intergroup bias. Simply put, intergroup bias means people tend to claim the successes and explain away the failures of someone they identify as a member of their group. Outgroup members, by contrast, get disproportionately blamed for failure and discredited for success.
During times of crisis — i.e., when the ingroup feels threatened — intergroup bias intensifies. When the company faces tough times and everyone is looking for someone to blame, the board (who represent the ingroup) will subconsciously protect the people it identifies with, which often does not include immigrant CEOs.
It’s not just the CEOs who suffer from this discrimination. Losing a CEO amid financial downturn compounds the challenges companies are facing. Shareholders suffer too: One study estimated forced CEO turnover costs shareholders $112 billion globally in total returns each year. A corporate board’s primary mandate is avoiding these types of losses. To keep from unnecessarily firing a foreign-born CEO because of misplaced blame, boards will have to do more than acknowledge a possible bias. Performance standards or AI-assisted objectivity might be the safest route to save their company millions.