When Will My Boss Step Down: Tenure Rules in Top Executive Change in Japanese Firms

Abstract

This paper is an empirical study of timing rules in the change of chief executive officers (CEO, or shacho in Japanese) in large Japanese firms. Organizational rules on CEO’s tenure provide an important mechanism for limiting the power of CEO. By identifying three types of tenure rules—unit term rule, tenure limit rule, and retirement age rule, I discuss the enabling role of tenure rules in CEO change process. In addition, I suggest tenure milestone set by predecessor’s tenure as a key concept in understanding the role of tenure rules in CEO change process. A CEO’s life cycle could be divided into three distinctive periods based on tenure milestone—before the milestone, milestone, and over-the milestone—presenting different mandates for the incumbent CEO. Specifically, I hypothesize that (1) CEO succession is more likely during the tenure milestone period; (2) the effect of performance is different across three periods; and (3) organizational and political factors moderates the tenure milestone effect on CEO change. I test the hypotheses in the sample of 200 largest industrial companies in Japan over the period of 1955-1995 using the event history analysis. The empirical results show that hazard rate is higher during the tenure milestone period and that the negative effect of performance is stronger in the over-the-milestone period than in the other two periods. Finally, organizational and political factors, such as the existence of large internal talent pool and the subunit rivalry resulting from merger, also facilitate CEO change during the tenure milestone period.