CEO Tenure and Recall Risk Management in the Consumer Products Industry

Abstract

Firms dread product recalls. Consequently, firm leaders may take steps to avoid recalls when possible, or to avoid the blame for them when there is someone else to blame. We analyze how the appointment of a new chief executive officer (CEO) for a firm in the consumer product industry influences the hazard of subsequent recalls initiated by that firm. Using 25 years of consumer product industry data, including 125 publicly traded firms that experienced 307 new CEOs and 584 voluntary recalls from 1992 to 2016, we find a unique recall pattern following new CEO appointments. The hazard of a recall is high immediately following a new CEO appointment, and then decreases significantly until the next CEO is appointed. We contend that the high hazard of a recall early in CEO tenure may be due to the attribution of blame to the prior CEO. We find evidence to support this contention by showing that the increase in recalls is even higher when the prior CEO was forced out. We also propose that the low hazard of a recall later in CEO tenure may be explained by recalls that can be more easily hidden, allowing them to go unannounced. We find evidence supporting this contention by showing that the decrease in recalls late in a CEO's tenure is stronger when recalls are more discretionary. We conclude with one firm governance recommendation and four regulatory policy recommendations for the Consumer Product Safety Commission.

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