Do employees' views matter in corporate governance? The relationship between employee approval and CEO dismissal

Abstract Research Summary As important stakeholders of a firm, employees are critical to firm success because they are directly engaged in strategy implementation. Accordingly, we theorize that employees' views can impact assessment of the CEO by the board of directors beyond firm financial performance and security analysts' recommendations. Specifically, we hypothesize that employee approval of a CEO's leadership is predictive of the board's CEO dismissal decision, particularly when there is relatively higher firm financial performance, more positive security analyst recommendations, and lower CEO power. Using longitudinal data from 338 firms and 1,252 firm‐year observations between 2010 and 2018, we found empirical support for the above predictions. Our theory and supportive findings have important implications for research and practice regarding employee engagement, strategic leadership, and corporate governance. Managerial Summary Because employees are important stakeholders of a firm and critical to its success, we argue that their views about the CEO can impact how the board of directors evaluates the CEO beyond firm financial performance and security analysts' recommendations. Our results show that higher employee approval of CEO leadership (measured by data collected from Glassdoor.com over multiple years) negatively predicts CEO dismissal, particularly when the firm performs better financially, gets more positive recommendations from security analysts, and the CEO has less power relative to the board. These findings suggest that employees' views do matter in the retention or dismissal of the CEO, and that CEOs should be mindful of how their employees view their leadership and the strategies they are promoting at their firms.