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Olga Lazareva and Sergey Solntsev Department of Economics, HSE CEO Turnover and Firm Performance in Russia

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Research question Agency problem in large firms: how to motivate CEO to act in the interests of shareholders? Tying CEOs remuneration to the firm performance Threat of firing in case of poor performance Is there a link between firm performance and CEO turnover in large Russian firms during 2003-2012? How did the turnover and turnover-performance sensitivity change during the crisis of 2008-2009 for the different types of firms (in particular, state-connected) and different types of managers (insiders-outsiders)? We report preliminary results (work in progress)!

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Our contribution We study of CEO turnover for the sample of the largest firms, and We cover a long period including crisis of 2008-2009 We compare the performance-turnover relationship for the strategic (state-connected/state-supported) vs. non- strategic firms, before and after the crisis We compare the performance-turnover relationship for inside vs. outside CEOs

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CEO turnover sensitivity to the firm performance Kaplan and Minton 2012: Increased CEO turnover in large US firms (Fortune 500) over 2000s compared to previous years Increased sensitivity of turnover to firm stock performance relative to industry or stock market Factors: growing block holdings and board independence Denis and McConnell (2003), Gibson (2003), and Kato and Long (2006) Gilson (1990) recorded the significant rise of senior managers resignation in companies undergoing bankruptcy. Karlsson and Neilson (2009) stated that little has changed in CEO labor market during the 2008; moreover, in North America and Europe, the CEO turnover rate has decreased

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CEO turnover in politically connected firms Kato and Long 2006 find weaker turnover-performance sensitivity and slower improvement in performance following the turnover for state-controlled firms in China Yuan 2011 politically connected CEOs in China have lower sensitivity of their turnover to firm performance Goldman 2009 politically connected boards of directors positively affect firm value in US Iwasaki and Frye 2011 government directors on the boards of Russian firms are present in collusion type firms which extract and provide benefits to state

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CEO turnover research in Russia Rachinsky (2002) examined senior managers turnover from 1997 to 2001 Muravyev (2003) presented negative correlation between firms productivity and CEOs replacement probability in late 1990ies for the sample of industrial firms Dyomina and Kapelyushnikov (2005) analyzed a sample of industrial firms in 1997-2003: poor firm performance increases the probability of CEO turnover Abe and Iwasaki in Dolgopyatova, Iwasaki and Yakovlev (2009): nonpayment of dividents increases probability of CEO turnover for the sample of firms surveyed in 2005 Solntsev 2013, Roshchin and Solntsev 2006: study top management transitions in Russian firms over 2000s

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Economic crisis of 2008-2009 Russian GDP fell by 7.8% in 2009 Companies turned from expansion to crisis management, thereby changing the demand for the skills of senior managers Simachev et al 2009, Danilov, Simachev and Yakovlev 2010: major state support during crisis was targeted at large industrial firms and sectors with large employment (automobiles and agricultural machinery, oil and gas sector, the military-industrial complex) Major tools of support providing access to financing (subsidies and guarantees on loans etc.) and tax reductions Golikova et al. (2011): Russian mid-sized companies coped with the economic recession better than large-sized ones

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Systemic/strategic firms during crisis ( / ) In December 2008 government approved a list of 295 firms (few more added later) These firms could expect to receive government support during the crisis (credit guarantees, interest rate subsidies, restructured tax debts, public procurements, preferential export and import tariffs). The criteria for inclusion in this list: annual sales of over RRB15 billion (around USD500 million) and a workforce of no less than 4000 employees); also, firms on the list were required to have the status of enterprises forming company towns and a certain level of tax payments. Selective measures to help large and very large corporations intensified lobbying efforts

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Data sources Sample - 355 firms from Expert-400 rating, which includes largest Russian firms based on sales volume in 2012 97 of them are strategic Panel data for 2003-2012 Data on CEOs Spark database (provides information starting from late 1990ies) and other available sources (company websites, annual reports etc.) (collected in HSE Laboratory for Labor Market Studies) Financial and ownership data Ruslana (Bureau Van Dijk) Ownership: 17% of firms are majority state controlled, 19% are foreign-owned (mostly MNCs) Out of 97 strategic firms only 23 are state-controlled No data on boards of directors (yet)

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Sector composition of the sample

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CEO turnover rate by year

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CEO turnover rate by sector

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CEO turnover rate (excl. electroenergy firms)

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CEO characteristics by year YearCEO ageCEO tenureFemaleForeignerInsider 2003 45,93,84%13%48% 2004 45,73,63%14%46% 2005 46,03,82%14%47% 2006 46,74,02%14%46% 2007 47,14,12%15%44% 2008 47,94,12%15%42% 2009 48,24,13%16%44% 2010 48,64,34%16%43% 2011 48,74,43%15%45% 2012 49,34,73%17%43% Among US S&P500 firms in 1990s 26% of new CEO hires are outsiders, in 2000- 2005 32,7% (Murphy, Zabojnik 2008).

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Average tenure of an outgoing CEO

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CEO characteristics by sector SectorCEO age CEO tenureFemaleForeignerInsider Electroenergy 47,92,30%3%28% Oil, gas, coal, metals 49,15,00%4%47% Chemicals and machine building 50,93,04%17%45% Food and agriculture 43,92,74%26%43% Construction, transport, communications 50,45,55%2%46% Trade and catering 42,13,83%37%56% Finance 44,95,14%10%41% IT and science 49,27,92%1%35% Other 47,62,40% 53%

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Previous experience Year Experience in the same sectorExperience as CEOExperience as state official 200392,1%75,3%26,7% 200492,9%76,9%25,4% 200592,5%75,3%27,0% 200692,8%73,7%25,9% 200793,2%74,6%26,0% 200894,6%76,1%27,6% 200995,6%77,4%27,7% 201095,3%75,2%27,9% 201195,0%75,3%27,4% 201294,6%76,5%26,6%

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Previous position

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International comparisons In our sample: Average tenure 2003-2012 4.1 Average completed tenure (upon leaving) 3.2 Average turnover rate 17.9%, before crisis 16,4% During 1990ies from 7 to 12%, tenure 8-9 years (according to earlier studies) Average tenure in large US firm (Kaplan and Minton 2012): for 1992-1999 average turnover rate 14,9%; for 2000-2007 average turnover rate 16,8% In China: 24% annual turnover (period 1998-2002) (Kato and Long 2006)

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Methodology T t =ROA t-1 + S-list + ROA t-1 * S-list +X t-1 + e T t indicator of turnover in year t S-list indicator of the firm in strategic list Firm performance measure ROA, i.e. return on assets (profit to assets), winsorized at 2%, absolute or relative to industry average; additionally, sales growth, change in ROA Controls: CEO age, gender, tenure, log assets, sector, ownership (majority state owned, foreign controlled), year We exclude electrical energy sector firms (turnover there is related to the sector reform)

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Results: the effect of performance on turnover (strategic) (1)(2)(3)(4)(5) Before 20092009-10 ROA( t-1) -0.339***-0.356***-0.399***-0.230*-0.356 (0.117)(0.104)(0.133)(0.126)(0.221) Strategic -0.044*-0.027-0.045*0.016-0.113** (0.025)(0.029)(0.024)(0.032)(0.046) Strategic*ROA -0.026 -0.2830.372 (0.255) (0.281)(0.493) Crisis 0.058**0.046** (0.027)(0.023) Strateg*Crisis -0.043 (0.035) Crisis*ROA 0.126 (0.211) N 1024 536314 pseudo R 2 0.0720.0660.0650.1150.075

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Results: the effect of performance on turnover (insider) (1)(2)(3)(4) All years 2003-82009-10 Insider -0.0070.0020.030-0.085** (0.022) (0.021)(0.039) ROA t-1 -0.321***-0.558***-0.462***-0.391 (0.102)(0.138)(0.125)(0.271) Insider*ROA 0.546***0.530***0.213 (0.200)(0.187)(0.402) N 855 432268 pseudo R 2 0.0610.0700.1480.084

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Results: the effect of turnover on subsequent performance (1)(2)(3)(4)(5)(6) Sales growth t+1 ROA growth t+1 Sales growth t+1 ROA growth t+1 Sales growth t+1 ROA growth t+1 All years20092010 CEO change 0.458***0.0070.582**0.041**0.2240.018 (0.126)(0.008)(0.276)(0.018)(0.229)(0.012) Strateg -0.002-0.008-0.2190.009-0.112-0.027* (0.103)(0.008)(0.267)(0.014)(0.208)(0.014) Log assets -0.229***0.002-0.127*0.002-0.1120.006 (0.035)(0.002)(0.076)(0.005)(0.104)(0.004) N 17461518252259262266

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Preliminary conclusions CEO turnover rates in large Russian firms are similar to large US firms Turnover has increased during the crisis by 50% CEO turnover in Russian firms does increase in response to the poor financial performance Firms that were promised state support during the crisis replaced their CEOs less often (controlling for state ownership) but performance- turnover sensitivity is the same Insider CEOs had lower performance-turnover sensitivity before crisis and lower turnover during crisis Firms that replaced CEOs during the crisis (in 2009) have experienced faster recovery