Organizacija, letnik / volume 40 Razprave / Research papers številka / number 1, januar / january 2007 51 Introduction Th e separation of ownership and control is a phenomenon that can explain the incidence of CEO turnover. Due to the separation managers become the administrators of the shareholders’ wealth. In the process, both parties – managers and owners – want to maximise their interests, therefore expropriation of the CEO position is not rare. One powerful weapon in the hands of owners in this situation is the threat of CEO dismissal. Th erefore, relation between company performance and management turnover is expected to be inverse (Warner et. al, 1988; Weisbach, 1988; Jensen and Murphy, 1990; Marphy and Zimmerman, 1993; Denis and Denis, 1995; Lausten, 2000; Brunello et.al, 2000; Kaplan, 1994 a,b; Kiang and S h i v a d a s a n i , 1 9 9 5 ; R e n n e b o o g , 2 0 0 0 e t c . ) . I n o r d e r t o practice this threat an owner can use diff erent corporate governance mechanisms. One of the internal corporate governance mechanisms that can be used are ownership structure, concentration and change. Denis et al. (1997) believed that the possibility of executive managers’ turnover is positively related to the presence of external owners. On the contrary, Jensen (1993) claimed that managerial shareholding helps align the interests of shareholders and managers (principals and agents). Berle and Means (1932) claimed that controlling block holders are more effi cient monitors of a company’s performance than a large number of shareholders. So, the probability of turnover in poorly performing companies in the case of concentrated ownership is higher and opposite. An ownership change is usually connected with management turnover. In these cases, there is a higher probability that the management turnover is not connected with the poor performance of the company but is instead caused by an ownership change (hostile or friendly takeover). Empirical researches (Holderness and Sheeham, 1985; Barclay and Holderness, 1991) have shown that the probability of management turnover is higher aft er a company has been taken over by a new owner. Research results on the sample of Slovenian companies showed that external owners (funds and other companies) are not better principals than insider owners (employees and managers). Further, ownership concentration is not identifi ed as an effi cient corporate governance mechanism. Th erefore, concentration does not improve the effi ciency of monitoring control. Opposite ownership change is an effi cient corporate governance mechanism used for disciplining poorly performing managers. Influence of the Company Performance and Ownership Structure on CEO Turnover: the Evidence of Slovenia Ljubica Knežević Cvelbar Faculty of Economics, University of Ljubljana, Kardeljeva ploščad 17, 1000 Ljubljana, Slovenia, ljubica.knezevic@ef.uni-lj.si The goal of the article is to research relation between CEO turnover, company performance ownership structure concentration and change. The empirical evidence presented in the article is based on the sample of 21 1 Slovenian companies in period 1998-2002. As expected the relation between CEO turnover and company performance is inverse. Ownership concentration is not an efficient corporate governance mechanism. Opposite change in the ownership structure influence on the management turnover in the poorly performing companies. Key words: CEO turnover, ownership structure, ownership concentration, ownership change corporate governance, agency theory Vpliv poslovanja podjetij in lastniške strukture na zamenjavo predsednika uprave: Primer Slovenije Cilj članka je raziskati relacijo med zamenjavo predsednika uprave in uspešnostjo poslovanja podjetij, lastniško strukturo, ko ncentracijo lastništva ter zamenjavo lastništva. Za empirično testiranje hipotez je bil uporabljen vzorec od 21 1 slovenskih podjetij v obdo bju 1998-2002. Kot pričakovano rezultati so pokazali, da je relacija med zamenjavo predsednika uprave in poslovanjem podjetij inver zna. Koncentracija lastništva ni učinkovit mehanizem vladanja podjetjem. Nasprotno zamenjava lastniške strukture vpliva na zamenjavo predsednikov uprav v podjetjih, ki slabo poslujejo. Ključne besede: zamenjava predsednika uprave, lastniška struktura, koncentracija lastništva, zamenjava lastništva, vladanje podjetjem, teorija agenta 6 Th e rest of the paper proceeds as follows. Th e next section briefl y describes empirical evidence on turnover performance relation, followed by the fi ndings and conclusions of the existing literature regarding the infl uence of the ownership structure, concentration and change on CEO turnover. Infl uence of management and company characteristics on management turnover is presented in section four. Data and methodology used are described in the section fi ft h. Th e sixth section is dedicated to the description of ownership structure and its change in Slovenia and CEO characteristics and turnover rates. Th e results of the probit regression model researching the infl uence of the ownership structure, concentration and change on management turnover are presented in the section seventh. Discussion on policy implications and conclusions are presented in the section eight. 2 Performance-turnover relation Th e sensitivity of top management turnover to fi rm performance is usually interpreted as an indication that the shareholders hold the CEO responsible for poor corporate performance and that they dismiss an underperforming CEO in order to increase the corporate value. It is commonly reported in the empirical studies that a poor corporate performance is associated with CEO turnover. Most of the empirical evidence in developed countries on turnover-performance confi rms inverse relation between two variables, meaning that shareholders are replacing poor performing managers (Warner et. al, 1988; Weisbach, 1988; Jensen and Murphy, 1990; Marphy and Zimmerman, 1993; Denis and Denis, 1995; Lausten, 2000; Brunello et.al, 2000; Kaplan, 1994 a,b; Kiang and Shivadasani, 1995; Renneboog, 2000 etc.). Empirical evidence in transition countries is scarce. Few studies research the turnover – performance relation and confi r m t h a t r e l a t i o n i s n e g a t i v e . G i b s o n ( 2 0 0 3 ) empirically examines the link between management turnover and fi rm performance in eight emerging markets and concludes that there is a signifi cant negative relationship between management turnover and companies performance. Aivazian et al. (2005) reported an inverse relationship between management turnover and companies’ performance on a sample of incorporated Chinese SOEs (state-owned enterprises). For a sample of Russian companies, REB Monitoring (2003) found that the replacement of top executives is more likely to occur in poorly performing companies. Eriksson (2005) a l s o p r o v i d e d e v i d e n c e o n m a n a g e m e n t t u r n o v e r i n t h e Czech and Slovak Republics. He found a signifi cant and negative relationship between management turnover and companies’ performance levels. Frydman, Hessel and Rapaczynski (2000) claim that management turnover among Czech, Hungarian and Polish companies aff ected with the company revenue growth. Th e companies in which new managers were appointed had higher g r o w t h r a t e s . F i d e r m u c a n d F i d e r m u c ( 2 0 0 6 ) a n a l y z e d management replacement aft er the privatization in Czech Republic. Authors showed that company performance improved aft er appointing the new manager. On a sample of large Ukrainian companies, Warzynski (2001) found that management turnover did not eff ect a change in productivity in state-owned enterprises but had a small and positive eff ect in privatised companies. 3 Ownership characteristics as a corporate governance mechanism controlling management turnover Th ree ownership characteristics infl uence on CEO turnover: ownership identity, ownership concentration and ownership change. Th eoretical and empirical evidence researching relation between ownership identity and CEO turnover mainly focus on the proportion of insiders and outsiders owners. Concerning Jensen’s hypothesis on the convergence of interest, managerial shareholding helps align the interests of shareholders and managers (principals and agents). With regard to this hypothesis, as the proportion of managerial equity grows the company’s performance improves as well (Jensen, 1993). De Angelo and De Angelo (1985) a lso fou nd t hat it is reasonable for ow ners to mot ivate the managers to invest in the company and share their faith with other company shareholders. On the other side, managerial ownership lowers the probability of replacing management which becomes a problem if poor managers are appointed. Further, managerial ownership can inhibit the external control market, reduce the eff ectiveness of internal control and reduce the probability of receiving a takeover bid. Th erefore, managerial ownership can be referred to as good if there is a successful manager in the position and ‘too much of a good thing’ if poor performing managers are appointed. Evidence of the infl uence of managerial ownership on the turnover-performance relationship is mostly limited to US practice. On a sample of American companies, Weisbach (1988) did not fi nd evidence that having a top executive shareholding reduces the probability of turnover. Morck et al. ( 1 9 8 8 ) c l a i m e d t h a t b o a r d s w i t h signifi cant managerial ownership are more likely to behave in the interests of shareholders due to the fact they are owners. On the other hand, Denis et al. (1997) found t h a t m a n a g e m e n t t u r n o v e r i s s i g n i fi cantly less sensitive to performance when managers hold 5 to 25 percent of ownership shares than when directors hold less than 5 percent of the shares, meaning there is lower possibility of a poor performing manager being replaced if they hold higher ownership shares in the company. Mikelson and Partch (1996) also found a negative relationship between management turnover and management ownership of a com pan y . UK p ractice sho ws that managerial o wnership reduces the probability of management turnover (Dahya, 1988; Dedman, 2003; Conyon and Florou, 2002). Parrino et al. (2003) and Denis et al. (1997) focus on institutional investors and their infl uence on CEO turnover and found that institutional investors positively aff ects the probability of top executive turnover due to poor performance. Brunello et al. (2003) on the sample of Italian companies Organizacija, letnik / volume 40 Razprave / Research papers številka / number 1, januar / january 2007 Organizacija, letnik / volume 40 Razprave / Research papers številka / number 1, januar / january 2007 7found that presence of the CEO as a controlling shareholder increases the sensitivity of turnover to performance. Voplin (2002) drew a diff erent conclusion on a sample of Italian companies. In Russia, inside ownership exerts a negative impact on management turnover probability while outside ownership has a positive one (REB Monitoring, 2003). In the case of Danish companies Lausten (2002) proved that family ownership can cause poor corporate governance. On the contrary, the presence of foreign and other domestic companies raise the probability of a poorly performing manager’s turnover. Ronneboog (2000) found that neither large institutional investors (banks, investment funds and insurance companies) nor holding companies seem to be involved in active corporate monitoring. In contrast, management replacement is infl uenced by large industrial investors and blocks held by families, however not signifi cantly. Kang and Shivdasani (1995) in a case of Japanese companies indicated that the relationship between turnover and performance is signifi cantly stronger for a fi rm tied to a main bank or a member of a keiretsu. On the other hand, Kaplan (1994a) did not confi rm that banks or large block holders increase the probability of a Japanese management turnover in the case of a poor performance. Concentrated ownership should provide effi cient management control, the maximisation of shareholders’ interests and the availability of external sources for fi nancing the company (Shleifer and Vishny, 1997). Bearle and Means (1932) claim that controlling block holders are more effi cient monitors of a company’s performance than a large number of minority stockholders. So the probability of turnover should be higher in the case of concentrated o w n e r s h i p . H o w e v e r , l i t t l e e m p i r i c a l e v i d e n c e c o n fi rms this hypothesis. For instance, the Belgian corporate governance system is characterised by high ownership concentration yet Renneboog (2000) showed there is scant evidence about the corporate control role of large shareholders. As expected, empirical evidence from the UK and the US does not support this hypothesis (Franks et al. , 2001; Ronneboog and Trojanowski, 2003; Denis and Denis , 1995; Franks and Mayers, 2001). Opposite Voplin (2002) on a sample of Italian companies recorded a more sensitive turnover-performance relationship due to ownership concentration. An ownership change is usually connected with m a n a g e m e n t t u r n o v e r e s p e c i a l l y i n t h e c a s e o f p o o r l y performing company (Holderness et al. , 1985; Barclay et al. , 1991, Franks et al. , 2001, Wayne and Megan, 1997; Mikkelson and Partch, 1997). Th e same evidence can be recorded in developing countries (REB Monitoring, 2003; Gibson, 2003). 4 Management and company characteristics Besides the stated corporate governance mechanisms, management and company characteristics’ impact on the probability of management turnover will be tested. Within management’s characteristics, management tenure and age have mostly been used in the empirical studies so far (Kaplan, 1994 a,b; Franks et al., 2001; Kang and Shidasani, 1995; Lausten, 2001; Gibson, 2003; Suchard et al., 2001; Brunello et al., 2003). It is shown that older management with a higher tenure has a greater probability of being replaced. Company size is the mostly used measure for testing the infl uence of company characteristics on management turnover (Conyon and Nicolitsas, 1998; Cosh and Hughes, 1997; Lausten, 2002; Suchard et al. 2001; Eriksson, 2005; Zhou, 2000; Warner et al., 1988). Empirical evidence is inconsistent when explaining the infl uence of company size on management turnover. Some research has found that the probability of management turnover in larger companies, while others claim the opposite. Th is hypothesis will be tested in the case of Slovenia. Last but not least, fi nancial leverage can infl uence management turnover (Hart, 1995; Hotchkiss, 1995; Franks et al., 2 0 0 1 ; R e n n e b o o g , 2 0 0 0 ) . C r e d i t o r s ’ p o w e r to infl uence the business decisions of the company arises from the many controllers’ rights belonging to them when the company does not fulfi l all of its responsibilities. High business risk and low liquidity raise the probability of a company going into bankruptcy, which ultimately leads to management turnover. Whether higher fi nancial leverage increases the probability of management turnover in Slovenian companies will also be investigated in this article. 5 Hypothesis, data and methodology Hypotheses tested within this article are listed below: H.1: Th e relationship between CEO turnover and company performance is expected to be inverse. H.2: A higher proportion of ownership controlled by outsiders (funds and other companies) increases the probability of a management turnover in poorly performing companies. H.3: Outsiders as controlling shareholders increase the probability of a management turnover in poorly performing companies. H.4: A n o w n e r s h i p c h a n g e p o s i t i v e l y i n fl uences a management turnover in poorly performing companies. H.5: Older and management board members with higher tenure decrease the probability of CEO turnover. H.6: Company size infl uences the probability of CEO turnover. H.7: Th e higher the fi nancial leverage the higher the probability of a CEO turnover. In order to test infl uence of the corporate governance mechanisms and company performance on management turnover, primary and secondary data sources were used. P r i m a ry d a t a u s e d f o r th i s r e s e a r c h w e r e c o ll e c t e d within quantitative research performed by the Institute for South-East Europe (ISEE) 1. Th e research took place in the period from May to September 2003. Th e fi rst step within 1 Th e research was conducted within the project ‘Regional Th ink Tank Partnership Project’ and was fi nanced by the IRIS . 8the research was the preparation of the questionnaire, which was the addressed to Slovenian fi rms. Th e questionnaire was composed of fi ve parts: corporate governance system characteristics; management characteristics; companies’ core competences; fi nancing issues; and research and development. For the purpose of the analysis presented in this paper the questions from the fi rst two parts addressed in the questionnaire, namely corporate governance system and management characteristics, were used. Th e questionnaire was mailed to 623 Slovenian companies. 211 questionnaires were returned. Th e high response rate of 34 percent was the result of a few months’ work. Th e main database is structured as an unbalanced panel dataset collected from the questionnaires addressed to the fi rms. 2 Data were collected for the period 1998-2002. Secondary data sources on fi nancial data. Financial reports were available from the Agency of the Republic of Slovenia for Public Legal Records and Related Services. Th e Agency keeps records for all joint-stock and limited companies that are not fi nancial institutions. Th ere are approximately 37,000 legal entities in the Agency’s register. Financial reports consist of balance sheets and income statements as well as information on a company’s main activity, main offi ce location, number of employees etc. Th ose data were used to compose a second database containing balance sheet and income statement data for the 211 fi rms in our sample, namely companies that co- operated in the research. Most companies (81 percent) in the sample are r e g i s t e r e d a s j o i n t - s t o c k c o m p a n i e s . Th e interviewed companies represented 19.5 percent of the sales and assets of all Slovenian companies and employed 20.1 percent of all employees in 2002. Th e average number of employees in the companies in the sample varies through the years from 458 to 496 (the standard deviations are very high). If companies are classifi ed with regard to the classifi cation recommended by the Companies Act from 1993, the sample was composed of 10.7 percent of small companies 3, 75.8 percent of medium-sized companies4 and 13.5 percent of large companies5. Financial indicators showed that, on average, total company sales grew from 7.2 to 11.5 percent o n t h e y e a r l y l e v e l . Th e return on assets (ROA) in the observed period was between 9.4 and 11 percent, while the return on equity (ROE) was between 4.1 and 5.3 percent. Th e companies in the sample had a debt-to-assets ratio of around 40 percent. To examine the impact of company performance and corporate governance mechanisms on management turnover, the Logit, Probit or Tobit regression models have been employed in most of the empirical studies conducted so far. To examine the impact of the company performance and ownership characteristics on CEO turnover in Slovenia, a Probit regression model was employed: P(CEO turnover) = f(β 1 + β2X (Performance measures variables) + β3X (Ownership identity, ownership concentration, ownership change) + β4X (Management characteristics variables) + β5X (Company characteristic variable and Financial leverage) + ε In order to test the relationship between turnover and performance two accounting measures of performance were used. Market measures of performance were not used since all companies in the sample were not listed 6 on the Ljubljana Stock Exchange. Current (in year t) and lagged performance values (in year t-1 and t-2) were used in the regression analysis. All performance measures were available for the period 1998-2002. Th e fi rst measure of performance used is sales growth . Th e second measure of performance used in the regression is return on assets (ROA) 7. Th e both performance measures were adjusted for the industry average8. D a t a o n o w n e r s ’ i d e n t i t y w e r e c o l l e c t e d w i t h i n t h e primary research. For regression analysis, state and investment fund ownership shares were combined within one variable: ownership of funds, domestic and foreign companies’ shares in one variable: company ownership and employees and management ownership shares in one variable: internal ownership. Th e reference group was the ownership shares of bank, state and minority shareholders. Ownership share data were used to form dummy variables representing the ownership concentration in the hands of a specifi c group of owners. Namely, the dummy variable took the value of 1 if a specifi c owner holds controlling shareholdings in the company (an ownership share higher than 50 percent) and 0 if it does not. Dummy variables were also used for ownership change. If the tracked ownership change was 10 percent or higher then dummies variables took the value of 1, and the value of 0 otherwise. I took 10 percent as a threshold value due to the fact that an owner gains substantial power in a company’s decision-making process if he increases his ownership share by 10 or more percent (an increase in shareholding for example by 1 or Organizacija, letnik / volume 40 Razprave / Research papers številka / number 1, januar / january 2007 2 Th e panel is unbalanced, there are some missing values for diff erent reasons (e.g. the company was established aft er 1998), so the actual number of observations diff ers from analysis to analysis. 3 A small company has: average number of employees up to 50; average annual income up to SIT 200 million (EUR 834,585) and ave rage assets value up to SIT 100 million (EUR 417,292). 4 Medium company has: average number of employees from 51 to 250, average annual income from SIT 200 million (EUR 834,585) up t o SIT 800 million (EUR 3.34 million) and an average value of assets from SIT 100 million (EUR 417,292) to SIT 400 million (EUR 1.67 million). 5 Large companies are companies which have at least two criteria higher than those companies classifi ed as medium sized (more than 251 employees, average annual income higher than SIT 800 million (EUR 3.34 million) and an average value of assets higher than SIT 400 million (EUR 1.67 million). 6 42 out of 211 companies from the sample are not listed on the Ljubljana Stock Exchange. 7 ROA is defi ned as the ratio between EBIT related to fi rm total assets. 8 Newly created performance measures represent company performance plus the diff erence in company performance and the industry average (for example, DTSti+(DTSti-DTSt). Using industry-adjusted variables company performance was adjusted for the industry average. For example, if the whole industry performed poorly, by adjusting company performance for industry average, the company results would be improved. Industry-adjusted variables for testing turnover performance relationship were also used by Dahya et al. (2002); Kang and Shivdasani (1995); Denis and Denis (1995); Renneboorg (2000); Brunello et al. (2003). Organizacija, letnik / volume 40 Razprave / Research papers številka / number 1, januar / january 2007 92 percent does not increase the owner’s decision-making power substantially). In order to relate ownership identity, concentration and change with company performance an additional set of variables was created. Namely, ownership characteristic variables were interacted with performance measures: total sales growth and return on assets (values at moment t). 6 Ownership structure in Slovenia Privatisation gave an important role to the insiders (employees and managers) and funds (state and investment) in the process of governing Slovenian companies. However, the ownership structure changed aft er the privatisation and is still in the process of transformation. Data on the ownership structure in Slovenian companies were collected during quantitative research for the period 1998-2003. In the observed period on a sample of 211 companies the most important individual owners were domestic and foreign companies, employees 9 and investment funds controlling on average 22.9 20.1 and 15.4 percent of the ownership, respectively. State funds owned on average 12.4 percent of the shares, while banks held on average 1.7 percent. Management 10 and minority shareholders held on average approximately the same ownership shares, amounting to 3 percent. Th e trends show an increase in the average ownership shares in the hands of domestic and foreign non-fi nancial companies. On the contrary, the average ownership shares controlled by state funds, investment funds and employees are decreasing 11 (Table 1). Th e results point to the conclusion that employees’ and state funds’ ownership ‘created’ during and aft er privatisation has been spilling over into the hands of managers and non-fi nancial domestic companies. Ribnikar (1995) believed that the ownership share of employees is decreasing due to the short-term orientation of employees a s o w n e r s . ‘ E m p l o y e e s w i l l b e p r e p a r e d t o s e l l s h a r e s a t the moment, when they will receive more for it, than they had paid’ (Ribnikar, 1995). Many authors claim that the reduction of the ownership controlled by state funds is highly important. Simoneti et al. (2005) claimed that the artifi cially made state funds were the transitional owners of the companies’ shares and they showed themselves to be good sellers of their ownership to ‘fi nal’ owners. Pahor et al. (2003) reported that the transformation of state and investment funds is highly important for achieving a normal market-oriented economy with a reduced political infl uence on business. Domadenik (2003) shared their opinion. Based on the above, it is expected that state funds will continue to decrease their ownership and thus the state’s infl uence on the economy. Th e trend of increasing ownership held by other domestic non-fi nancial companies will continue, while it is to be expected that foreign companies will raise their ownership in the future. Ownership concentration in Slovenian companies remained low and in 1998 half of the fi rms listed on the Ljubljana Stock Exchange did not have an owner holding more than 20 percent of the voting rights, while the concentration of ownership and control was slightly higher in the case of non-listed companies (Gregorič, 2003). Th e trends showing the increasing concentration of ownership among Slovenian companies. Based on data obtained from the offi cial Shareholders’ Register kept and updated by the Central Clearing Securities Corporation, the largest owner (C1) in 211 companies in the 1998-01 period had an average share of 35 percent, the second largest owner has 14 and the third 8 percent, while the top fi ve owners (C5) had on average 61 percent of the ownership shares (Knežević Cvelbar, 2006). 7 CEO turnover rates in Slovenia Th e average CEO turnover rate, calculated on a sample of 211 Slovenian companies in the 1998-02 period was 5.97 percent. Th e CEO turnover rate is calculated as the percentage of changed CEOs in the total number of observations from the sample. Th is fi gure is lower than that recorded in developed countries. For example, the C E O t u r n o v e r r a t e i n t h e U S v a r i e s f r o m 1 8 . 3 p e r c e n t (Warner et al. , 1988) to 7.8 percent (Weisbach, 1988), in the UK between 13.6 percent (Franks et al ., 2001) and 7.71 percent (Dahya et al. , 2002) etc. Table 2 reveals that the CEO turnover rate in Slovenia diff ers over the observed period. An analysis of variance showed signifi cant diff erences between the turnover rates in 2001 and 2002 in comparison to other observed years. CEO turnover rates in 2001 and 2002 moved closer to the developed countries’ average and amounted to 9.5 and 8.5 percent, respectively. On the other side, CEO turnover rates in the 1997-2000 period were signifi cantly lower and on average amounted to 3 to 4 percent. I t is hard to explain why the CEO turnover rates were lower in 1997-2000 than aft er 2000. Th e changing ownership structure could be one reason. Namely, aft er privatisation the artifi cial owners were gradually replaced with more active ones. Th e replacement or even retirement of the ‘old boys’ who came into their positions aft er privatisation might b e an a d di ti o n al r e a s o n f o r th e h i gh e r tur n o v e r r a t e s in 2001 and 2002. Another reason for the higher turnover rates recorded aft er 2000 could be the change of four-year mandate for CEOs taking up their positions in 1996 (aft er privatisation). Th e main limitation of the results presented h e r e i s t h a t t h e d a t a d o n o t d i s t i n g u i s h t h e r e a s o n f o r turnover. Th erefore, the reported CEO turnover rate could be biased upwards due to the fact that unforced turnovers are included in the reported turnover rate. As presented in the table 2 below on average, the Slovenian CEO has held their position for 6.7 years and on average CEO has 9 Th is group includes: employees, former employees, retired persons and their relatives. 10 Th is group includes: managers – top, middle, low managers. 11 Th ese fi ndings support the research results of Prašnikar et al. (2000), Gregorič and Prašnikar (2002), Damijan et al . (2003) and Simoneti and Gregorič (2004). 10Organizacija, letnik / volume 40 Razprave / Research papers številka / number 1, januar / january 2007 Ye ar State fund ownershipInvestment fund ownershipBank ownershipDomestic companies’ ownershipForeign companies’ ownershipEmployees’ ownership Management ownership Minority ownersOther 1998Mean 18.3*** (16.3)14.8 (16.9)1.3 (5.2)13.8*** (27.2)3.5 (12.3)27.5*** (21.3)2.2** (5.9)2,5 (7,2)7,1 (19)SD 1999Mean 16.7*** (15.6)15.7 (18.4)1.6 (5.1)16.9*** (29.2)3.3 (13.9)24.2*** (19.9)2.1** (5.8)2,7 (9,9)7,9 (17,3) SD 2000Mean 13.2*** (15.7)16.2 (19.7)1.6 (6.9)21.8*** (30.4)4.3 (17.3)20.4*** (17.9)2.1** (9.6)3,4 (9,5)7,1 (18,4) SD 2001Mean 11.2*** (13.5)15 (22)2.2 (6.1)25.0*** (31.2)5.7 (21.7)17.1*** (19.4)3.1** (10.9)2,8 (9,3)8,7 (15,3) SD 2002 Mean 8.5*** (12.4)15.8 (21.9)1.9 (6.2)28.8*** (32)7.0 (21.4)16.5*** (19.9)4.0** (11.3)3,1 (9,6)6,3 (15,5) SD 2003Mean 7.3*** (15.6)15.1 (19.3)1.9 (5.8)30.6*** (29.9)6.7 (17)16.4*** (20.4)4.3** (8.8)3,2 (8,8)6,3 (17,3) SD 1998-2003Mean 12.4*** (15.4)15.4 (2.2)1.7 (12.7)22.9*** (21.6)5.1 (2.2)20.1*** (2.2)3.0** (7.0)2,9 (18,2)7,2 (9,6) SD Table 1: Ownership structure in Slovenian companies in the 1998-2003 period (mean and standard deviation (SD) value Source: questionnaire data and own calculations ** diff erences between the groups signifi cant at the 5% level (One-way Anova; Duncan method) *** diff erences between the groups signifi cant at the 1% level (One-way Anova; Duncan method) Organizacija, letnik / volume 40 Razprave / Research papers številka / number 1, januar / january 2007 11been working for 11 years in the company. Th e last CEO characteristic observed was the CEO’s age. On average, the Slovenian CEO is 48 years old. 8 Results Th e fi rst question is whether a turnover is related to a poor company performance. Th e article investigate whether disciplining takes place at an early stage (rapidly aft er a sales growth decrease) or later when a company has been generating low or negative sales growth rates for a few years. Th e inclusion of lagged performance up to two years aft er a turnover allows me to investigate the reaction time of Management Board restructuring. As shown in Table 3 in the case of non-fi nancial Slovenian companies there is a negative and signifi cant relationship between CEO turnover and both performance measures. A signifi cant and negative relationship was recorded between current sales growth and CEO turnover, while a signifi cant and negative relationship was recorded between CEO turnover and the lagged return on assets. Both total sales growth and industry-adjusted sales growth rates showed there is a higher probability of a CEO being replaced if the sales volume drops in the current year. On the contrary, there is a higher probability of the CEO being replaced if ROA and industry-adjusted ROA were negative two years before the turnover. Th erefore, the evidence presented in Table 3 fails to reject hypothesis H1 and shows that the poorer the performance the higher is the probability of a CEO turnover. Th e Probit regression presented in Table 3 also investigates whether the ownership structure plays a performance-induced disciplining role. Regression results showed that all of the ownership categories seem to be involved in disciplinary actions against the CEO when performance is poor. Variables explaining the interactions between company performance (sale growth) and the owners’ identity were negative and signifi cant. On the other side, variables representing the interaction between ownership shares and ROA were negative but not signifi cant 12. Based on these results hypothesis H.2 stating that management turnover due to poor performance falls along with increasing ownership shares of insiders has to be rejected . Th e results point out that insiders are just as good as monitors as outsiders. High leverage encourages management to generate suffi cient funds to service the debt. Th erefore, a high debt-assets ratio is expected to reduce management’s discretion and call for more intensive creditor monitoring. M a n a g e m e n t t u r n o v e r i s e x p e c t e d t o b e p o s i t i v e l y c o r r e l a t e d with high fi nancial leverage. On the sample of Slovenian non-fi nancial companies hypothesis H7 thus has to be rejected. Th e relationship between the debt-to-assets ratio and CEO turnover is signifi cant and negative, meaning that a higher debt-to-assets ratio decreases the probability of a CEO turnover. Th is result can be explained by the fact that banks are crediting successful companies (Knežević Cvelbar, 2006) 13. Th e next determinate included in the regression is company size. Regression results showed that the size of the company does not aff ect CEO turnover in Slovenia, therefore hypothesis H.6 can be rejected . Ye ar CEO turnover rate (%)CEO tenure CEO years in company ***CEO age 19974.3** (2.0)4.6*** (6)9.0*** (9.7)46.0*** (7.1) 19983.3** (1.7)5.2*** (6.3)9.7*** (10.0)46.0*** (6.7) 19994.3** (2.0)5.9*** (6.6)10.4*** (10.3)47.0*** (7.4) 20004.3** (2.0)6.6*** (6.9)11.1*** (10.6)48.0*** (7.6) 20019.5** (2.9)7.3*** (7.1)11.8*** (10.9)48.8*** (7.7) 20028.5** (2.8)8.2*** (7.3)12.7*** (11)49.2*** (7.5) 1998-20025.9 (2.3)6.7 (6.9)11.2 (10.6)47.9 (7.5) Source: questionnaire data and own calculations ** diff erences between the groups were signifi cant at the 5% level (One-way Anova; Method: Duncan) *** diff erences between the groups were signifi cant at the 1% level (One-way Anova; Method: Duncan)Table 2: CEO turnover rates and characteristics in the 1997-2002 period 12 An exception was the negative relationship recorded between CEO turnover and ownership shares in the hands of insiders, meani ng there is a higher probability of the CEO being replaced if an ownership share in the hands of insider owners’ increases and the company is record ing a negative return on assets. 13 Knežević Cvelbar (2006) performed Factor and Cluster analysis. Companies were divided in three groups. Results showed that co mpanies that belong to the group of »the most successful companies« had higher debt to assets ratio. Th is result could be explained with the fact that Slovenian banks have restrictive bank policies. 12 Th e last group of independent variables included in the Probit regression model are management characteristics. CEO characteristics could not be included in the model since data on CEO turnover are truncated variables based on CEO tenure, meaning that we collected data on current CEO characteristics. Instead, CEO characteristics, board members’ tenure, age and turnover were incorporated in the model. As presented in Table 3, all Management Board members’ characteristics variables are signifi cant. Th e regression results showed that the longer Management Board members have held their position and the older they are there is a lower probability of a CEO turnover. Th is result can be explained by the fact that companies frequently appoint an insider as a new CEO. A dummy variable representing the other board members turnover was included in the models. Th e results showed a positive relationship between CEO turnover and Management Board member turnover. Th i s r e s ul t m a y in di c a t e th a t the Supervisory Board usually gives its trust in the whole Management Board and replacing one of the board members raises the probability of replacing the others. Organizacija, letnik / volume 40 Razprave / Research papers številka / number 1, januar / january 2007 TOTAL SALES GROWTH (DTS) RETURN ON ASSETS (ROA) INDUSTRY-ADJUSTED DTS INDUSTRY-ADJUSTED ROA VARIABLE Par. est P >|z| Par. est P >|z| Par. est P >|z| Par. est P >|z| Obs. N. 392 504 392 514 1. Intercept -0.263 0.793 0.4644 0.511 -0.1313 0.894 0.1649 0.811 Performance 2. Performance t -6 6.202** 0.034 2.4713 0.344 - -2.7034** 0.026 -0.8633 0.583 3. Performance t-1 -0.120 0.805 -0.5832 0.474 0.0866 0.728 -0.3382 0.413 4. Performance t-2 -0.142 0.738 - -1.4079* 0.059 -0.0226 0.917 - -0.6422* 0.085 Ownership identity (%) 5. Funds 0.007 0.358 0.0023 0.708 0.0064 0.374 0.0008 0.888 6. Other companies 0.005 0.468 0.0006 0.899 0.0046 0.479 0.0008 0.865 7. Internal -0.006 0.539 -0.0127 0.103 -0.0059 0.522 -0.0078 0.289 Interaction between ownership share (%) and performance at t 8. Funds - -0.085** 0.019 0.0347 0.617 - -0.0757** 0.013 0.0124 0.736 9. Other companies - -0.091** 0.021 0.0293 0.336 - -0.0791** 0.019 0.0090 0.594 10. Internal - -0.155*** 0.001 - -0.0806*** 0.000 - -0.1456*** 0.000 0.0107 0.814 Financial Leverage 11.DA - -1.106** 0.043 - -1.1353*** 0.010 - -1.0192** 0.050 - -0.8463** 0.053 Firm characteristic 12. Employee num 0.000 0.781 -0.0001 0.560 0.0001 0.599 -0.0001 0.536 Management characteristics 13. MBM tenure - -0.108*** 0.000 - -0.0748*** 0.001 - -0.1085*** 0.000 - -0.0733*** 0.001 14. MBM age - -0.031*** 0.007 - -0.0293*** 0.004 - -0.0306*** 0.008 - -0.0275*** 0.005 15. MBM turnover 0 0.324* 0.100 0 0.3523** 0.041 0.3080 0.131 0 0.3936** 0.017 Prob› chi2 0.0000 0.0000 0.0000 0.0001 Pseudo R20.2999 0.1905 0.3029 0.1855Table 3: Probit regression on CEO turnover – ownership identity * coeffi cients statistically signifi cant at the 10% level; ** coeffi cients statistically signifi cant at the 5% level ; *** coeffi cients statistically signifi cant at the 1% level. Source: questionnaire data and own calculations In line with the theory, large shareholdings controlled by a single owner should improve monitoring and reduce agency costs. On the sample of Slovenian non-fi nancial companies’ hypothesis H.3 was rejected . Th e regression results indicate that in successful companies in which other companies hold controlling shareholdings the probability of replacing the CEO is signifi cantly higher than if internal owners have controlling shareholdings. On the contrary, the probability of CEO turnover in poorly performing companies in which funds are controlling owners is not signifi cantly greater compared to companies controlled by internal owners. Th is would mean that poor performance and the existence of a controlling outsider owner do not increase the probability of a CEO turnover. Th ese results indicate that ownership concentration does not improve the effi ciency of the corporate governance system. Other independent variables had the same infl uence on CEO turnover as in the previous regression (Table 4). Increasing the ownership shares in the hands of a specifi c owner could boost the probability of a management turnover. Regression results testing how ownership changes infl uence CEO turnover in Slovenia are presented in Table 5. An increase in ownership controlled by funds and other companies are defi ned as dummy variables, while an increase of insider ownership is defi ned as a reference variable. Results of the Probit regression indicate that an ownership change does not signifi cantly increase the probability of a CEO turnover. Variables representing the interaction between an ownership change and current performance were also included in the model. Th e results showed there is a higher probability that a CEO will be replaced if other companies increased they ownership shares (by 10 percent or more) in poorly performing companies (sales growth is decreasing) than where internal owners were to increase their ownership holdings. On the contrary, there is no signifi cant diff erence in the probability of a CEO turnover if funds increase their ownership shares. Th ese results indicate that the probability of a CEO turnover in poorly performing companies will rise if other companies increase their ownership shares. Th erefore, hypothesis H.4 cannot be rejected if other companies are increasing their ownership share. Th ese results indicate that managers in successful companies have a higher probability of remaining in their position when other companies increase their ownership shares (Table 5). Organizacija, letnik / volume 40 Razprave / Research papers številka / number 1, januar / january 2007 139 Conclusions Th e Slovenian corporate governance system is closer to the insider than the outside corporate governance model (Gregorič, 2003). A relatively low ownership concentration (the largest shareholder controls 35 percent of ownership shares), the increasing ownership shares in the hands of non-fi nancial domestic companies and managers, decreasing ownership held by employees, gradual selling off of the ownership controlled by state funds, the low level of interference of foreign non-fi nancial companies are just some of the characteristics of the Slovenian corporate governance system (Gregorič, 2003; Prašnikar and Gregorič, 2002; Domadenik, 2003; Pahor, 2003; Knežević Cvelbar, 2006). Research results showed that external owners (funds and other companies) are not better principals than insider owners (employees and managers). Th e results did not prove that insiders, employees and managers are protecting CEOs interest when performance is poor. It appears that funds, other companies and insiders are involved in disciplinary action against the CEO when performance is poor. Ownership concentration TOTAL SALES GROWTH (DTS) RETURN ON ASSETS (ROA) INDUSTRY-ADJUSTED DTS INDUSTRY-ADJUSTED ROA VARIABLE Par. est P >|z| Par. est P >|z| Par. est P >|z| Par. est P >|z| Obs. N. 386 505 385 504 Performance 1. Intercept 0.0944 0.876 0.0646 0.900 -0.0085 0.989 -0.1575 0.754 2. Performance t - -3.1817*** 0.004 -2.1285 0.217 - -1.5076*** 0.003 -0.2559 0.555 3. Performance t-1 0.2446 0.637 -0.7399 0.364 0.1354 0.595 -0.3790 0.345 4. Performance t-2 -0.2585 0.574 - -1.4782** 0.047 -0.1038 0.644 - -0.7379** 0.052 Ownership concentration dummy 5. Funds 0.2576 0.411 0.2401 0.394 0.3565 0.250 0.4306 0.112 6. Companies 0.2490 0.382 0.3026 0.207 0.3770 0.178 0 0.4761** 0.052 Interaction between ownership concentration dummy and performance at t 7. Funds 1.6277 0.248 4.1129 0.321 0.8256 0.217 1.8693 0.366 8. Companies 2 2.4230* 0.079 2.1156 0.285 1 1.1713* 0.073 6 6.1991* 0.060 Financial Leverage 9.DA -0.7865 0.111 - -0.8286** 0.052 - -0.8152* 0.098 - -0.8846** 0.039 Firm characteristic 10. Employee num -0.0004 0.134 - -0.0003* 0.100 -0.0004 0.121 -0.0003 0.166 Management characteristics 11. MBM tenure - -0.0940*** 0.000 - -0.0735*** 0.001 - -0.0933*** 0.000 - -0.0773*** 0.001 12. MBM age - -0.0279*** 0.008 - -0.0254*** 0.009 - -0.0284*** 0.007 - -0.0253*** 0.011 13. MBM turnover 0 0.3663** 0.051 0 0.4150** 0.014 0 0.3734** 0.048 0 0.4026*** 0.020 Prob› chi2 0.0000 0.0000 0.0000 0.0000 Pseudo R20.2540 0.1962 0.2495 0.1996Table 4: Probit regression on CEO turnover – ownership concentration * coeffi cients statistically signifi cant at the 10% level; ** coeffi cients statistically signifi cant at the 5% level; *** coeffi cients statistically signifi cant at the 1% level. Source: questionnaire data and own calculations 14was not identifi e d a s a n e ffi cient corporate governance mechanism. Regression results indicate that ownership concentration increase the probability of a CEO turnover, however it does not discipline poorly performing CEOs. Th erefore, concentration does not improve the effi ciency of monitoring control. Th is might be the case since ownership concentration is lower in Slovenia in comparison with other continental European countries and the largest owners do not have a controlling ownership share. Ownership change is an effi cient corporate governance mechanism used for disciplining poorly performing CEOs. Th e research results showed in companies that recorded poor performance, an increase of ownership (by 10 percent or more) in the hands of other companies increases the probability of CEO turnover. Th ese results point out that the increasing of ownership shares controlled by other companies plays a disciplining role in the process of CEO turnover. Th ere is a higher probability of a board member turnover if the CEO is replaced. Th is can lead to the conclusion that a management board member’s career i s l i n k e d t o th a t o f th e C E O . A s i g n i fi cant and negative relationship was recorded when relating CEO turnover to board member age and tenure, indicating there is a lower probability of the CEO being replaced if board members are older and have held their position longer. Th is may lead to the conclusion that CEOs in Slovenian companies are being replaced by insiders. Financial leverage has a negative relationship with CEO turnover, indicating that the CEO in those companies with a lower debt-to-assets ratio has a higher probability of being replaced. Th is result is an indication that Slovenian banks are fi nancing more successful companies (Knežević Cvelbar, 2006). Organizacija, letnik / volume 40 Razprave / Research papers številka / number 1, januar / january 2007 TOTAL SALES GROWTH (DTS) RETURN ON ASSETS (ROA) INDUSTRY-ADJUSTED DTS INDUSTRY-ADJUSTED ROA Par. est P >|z| Par. est P >|z| Par. est P >|z| Par. est P >|z| Obs. N. 384 487 384 487Performance 1. Intercept 0.4463 0.488 0.4137 0.510 0.4044 0.522 0.2887 0.606 2. Performance t -0.7554 0.187 -0.1762 0.790 -0.3464 0.209 -0.0102 0.975 3. Performance t-1 0.1812 0.693 -0.9663 0.191 0.1084 0.622 -0.4088 0.280 4. Performance t-2 -0.6554 0.145 - -1.8030** 0.026 -0.2982 0.179 - -0.8327** 0.044 Ownership change dummy 5. Funds -0.0538 0.921 -0.7634 0.279 -0.2226 0.679 -0.4116 0.412 6. Companies -0.2652 0.415 0.1871 0.435 - -0.5843* 0.094 0.1516 0.503 Interaction between ownership change dummy and performance at t 7. Funds -3.5674 0.176 1.4751 0.112 -1.5595 0.237 7.1189 0.111 8. Companies - -7.5267*** 0.000 -1.0746 0.594 - -3.4593*** 0.000 -0.3702 0.705 Supervisory Board composition (dummy) and size 9. SB size 0.0593 0.296 0.0321 0.541 0.0548 0.335 0.0257 0.626 10. SB external 0 0.632** 0.013 0 0.5447** 0.017 0 0.5902** 0.020 0 0.5228** 0.021 Financial Leverage 11.DA -0.8781* * 0.082 - -0.8458* 0.057 - -0.9273* 0.064 - -0.8440* 0.059 Firm characteristic 12. Employee num - -0.0001* 0.060 - -0.0004* 0.084 - -0.0004* 0.070 -0.0003 0.125 Management characteristics 13. MBM tenure - -0.0885*** 0.000 - -0.0936*** 0.000 - -0.0916*** 0.000 - -0.0943*** 0.000 14. 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Journal of Financial Economics 20: 431-460. Zhou, X. (2000). CEO pay, fi rm size, and corporate performance: evidence from Canada. Canadian Journal of Economics 33(1): 213-51. Ljubica Knežević Cvelbar is currently employed as an assistant at the Faculty of Economics (FELU), University of Ljubljana. She holds Ph.D in Economics received from the same institution in 2006. She was previously employed as a full time researcher at the Institute for South East Europe (at the FELU). As researcher she cooperated in 15 national and international research or consulting projects. She is author of two scientific articles published in Econlit Journals and eight parts of monograph. 16Organizacija, letnik / volume 40 Razprave / Research papers številka / number 1, januar / january 2007