Jeff Bezos announced last Tuesday that he would be stepping down as CEO of Amazon, the company he founded in 1994. He will transition to becoming its executive chairman. Andy Jassy, who has been with Amazon for over 24 years, will become the new CEO. There has been intensive coverage of this unexpected announcement in the global media. The coverage is justified, given the company’s phenomenal success. This remarkable change in the leadership of a company as prominent as Amazon has motivated us as scholars of corporate finance to offer perspective on this event. We suggest that there are three different lenses from which to view this executive transition, given the research that exists.
Insider vs. Outsider CEO Succession
One such lens is that of insider versus outsider CEO successions. In a study entitled “Six Decades of CEO Successions: The Importance of Being an Insider” by Ferris, Jayaraman, and Lim (2015), we examine the changing nature of succession patterns in U.S. firms. We investigate how the choice between an internal or external candidate influences strategically critical decisions. We argue that there is less organizational disruption or “turbulence” with an internal leadership change. That is, internal candidates have significant company-specific human capital that allows them to easily assume the CEO role and execute the firm’s strategies without interruption. We find during our 60-year sample period that internal succession is the norm, with over 78% of all successions filled by an internal candidate. We find that the majority of CEO successions are internal, regardless of the age of the company. Further, we discover that firms with internal succession have larger boards and higher overall corporate valuations. Based on this, we would project that Amazon will continue to do well going forward.
Founder-Managed vs. Non-Founder Managed Companies
A second perspective through which to view this transition is that of a founder-managed versus a non-founder managed company. In the study, “CEO Founder Status and Financial Performance,” by Jayaraman, Khorana, Nelling and Covin (2000), we find that that founder management is positively related to stock performance among smaller and younger ﬁrms. It adversely affects stock performance among larger and older ﬁrms. A practical implication of this research is that founders should grow their organizations with the expectation in mind that they may have to step down from their leadership positions for the benefit of their companies. This is often an emotional decision for founders who created the company. While founders can add market value to smaller and younger ﬁrms, the value of a founder decreases as the company matures. Thus, Bezos’ decision to retire appears to bode well for the company’s future.
‘Retention Light’ and the Chairman Role
A third perspective is to examine companies in which a retiring CEO continues to play a significant role as the chairman of the board. In the study, “CEO turnover and retention light: Retaining former CEOs on the board,” Evans, Nagarajan, and Schloetzer (2010) study the case where the incumbent CEO is removed but retained on the board for an extended period. They refer to this as ‘retention light.’ When ‘retention light’ involves a non-founder CEO, it is negatively associated with the company’s financial performance. But when the exiting CEO is both the chairman and founder, this negative association is no longer significant. Viewed from this lens, it is fair to say that we should not expect to see a significant decline in Amazon’s performance given Bezos’ new role in the company. Given the significant ownership Bezos has in Amazon, he will not be very far from the reins of control.
Regardless of the lens one elects to view the departure of Bezos as Amazon’s CEO, the evidence suggests that Amazon will continue to thrive with its new leadership.
Contributors: Narayanan Jayaraman, Thomas R. Williams-Wells Fargo Professor of Finance, Scheller College of Business, Georgia Institute of Technology; Steve Ferris, Dean, Miller College of Business, Ball State University
Evans, III, J. H., Nagarajan, N. J., & Schloetzer, J. D. (2010). CEO turnover and retention light: Retaining former CEOs on the board. Journal of Accounting Research, 48(5), 1015-1047.
Ferris, S. P., Jayaraman, N., & Lim, J. (2015). Six Decades of CEO Successions: The Importance of Being an Insider. Journal of Accounting & Finance (2158-3625), 15(4).
Jayaraman, N., Khorana, A., Nelling, E., & Covin, J. (2000). CEO founder status and firm financial performance. Strategic Management Journal, 21(12), 1215-1224.