Rise of the Rank-and-File

Memo to CEOs: Employee opinion matters.

New research by Bruce Avolio of the UW Foster School of Business finds that employee approval greatly influences whether a board of directors will retain or dismiss a chief executive officer. For a CEO, that means job security could hinge on keeping workers positively engaged and appreciative of leadership.

Financial performance, analyst recommendations and the level of CEO power within the organization are among the most well-known predictive factors.

But the study shows that employee approval also has an impact on this consequential decision made by boards of directors. Employees can offer an inside perspective on CEO performance, which is the premise behind the research. This is important because they are primarily responsible for implementing the organization’s strategies.

“The bottom line is, employees matter—both to CEO success and organizations,” says Avolio, a professor of management and the Mark Pigott Chair in Business Strategic Leadership at Foster. “That’s a group of stakeholders that has been underrepresented in strategic leadership research.

“Employee approval does have a significant impact on the most consequential decision a board can make: the involuntary turnover and dismissal of the CEO. Based on our findings, you can predict, with some degree of accuracy, the risk of a CEO being dismissed.”

Morale tied to organizational success

Avolio and his co-authors—Danni Wang of Rutgers University, Qi Zhu of Hong Kong Polytechnic University and Wei Shen and David Waldman of Arizona State University—gathered data from Glassdoor.com, an online platform where current and former employees can share information anonymously about their leaders and organizations.

Their analysis revealed that employee approval or disapproval is predictive of a board’s dismissal decision. This is particularly true when the CEO has less power than the board, because powerful CEOs have more influence over decisions and become further entrenched in their position. Employee opinion also carries more weight when a firm is performing well financially and has positive recommendations from security analysts.

“If a firm is performing poorly, then you know there is a problem,” Avolio says. “But if they’re doing well, and your employees don’t value your leadership, something is going on that may not seem as obvious. There’s also been a lot of attention in the news recently about the importance of employee sentiment and their well-being. Employee morale has also been rising to the top in terms of the factors that can impact an organization’s success. Employee sentiment, just like consumers, is going to matter more and more. Leadership is going to have to pay attention.”

Measurable sentiment

The researchers used longitudinal data from 338 firms and 1,252 firm-year observations between 2010 and 2018. To make sure reviews reflected an organization’s current situation, the researchers analyzed data only from current employees. And they used only the years—in which Glassdoor.com had data—that had input from at least 60 employees. The authors also dropped all years in which CEO succession occurred.

Separately, via one-on-one interviews, researchers found that board members are paying attention to employees’ opinions.

“I interviewed about 20 members of major boards,” Avolio says. “Almost all were certainly aware of social media. Many were aware of Glassdoor, and a proportion of them said that they regularly get briefings on that kind of data.”

Demanding satisfaction

When approval of a CEO is high, Avolio said it shows that employees are confident in their leadership and are supportive of their strategies. If a board removes that CEO, it could upset employees and potentially hurt future organizational success. Conversely, low approval ratings signal employees aren’t confident in a CEO and are less likely to implement their strategies. In this case, replacing a CEO could help a firm regain employee confidence.

“Employee satisfaction covers so many things, including the quality of management,” adds Avolio, the executive director of Foster’s Center for Leadership and Strategic Thinking. “The most common source of stress for employees, which is bad for you physically and mentally, is a bad supervisor. All of us have worked for people who kind of suck the energy out of units and organizations. I think there’s a real thing growing around the importance of health and well-being of employees tied to effective leadership and organizational performance.”

“Do employees’ views matter in corporate governance? The relationship between employee approval and CEO dismissal” is forthcoming in Strategic Management Journal.