Riding off into the Sunset: Organizational Sensegiving, Shareholder Sensemaking, and Reactions to CEO Retirement

• DOI: http://doi.org/10.1111/joms.12264
• Author: Jonathan L. Johnson,Joanna Tochman Campbell,Hansin Bilgili,Alan E. Ellstrand
• Published date: 01 November 2017
• Date: 01 November 2017

Riding off into the Sunset: Organizational Sensegiving,

Shareholder Sensemaking, and Reactions to CEO

Retirement

Hansin Bilgili, Joanna Tochman Campbell,

Alan E. Ellstrand and Jonathan L. Johnson

Kansas State University; University of Cincinnati; University of Arkansas; University of Arkansas

ABSTRACT We test hypotheses derived from resource dependence and sensemaking/

sensegiving theoretical lenses in the context of CEO succession, focusing on an under-

researched yet prevalent type of executive turnover – CEO retirement. Using event study

methodology and a sample of CEO retirements from S&P 1500 firms during the 2003–12

period, we find that, all else equal, shareholders’ perceptions of organizations’ capacity to

serve their interests are adversely affected when a retirement related change occurs in the

leadership structure. Specifically, in line with resource dependence theory, we find that CEO

retirement disclosures typically generate negative abnormal returns. Furthermore, in line with

the sensemaking perspective, we find that the magnitude of shareholders’ reactions is

contingent on the lexical sensegiving cues contained in the organizational narratives that are

released to capital markets via executive retirement announcements. Overall, our theory and

results point to CEO retirement events as consequential in the eyes of shareholders,

challenging an important assumption of extant succession research. Moreover, they suggest

that shareholders’ interpretation of these events is influenced by organizational sensegiving,

highlighting the important role of organizational communication around succession events.

Keywords: CEO, event study, retirement, resource dependence, sensemaking, sensegiving,

succession

INTRODUCTION

‘The surprise retirement announcement by Intel CEO Paul Otellini has caught Wall Street by sur-

prise. Otellini, who has spent nearly 40 years at the chip maker and took the CEO position in

2005, will step down as chief executive in May. Otellini is 62 years old. (...) Analysts say

Intel’s search for a successor could create another headwind for the stock price’. (Russolillo, 2012)

Address for reprints: Hansin Bilgili, College of Business Administration, Kansas State University, 3091

Business Building, 1301 Lovers Lane, Manhattan, KS 66506 (hbilgili@ksu.edu).

V

C2017 John Wiley & Sons Ltd and Society for the Advancement of Management Studies

Journal of Management Studies 54:7 November 2017

doi: 10.1111/joms.12264

‘One of the things that we often miss in succession planning is the fact that there really should be

something that’s gradual and thoughtful and with lots of sharing of information... so that it’s almost

a nonevent when it happens’ – Anne Mulcahy, former CEO of Xerox (White, 2009,para7)

At the crossroads of strategic management and organization theory, CEO succession

research investigates how succession affects organizational change and performance

(Beatty and Zajac, 1987; Goodstein and Boeker, 1991; Miller, 1993; Shen and Can-

nella, 2002). Three paradigms within this stream view succession as either an adaptive,

disruptive, or inconsequential event (Kesner and Sebora, 1994; Rowe et al., 2005). Suc-

cessions due to customary retirements have been generally presumed to fall within the

last category, in line with what Xerox experienced with merely an eight-cent drop in its

stock price around Anne Mulcachy’s retirement (White, 2009). Prior research either

implicitly or explicitly assumes that retirement announcements have a negligible effect

on stock performance, and executive retirements are typically excluded from empirical

analysis (e.g., Friedman and Singh, 1989; Puffer and Weintrop, 1991). Sixty-five has

long been considered the normative retirement age among CEOs (Goyal and Park,

2002). However, many executives today work past the age of 65 or exercise the option

of early retirement (Vough et al., 2016), making the exact timing of their retirement

uncertain (Spencer, 2006; Tonello, 2012). As such, CEO retirements often represent

surprises to the market, more so than forced successions examined by extant research,

which are usually precipitated by declining firm performance.

A contemporary example of an abrupt retirement is that of Rackspace CEO Lanham

Napier, which decreased the value of the company’s shares by 18 per cent (Bort, 2014).

In contrast, Intel’s CEO Paul Otellini’s retirement decision at age 62, three years before

the normative retirement age, resulted in a less than 1 per cent change in the company’

stock price, despite its unexpected nature (Clark and Lublin, 2012). These examples

highlight the heterogeneity in shareholder reactions to retirement announcements. In

this paper, we investigate the direction and the sources of variation in shareholder reac-

tions to CEO retirements using resource dependence theory (Pfeffer and Salancik,

1978) and drawing on organizational sensemaking

[1]

and sensegiving research (Gioia

and Chittipeddi, 1991; Weick, 1995).

Prior research suggests that, on the surface, CEO retirements represent a relatively

smooth exchange of titles (Vancil, 1987); as such, incumbent CEO retirement

announcements should attract a negligible shareholder reaction. Our research questions

whether the prediction of a negligible retirement effect is, in fact, valid. More impor-

tantly, what are the factors that explain the variance in shareholder reactions? Herein,

we seek to answer these questions and open up new research avenues in the established

literature on CEO succession. We empirically analyse the relationship between CEO

retirement announcements and shareholder reactions with event study methodology,

using a comprehensive dataset that compiles CEO retirement events from S&P 1500

firms during the 2003–12 period.

We document that capital markets react significantly to retirement announcements,

and that the magnitude and direction of this reaction is contingent on the organizational

sensegiving narratives contained in the retirement announcements. Sensegiving is

defined as ‘a process of attempting to influence the sensemaking and meaning

1020 H. Bilgili et al.

V

C2017 John Wiley & Sons Ltd and Society for the Advancement of Management Studies