Elections and CEO successions in Brazilian state-owned companies.
| Autor | Guimaraes, Sergio Foldes |
1 Introduction
This study investigates how elections and executive turnover affects state-owned enterprises (SOEs), an important part of the Brazilian economy. In the past two decades, discussions about the governance and strategic importance of these companies have been in the headlines, swinging between those who desire privatization and defendants of a greater role of SOEs in the economy. Concerns about governance in SOEs has been a theme of political discussions and debate in Brazilian society, as they have often been involved in corruption scandals and faced management and governance problems caused by political interference.
Recent changes in the law try to minimize these problems but the real impacts are yet to be seen. However, initial tests provide evidence that political interference may not have finished. A recent case of CEO (Chief Executive Officer) succession in the most important Brazilian SOE (Petrobras) shows that political interference can still have an impact on markets and be a determinant of executive turnover in SOEs.
CEO succession has been a key theme for researchers but not specifically regarding SOEs, despite their presence being relevant in several economies. We posit that successions in SOEs are linked to political and electoral processes, with executive turnover in SOEs being greater than in private companies, making succession and governance processes in SOEs unique.
In general, there is a downward trend in CEO tenures, which Charan (2005) calls the "CEO crisis," this being more dramatic in companies without successors ready to take the helm. Shorter CEO tenures provoke corporate instability and market uncertainty, which may harm a company's image and affect all stakeholders. It is in this context that succession matters more than ever.
A recent survey (http://reports.weforum.org/outlook-global-agenda-2015/top-10- trends-of-2015/3-lack-of-leadership, retrieved on September 20th, 2019) mentions lack of leadership as being a global trend, as 86% of the respondents think there is a leadership crisis. Brazil has one of the lowest rates of confidence regarding leadership.
In democracies, politicians must face elections every few years and in companies, CEOs must be confirmed by shareholders and boards and are threatened by the possibility of being ousted. In fact, as well as during the election or general assembly period, there is always the chance of an unexpected turnover.
CEOs of listed SOEs are often seen as executives and politicians, as they are appointed by governments and are subject to double pressure, from the government and market participants.
The political praxis in Brazil, now unveiled by "Operation Car Wash," has been to let different political parties forming a coalition appoint individuals to top positions in Brazilian SOEs. This often leads to corruption scandals. The President of Brazil, as the head of the executive power, can appoint 22,500 people to public positions, far more than the 4,000 in the US, 300 in the UK, and 500 in France and Germany, according to Claudio Abramo, from the nongovernmental organization Transparencia Brasil.
Brazilian SOEs are historically among the most important listed companies on the B3 (the Brazilian stock exchange). This paper will focus on succession processes at the SOEs in Brazil listed on the B3 and forming part of the IBOVESPA benchmark index: Banco do Brasil (BB), Eletrobras, and Petrobras.
We will analyze, through a longitudinal study spanning more than two decades, the impact of elections and successions on the market value of those companies. During this time span, at least once, all three companies had losses attributed to mismanagement and political use to promote unsustainable policies favored by different governments.
Thus, analyzing SOE performance linked to CEO appointments is relevant for understanding how perceptions of political influence drive market reactions.
Brogaard and Detzel (2015) showed how uncertainty related to government economic policies affects the decision-making processes of investors and companies in general, and how it is an important risk factor. Election periods are prone to increased uncertainty and the outcomes of polarized elections can have dramatic impacts on markets. Bialkowski, Gottschalk, and Wisniewski (2006) highlighted that elections processes in 27 OECD countries do promote market volatility.
Besides market volatility and uncertainty related to government economic policies, elections affect SOEs directly, as changes in top management are dependent on the political process, potentially affecting their strategy.
Several conflicts of interest may arise in SOEs, which are seen as hybrid organizations (Bruton, Peng, Ahlstrom, Stan, & Xu, 2014), as they play additional roles given by government, while shareholders complain that management does not seek value maximization. Carvalho (2014) shows how governments can shape public policies and use SOEs to implement them, favoring political allies in elections.
The relationship between succession and performance in SOEs presents additional challenges, as the life cycle of main executives is subject to the political cycle, where changes in the balance of power in government affect the top management of those companies. Thus, the relevance of succession in SOEs is paramount but not fully understood.
Management turnover and CEO succession in SOEs is different from in their private counterparts and linked to the political process. To gather evidence of this phenomenon, we investigated yearly changes in management in official documents filed at the CVM, paying special attention to changes after election years.
By analyzing those changes in top management disclosed in official documents, we found that CEO turnover in SOEs is greater than in private companies and can be linked to the political cycle, which makes it important to analyze the impacts of elections and CEO turnover on market performance.
After the recent corruption scandals involving SOEs such as Eletrobras and Petrobras and several private groups in Brazil, linked with corruption among politically appointed executives, Congress approved law 13,303/2016, strengthening governance requirements, improving transparency, disclosure, risk management, and compliance aspects in SOEs, and giving special attention to executive and board member appointment processes. The law is quite recent but is already being questioned by congressmen that want to soften its requirements.
Event studies on political events (presidential elections and impeachment processes) and CEO successions in SOEs show that, in several cases, the SOE's market performance was affected and there is evidence of abnormal returns (AR) on the day of the event or cumulative abnormal returns (CAR) around the day of the event.
To the best of our knowledge, this is the first study to combine an analysis of changes in top management in documents filed by companies at the CVM with quantitative results from short-horizon event studies, providing a unique insight into phenomena that should be studied more: the impacts of CEO succession and political processes on market prices.
The structure of this paper proceeds along the following lines: Section 2 provides a literature review on succession, in Section 3 we present the data and methodology, Section 4 discusses the results, and Section 5 concludes the paper.
2 Literature Review
Research on CEO succession has attracted many scholars, looking at succession events through different lenses: human resources, planning, strategy, leadership, and finance. The antecedents and consequences of succession, including firm and CEO characteristics, were reviewed by Giambatista, Rowe, and Riaz (2005).
The research also seeks to identify the key ingredients for success in successions and the role of executives in leading companies and driving firm performance. A key variable is the origin of the newly appointed CEO, as insiders (working within the company) and outsiders may face different difficulties but can bring different contributions to the firm.
The relationship between CEO origin and firm performance is one of the most important streams of research. Zhang and Rajagopalan (2010) look at succession processes, focusing on how firm performance and changes in strategy vary according to CEO origin. Jalal and Prezas (2012) examine outsider CEO succession and its relationship with firm performance, finding that insider succession provides better immediate results, but outsiders display better stock performance in later years. Ferris, Jayeraman, and Jongha (2015) summarize sixty years of research on the origin of successors and capital allocation decisions regarding dividends, M&A, and investments.
The industry is another important variable when studying CEO succession processes. Industry-related aspects of succession were analyzed by Datta and Rajagopalan (1998). Often, the definition of insider has incorporated industry-specific as well as company-specific knowledge.
Berns and Klarner (2017) published a comprehensive literature review on CEO succession, trying to understand successions in companies as complex processes rather than isolated events when companies have succession planning.
CEO turnover may happen for different reasons. It can be voluntary or forced, planned or unexpected, with different consequences for companies. How each process unfolds may depend on case-specific agency problems between executives and shareholders, according to Jensen and Meckling's (1976) theory of the firm, making it important to understand how shareholders monitor and control companies.
Guo and Masulis (2015) provide evidence of how differences in board structure and monitoring have an impact on CEO turnover. Greater board independence leads to more rigorous CEO monitoring.
The relationship between CEO succession and firm performance has been studied by many scholars. Jenter and Kanaan (2015) showed that CEOs...
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