The role of military directors in holding the CEO accountable for poor firm performance

Pavićević, Stevo; Keil, Thomas Article — Published Version The role of military directors in holding the CEO accountable for poor firm performance Strategic Management Journal Provided in Cooperation with: John Wiley & Sons Suggested Citation: Pavićević, Stevo; Keil, Thomas (2024) : The role of military directors in holding the CEO accountable for poor firm performance, Strategic Management Journal, ISSN 1097-0266, John Wiley & Sons, Ltd., Chichester, UK, Vol. 46, Iss. 3, pp. 790-814, https://doi.org/10.1002/smj.3675 This Version is available at: https://hdl.handle.net/10419/319308 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. http://creativecommons.org/licenses/by-nc-nd/4.0/ RESEARCH ARTICLE The role of military directors in holding the CEO accountable for poor firm performance Stevo Pavi cevi c 1 | Thomas Keil 2 1 Department of Management, Frankfurt School of Finance and Management, Frankfurt, Germany 2 Department of Business Administration, University of Zurich, Zurich, Switzerland Correspondence Stevo Pavi cevi c, Department of Management, Frankfurt School of Finance and Management, Frankfurt, Germany. Email: [email protected] Abstract Research Summary: Why do some boards of directors dismiss the CEO when a firm performs poorly, while others do not? We argue that military directors—outside directors with military backgrounds—on the board increase the likelihood of CEO dismissal under lowperformance conditions. Military service instills a lifelong system of values and beliefs related to accountability—the obligation to accept responsibility for one's own actions and outcomes—which leads military directors to attribute low performance to the CEO and hold the CEO strictly accountable for such performance. This argument is supported by extensive quantitative data on CEO dismissal in publicly listed firms and qualitative data obtained from interviews with military directors who have served on boards of those firms. Managerial Summary: Military directors—outside directors with military backgrounds—frequently occupy seats on the boards of publicly listed firms in the United States. Military service instills an enduring system of values and beliefs rooted in accountability, which, we argue, makes military directors more inclined to attribute performance shortfalls to the CEO and advocate for more rigorous CEO accountability, resulting in CEO dismissal. Our argument is supported by quantitative data on CEO dismissals within publicly Received: 10 March 2022 Revised: 22 May 2024 Accepted: 19 September 2024 DOI: 10.1002/smj.3675 This is an open access article under the terms of the Creative Commons Attribution-NonCommercial-NoDerivs License, which permits use and distribution in any medium, provided the original work is properly cited, the use is non-commercial and no modifications or adaptations are made. © 2024 The Author(s). Strategic Management Journal published by John Wiley & Sons Ltd. 790 Strat Mgmt J. 2025;46:790–814. wileyonlinelibrary.com/journal/smj listed firms and qualitative data derived from interviews with military directors who have served on boards of those firms. Our findings underscore that principles ingrained via military service may influence corporate governance, particularly one of its core components: executive accountability. KEYWORDS accountability, board of directors, CEO dismissal, military directors, performance 1|INTRODUCTION CEO dismissal—the act of replacing CEOs against their will (Zhang, 2006,2008)—is described as “a window to the heart of executive accountability”(Crossland & Chen, 2013, p. 79). Because of their role within a firm, CEOs are personally responsible for firm performance (Finkelstein et al., 2009; Fredrickson et al., 1988). When firm performance is low, the board of directors is expected to ensure executive accountability, which may include CEO dismissal (Wiersema & Zhang, 2011). However, despite this expectation, extensive empirical evidence indicates high variance in CEO dismissal rates among poorly performing firms (for reviews, see Berns et al., 2021; Hilger et al., 2013). This variance raises the following question: Why are the boards of some underperforming firms more likely than others to hold the CEO accountable through dismissal? Prior research addressing this question has focused primarily on agency-based explanations related to CEO power vis-à-vis the board or the board's loyalty to the CEO (e.g., Boeker, 1992; Flickinger et al., 2016) and situational explanations related to analysts' evaluations of the CEO or the availability of CEO replacements (e.g., Wiersema & Zhang, 2011; Zhang, 2006). More recently, a smaller body of research has elucidated the importance of director backgrounds, suggesting that directors' demographic (Shin & You, 2023) and business backgrounds (Zorn et al., 2020) influence a board's decision to dismiss an underperforming CEO. Additionally, directors vary in their nonbusiness backgrounds. In particular, directors with military backgrounds, hereafter referred to as military directors, are commonly found on the boards of public firms (e.g., Fedaseyeu et al., 2018; Koch-Bayram & Wernicke, 2018; Marino, 2015). Military background is recognized for shaping individual accountability (e.g., Broedling, 1981; Franke, 2001; Lerner & Tetlock, 1999; Romzek & Ingraham, 2000), thus potentially influencing the manner in which boards with military directors approach executive accountability. Nevertheless, the relationship between the board participation of military directors and CEO dismissal remains unexplored. To theorize about this relationship, we draw upon military science research, which suggests that military service has a lasting impact on individuals' values and beliefs, significantly shaping their understanding of what constitutes appropriate behavior later in life (e.g., Sonpar et al., 2022; Zhang et al., 2022). Specifically, military service instills in individuals a unique and lifelong system of values and beliefs regarding accountability, making individuals accustomed to being held accountable and holding others accountable for actions and outcomes PAVI  CEVI  C and KEIL 791 (e.g., Broedling, 1981; Franke, 2001; Romzek & Ingraham, 2000). These values and beliefs align directly with executive accountability, a central mechanism for boards to ensure that CEOs act in the best interest of shareholders (e.g., Crossland & Chen, 2013; Huse, 2005; Roberts et al., 2005). Accordingly, we argue that accountability values and beliefs prompt military directors to advocate for stricter CEO accountability when firm performance is poor, thereby increasing the likelihood of CEO dismissal. As military directors have received limited attention in prior research, we enrich our deductive theorizing by adding insights from qualitative data obtained through interviews with 20 military directors who have collectively served on the boards of 34 public firms. We find empirical support for our argument based on the results from regression analyses of quantitative data on CEO dismissal within 865 public firms in the United States between 2010 and 2020. In our supplementary analyses on boundary conditions, we find that the influence of military directors on CEO dismissal is more pronounced when military directors serve on a nominating committee. We also find that military directors might even facilitate the dismissal of powerful (stock owner or long-tenured) CEOs but not CEOs who concurrently hold the position of a board chair. Through our arguments and findings, we contribute to the literature on CEO dismissal by revealing a novel, accountability-related factor that explains the variance in CEO dismissal rates across low-performing firms. 2|THEORY AND HYPOTHESIS 2.1 |Performance-related CEO dismissal The board has a duty to evaluate the CEO's leadership for shareholders, and as a result, the CEO is formally accountable to the board (Huse, 2005). Boards employ firm performance as the primary metric for evaluating the CEO (Hambrick & Fukutomi, 1991). Given the CEO's position at the top of the firm, boards assign a disproportionately higher level of accountability to the CEO for firm performance than do other executives (Boeker, 1992). In cases of low performance, particularly compared to industry competitors (Haleblian & Rajagopalan, 2006), the board is expected to ensure CEO accountability via CEO dismissal (Fredrickson et al., 1988; Wiersema & Zhang, 2011). However, empirical evidence indicates substantial variation in CEO dismissal rates among poorly performing firms (Berns et al., 2021; Hilger et al., 2013), which implies that the boards of some firms are more inclined than the boards of other firms to attribute low performance to the CEO and hold the CEO accountable. Recent literature reviews show that there has been growing scholarly effort to examine such variation (Berns et al., 2021; Gentry et al., 2021), pointing to two sets of explanatory factors. The first set of factors, rooted in the agency perspective, focuses on the CEO's power relative to the board and the board's loyalty to the CEO. For example, CEOs with extensive tenure within the firm (Ocasio, 1994), substantial ownership of the firm's stock (Wowak et al., 2011), or simultaneous roles as board chairs (Yi et al., 2020) can attribute low performance to external factors or other executives, insulating themselves from stringent accountability (Boeker, 1992). The second set of factors, derived from a contingency perspective, pertains to situational factors that prompt boards to demand stricter CEO accountability. For instance, boards lean toward CEO dismissal when analysts and employees assess the CEO's leadership unfavorably (Park et al., 2021; Wang et al., 2023) or when suitable CEO replacements are readily available (Zhang, 2006). 792 PAVI  CEVI  C and KEIL Beyond these factors, a board's governance approach is influenced by the backgrounds of its directors (Johnson et al., 2013). The demographic, business, and nonbusiness backgrounds shape what directors value, believe, and think about, impacting their decisions (Forbes & Milliken, 1999). Shin and You (2023) found that directors' demographic backgrounds create board faultlines, increasing disagreement among directors and thus hindering the removal of underperforming CEOs. Zorn et al. (2020) found that directors' business backgrounds, especially extensive board experience, reduce the choice-supportive bias that hinders boards from dismissing a CEO. In addition to demographic and business backgrounds, we expect directors' military backgrounds, a notable and life-shaping nonbusiness background (Campbell et al., 2023), to influence CEO dismissal. 2.2 |Military directors Research in military science suggests that military service constitutes one of life's most profound experiences, significantly molding individuals' values and beliefs (Elder, 1986; Franke, 1998; Jackson et al., 2012). This alteration of values and beliefs begins during military training (Arkin & Dobrofsky, 1978; Soeters, 1997) as an individual's civilian identity evolves into a new military identity (Caspar et al., 2020; Jackson et al., 2012). The values and beliefs acquired during military service become ingrained, shaping how individuals think, feel, and act throughout their lives (Elder, 1986; Jenning & Markus, 1977; Wong et al., 2003). Even a relatively short period in the military can be sufficient for the military imprint to take hold and exert a lasting impact on how individuals interpret what constitutes appropriate behavior later in life (Sonpar et al., 2022; Zhang et al., 2022). In an interview with Korn/Ferry, a military director at Edwards Lifesciences and Xylem, emphasized that “[military] value systems guide your daily actions and decisions”(Duffy, 2006), while a director we interviewed noted, “when we work in a civilian organization, we transfer military beliefs and values and act based on those beliefs and values.” 1 In particular, during military training and service, people internalize values and beliefs related to accountability—the obligation to accept responsibility for one's actions and their outcomes (Lerner & Tetlock, 1999)—which leads to a habit of both being held accountable and holding others accountable for their actions and the outcomes of those actions (Ricks, 2012; Romzek & Ingraham, 2000). This process of internalizing such values and beliefs is influenced by the significance of the chain of command in military structures, the emphasis on adhering to orders and rules in military decision-making (Feld, 1959; Roberts et al., 1994), and the prevailing culture within the military that consistently upholds high standards for accountability (Hall, 2012; Wilson, 2008). Cultivating a sense of accountability and the expectation of the same from others begins early in military training (Bolles & Patrizio, 2016; Wong et al., 2003). The US Army's training guide emphasizes the fundamental value that soldiers are required to cultivate, which is “to be accountable”(Department of the Army, 2015, pp. 4–9). As accountability values and beliefs are integral to military culture (Wilson, 2008), they remain regularly reinforced throughout military service, or as one director simply puts it, “accountability is part of the discipline we grew up with in the military.” 1 Section 1 of Table A1 in the Online Appendix offers additional evidence from our interviews concerning the longlasting impact of military values and beliefs on individuals' behaviors and decisions. PAVI  CEVI  C and KEIL 793 Anecdotal evidence supports these ideas. Military veterans in leadership roles in the education sector reported that they “have learned about accountability during military service”and that “their military experiences equipped them to lead in the face of accountability demands” (Bolles & Patrizio, 2016, p. 109). A military director at Xerox emphasized that “the leader should always take personal responsibility for results of the organization”(Lin et al., 2011, p. 1). A director we talked to compared military directors to other directors, explaining that “paying more attention and giving more weight to responsibility and accountability in achieving commitments and goals is where the impact of military people in the boardroom comes from; people in the business world are more forgiving.” 2 In summary, insights from military science, supported by our interview evidence, indicate that military directors hold strong beliefs that leaders are personally responsible for their organization's performance and emphasize accountability in their decision-making. Therefore, as detailed next, we expect military directors to prompt boards to attribute low performance to the CEO and to hold the CEO accountable for it, which increases the probability of CEO dismissal. 3 2.3 |Military directors and performance-related CEO dismissal Boards often grapple with ambiguity when assessing firm performance (Haleblian & Rajagopalan, 2006). In performance crises, high accountability standards compel military directors to address such ambiguity with thorough information processing (Roberts et al., 1994; Tetlock, 1985). During this process, they likely insist that the CEO discloses all information, even if it entails delivering “bad news”(Bamber et al., 2010; Soeters, 1997). This transparency is crucial since outside directors depend on the CEO to learn about the firm (Haleblian & Rajagopalan, 2006), forming the basis for the board's accurate performance assessment. As one military director expressed, “we [military directors] treat the situation as we find it rather than as we would wish it to be, and we tend to be interested in the accuracy and brevity of information; not everyone on a board will be that way.”In their quest to understand performance reasons, military directors actively “search for information about how well the CEO is performing” (Fredrickson et al., 1988, p. 258) and insist on a direct evaluation of the CEO's contribution to performance issues. As one military director emphasized, “CEO evaluations must be done rigorously.”Without such guidance from military directors, CEO evaluations can become mechanical processes, with directors merely going “through the motions”(Conger et al., 1998, p. 8), potentially allowing the CEO too much leeway in diagnosing the severity of the crisis. Boards' performance evaluations inevitably involve attribution processes to understand poor performance causes (Haleblian & Rajagopalan, 2006). The CEO can influence such processes. For example, with significant power, a CEO can control the board's agenda, allocating less time to discussing causes of underperformance or using inside information to shape the board's perceptions (Ocasio, 1994; Yi et al., 2020). An influential CEO may craft a narrative that attributes low performance to external factors (Park et al., 2020; Park et al., 2021) or shifts blame to other executives (Boeker, 1992). However, for boards with military directors, a CEO may struggle to 2 Section 2 of Table A1 in the Online Appendix presents additional interview evidence related to military directors' accountability values and beliefs. 3 In formulating this hypothesis, we briefly reference evidence from interviews with military directors to shed light on their approach to CEO accountability and the underlying board processes related to CEO evaluations and dismissals. Additional interview evidence is presented Section 3 of Table A1 in the Online Appendix. 794 PAVI  CEVI  C and KEIL sway the board's interpretation or misattribute low performance. Military directors are comfortable asking difficult questions (Shortland et al., 2020), which may prompt other directors to do the same. As one military director said, “when I nudge folks a little bit into the conversation about CEO performance, everybody lets loose.”Believing in a leader's ultimate responsibility for success and failure (Bolles & Patrizio, 2016; Wilson, 2008), military directors advocate connecting low performance to the CEO's leadership while being sensitive to a CEO's attempts to shift blame to other executives (Boeker, 1992). In contrast, for boards without military directors, the CEO may more easily shape the board's view on performance, and who, rather than the CEO, should be held accountable for it. Some directors may help the CEO avoid accountability. CEO friends may see performance declines as temporary and persuade fellow directors to trust the CEO's ability to rectify the situation (Haleblian & Rajagopalan, 2006). CEO-appointed directors may feel obligated to return to the CEO and avoid overt criticism (Boeker, 1992). However, as military directors actively seek to “surrender private interests”(Daboub et al., 1995; Soeters, 1997) and “place service before self”(Franke, 2001), they may oppose directors who prioritize personal relations with the CEO over the firm's interests. In this context, “you can't turn the light switch on immediately, but you can begin to build that requirement”and “after numerous difficult discussions—and this is one other thing the military teaches you; sometimes you have to have tough discussions—you build that requirement,”as two military directors explained. Without this accountability push from military directors, other directors will prioritize loyalty to the CEO over holding them accountable for low performance. While the board may attribute poor performance to the CEO and agree on accountability, the scarcity of CEO replacements may lead to giving the CEO more time for performance recovery (Martin & Combs, 2011; Zhang, 2006). However, driven by strong accountability values and beliefs, military directors are less inclined to approve such decisions. As one military director noted, “the decision to terminate somebody is not an easy one, but too often businesses allow a problem to exist until it turns into a mushroom cloud disaster as opposed to dealing with it as things happen. I think part of the legacy for me out of the military is dealing with the issue in a timely manner instead of letting it fester.”Military directors may seek to expedite the dismissal of an underperforming CEO by, for example, advocating for early searches for potential replacements (Schepker et al., 2018) or encouraging directors to search for suitable replacements via their networks (Harris & Helfat, 2007). In summary, these arguments suggest the following hypothesis. Hypothesis. The negative association between firm performance and CEO dismissal strengthens (becomes more negative) with the board representation of military directors. 3|METHODOLOGY 3.1 |Sample and data To test our hypothesis, we sampled manufacturing firms that have primary activity in industries with two-digit SIC codes ranging from 20 to 39 and are listed on US stock exchanges (cf. Wiersema & Zhang, 2011; Zhang, 2006). We tracked firms between 2010 and 2020—a period between the financial crisis and the pandemic crisis, during which exogenous disruptions are PAVI  CEVI  C and KEIL 795 unlikely to have impacted the corporate governance system or CEO dismissal rates (e.g., Gao et al., 2017; Shin et al., 2022). Our sample consisted of a panel comprising 7443 firm-year observations involving 865 unique firms. This panel was unbalanced because some firms ceased to exist or were acquired during the sample period and because we omitted observations with missing data. We also conducted interviews with military directors. Initially, we compiled a list of 200 such directors who served on the boards of the sampled firms in recent years. Leveraging a commercial database called RocketReach, which provides real-time verified email addresses for professionals worldwide, we acquired at least one email address for 144 military directors on this list. Among the 32 directors who responded, 16 declined our invitation, 2 provided brief reflections in writing, and 14 agreed to an interview. We arranged 6 additional interviews using a snowball approach. In total, we interviewed 20 military directors who collectively served the boards of 34 firms. 4 We asked open-ended questions to directors regarding their military service, its potential influence on their approach to corporate governance, and the CEO evaluation and related processes of boards in which they serve. We supplemented these questions with ones that seemed important to pursue during the interview (e.g., inquiries about a particular CEO dismissal case highlighted by the interviewee) (e.g., Bourgeois & Eisenhardt, 1988). All interviews were conducted via Zoom, lasting 30–45 min. This resulted in more than 120 pages of transcribed text. We have used these interview data in the theory and hypothesis section to strengthen our deductive reasoning and enhance the face validity of our arguments. We further utilized interview insights to deepen the interpretation of the results obtained from the supplementary analyses of our quantitative data. 3.2 |Dependent variable: CEO dismissal To measure our dependent variable, we utilized the database compiled by Gentry et al. (2021), encompassing data on CEO dismissal events between 2010 and 2018. We coded dismissals for 2019 and 2020, adhering to the procedure outlined by Gentry et al. (2021). We measured CEO dismissal as a binary variable, taking on the value of 1 if the firm dismissed the CEO in a particular year due to job performance and 0 otherwise, that is, if the firm did not change the CEO; if the CEO departed involuntarily due to illness, death, or policy-related issues; or if the CEO departed voluntarily due to retirement or the pursuit of new opportunities (e.g., Wiersema & Zhang, 2011). 5 4 To reduce social desirability bias, we adhered to best practice recommendations for conducting interviews with elite individuals, such as ensuring confidentiality and asking open-ended questions (Solarino & Aguinis, 2021). 5 When justifying CEO departures, “many companies will indicate that a CEO departed voluntarily,”framing a departure, for example, as CEO pursuing new opportunities, “when in fact the departure was forced by the board” (Wiersema & Zhang, 2011, p. 1168). To address a concern that such framing of CEO dismissals may introduce bias in our findings, we examined other involuntary departures resulting from behavioral or policy-related issues and voluntary departures driven by the pursuit of new opportunities (Gentry et al., 2021). When we broadened our definition of CEO dismissal to encompass departures related to behavioral or policy-related issues, we found results consistent with the results reported below. The same held true when we expanded the definition of CEO dismissal to include departures framed as CEO pursuing new opportunities. This mitigates a concern that the firms' strategic framing of CEO departures on the CEO dismissal data could impact our findings. 796 PAVI  CEVI  C and KEIL 3.3 |Independent variable: Firm performance We followed previous studies on CEO dismissal by using return on assets (ROA) as a performance indicator (e.g., Zhang, 2006; Zhang, 2008). Specifically, using data from Compustat, we measured firm performance as the firm's ROA minus the median ROA within the firm's primary industry (four-digit SIC code, excluding the focal firm) for a given year. 3.4 |Moderator variable: Military directors For each outside director in our sample, we sought to identify their employment or service experience with the US Department of Defense, one of its divisions (e.g., US Army, US Navy, Marine Corps, US Air Force, National Guard), or its foreign equivalents (Fedaseyeu et al., 2018; Koch-Bayram & Wernicke, 2018). 6 We did this in three steps. First, we inspected the biographies of directors available in BoardEx, the largest dataset containing biographical and career information about corporate directors. Second, we consulted additional data sources to verify that directors not classified as military directors, according to BoardEx, had indeed never worked or served in the military. We leveraged the US Securities and Exchange Commission (SEC) requirement that firms listed on US stock exchanges disclose director backgrounds in their proxy statements (Krause et al., 2016). We gathered proxy statements for firms corresponding to the sample years via the SEC's Edgar platform. We conducted content analysis on the biographies of directors using the algorithm developed by Adams et al. (2018), along with a dictionary that included keywords such as “military,”terms referring to military branches (e.g., “army”), ranks (e.g., “lieutenant”), or services (e.g., “war”). We also read the biographies that included such keywords to minimize coding errors. Third, we examined director profiles in the Notable Names Database, a commercial database that contains biographical information about individuals of public interest (Koch-Bayram & Wernicke, 2018), and conducted keyword searches of news coverage related to directors through LexisUni. These searches utilized strings that combined a director's and a firm's name with the keywords used in the previous step. Following these steps, we identified 598 military directors. Our moderator, military directors, is the number of military directors serving on a board each year. We examined the military backgrounds of these directors. Most military directors for whom we could obtain rank information were officers, with some achieving high ranks, such as general or admiral. Some directors spent most of their professional lives in military service, yet many served for less than a decade. Approximately one-quarter of the military directors were affiliated with each of the following branches: the US Army, US Navy, and US Air Force, with the remaining quarter distributed across other branches. 7 These statistics indicate that the effects of military directors reported in this study are unlikely to be driven solely by officers 6 Prior research has also classified individuals who served with the US Department of Homeland Security (DHS) as having a military background (e.g., Fedaseyeu et al., 2018), likely due to the shared values of integrity, accountability, and a commitment to “service before self”that are commonly observed also among DHS personnel (see, e.g., https:// www.dhs.gov/core-values). Consistent with this prior research, we have also designated individuals as “military directors”if they have served within the DHS. In our dataset, there are 41 directors who meet this criterion, and among them, 13 also possess other types of military backgrounds. Excluding the 28 military directors who only served within the DHS from our sample does not impact our findings. 7 The detailed statistics can be found in the Online Appendix (Table A2). PAVI  CEVI  C and KEIL 797 individuals and organizations embedded in military communities share military-like values (Hall, 2012; Law & Mills, 2017). Based on this research, we expected firms in militarized communities to be more inclined to appoint military directors to their boards than other firms. TABLE 3 Endogeneity analyses. Selection into military service Appointment of military directors Model 1 (first stage) Model 2 (second stage) Model 3 (first stage) Model 4 (second stage) DV =military directors DV =CEO dismissal DV =military directors DV =CEO dismissal Variables bpbpbpb p Firm performance × Military directors −1.72 .03 −1.74 .03 Military directors .50 .06 .46 .14 Firm performance −.24 .30 −.96 .03 −.23 .33 −.97 .03 Firm size .14 .01 .13 .22 .13 .01 .13 .20 Financial leverage .00 .75 −.01 .63 .00 .80 −.01 .62 R&D intensity .02 .64 .01 .93 .02 .63 .01 .91 Capital intensity .09 .08 −1.09 .38 .11 .05 −1.09 .38 Diversification .04 .02 −.07 .20 .05 .01 −.07 .21 Military contracts 2.29 .00 −4.85 .07 2.19 .00 −4.72 .12 Board size .11 .00 .02 .66 .11 .00 .02 .64 Board independence 2.07 .00 .68 .48 2.14 .00 .72 .47 Hiring directors .04 .00 −.04 .22 .05 .00 −.04 .24 CEO ownership −.01 .18 −.04 .21 −.01 .25 −.04 .22 CEO tenure .02 .01 −.04 .11 .02 .00 −.04 .12 CEO duality .09 .26 −.40 .02 .08 .37 −.40 .03 CEO age −.01 .27 .04 .00 −.01 .52 .04 .00 CEO gender −.02 .93 .42 .22 −.03 .88 .41 .23 Internal CEO candidate .01 .83 −.33 .11 .03 .66 −.33 .11 Korean War .41 .00 Vietnam War .17 .01 Active duty and reserve service .01 .03 Military bases .07 .01 Residuals −.61 .01 −.57 .03 Intercept −3.92 .00 −7.34 .00 −4.10 .00 −7.01 .00 N (firm-years) 7443 7443 7443 7443 Log-likelihood −6642.98 −754.56 −6698.07 −755.03 Note: Unstandardized coefficients (b) are reported with pvalues. Two-tailed tests for all coefficients. Year effects are included in all the models. 804 PAVI  CEVI  C and KEIL We created two proxies for a firm's embeddedness in such a community based on the state in which the firm's headquarters were located: (a) the number of military members (in thousands) in active duty and reserve service (obtained from the Defense Manpower Data Center) and (b) the number of military bases (obtained from military.com). These variables were positively associated with the board representation of military directors in the first-stage model (Table 3, Model 3: b=.01, p=.03; b=.07, p=.01) and were not correlated with residuals from the second stage, satisfying the exclusion restriction criteria (Wooldridge, 2015). In the second stage (Table 3, Model 4), which included residuals from the first stage as an additional control variable, the coefficient estimates for firm performance (b=−.97, p=.03) and the interaction term (b=−1.74, p=.03) remained negative and predictive of CEO dismissal. After accounting for potential endogeneity from unobserved characteristics of firms (boards), our hypothesis remained supported. 6|SUPPLEMENTARY ANALYSES OF BOUNDARY CONDITIONS 6.1 |Board role of military directors Does the influence of military directors on CEO dismissal depend on their role on the board? When military directors hold key leadership roles, such as board chairs or lead directors, their influence on CEO dismissal may be more substantial. However, we found no evidence to support this notion, likely because in our dataset, military directors only served as chairs and lead directors in 2.2 and 3.6% of the observations, respectively (6.0 and 9.7% of the observations corresponding to firm-years with military directors). We also checked whether military directors served on the nominating committee, which typically leads the CEO evaluation process (Zhang, 2008). This was the case for 16.0% of the observations (44.3% of the observations corresponded to firm-years with military directors). We created two variables by separating military directors into those serving and not serving on the nominatingcommittee,eachofwhichwetheninteractedwithfirmperformance.InModel1of Table 4, the two interaction coefficients indicate that military directors increase the likelihood of dismissing underperforming CEOs irrespective of whether (b=−2.66, p=.02) or not (b=−1.81, p=.09) they serve on the nominating committee. While a formal test for the difference in the significance of these two interaction coefficients showed no significant difference, the practical significance of the effect of military directors appears greater when they serve on the nominating committee, likely due to their greater direct involvement in CEO evaluations. Indeed, as one military director explained, “the nominating committee takes the lead on CEO evaluation and generates the evaluation report; …only after the nominating committee prepares the report, we [directors] have a frank discussion about the CEO in the board meeting.”These results suggest that the influence of military directors on CEO dismissal does not depend upon the role they play on the board; however, they may have more impact when they serve on the nominating committee. 6.2 |CEO power Can military directors prompt boards to dismiss CEOs who hold significant power? To address this question, we first tested our hypothesis in a subsample corresponding to a condition of high CEO power, determined based on the above-median value of the composite index that PAVI  CEVI  C and KEIL 805 TABLE 4 Supplementary analyses of boundary conditions. Nominating committee Powerful CEO (composite) Powerful CEO (ownership) Powerful CEO (tenure) Powerful CEO (duality) Model 1 Model 2 Model 3 Model 4 Model 5 DV =CEO dismissal DV =CEO dismissal DV =CEO dismissal DV =CEO dismissal DV =CEO dismissal Variables b pb pb pbpbp Firm performance ×Military directors on NC −2.66 .02 Firm performance ×Military directors not on NC −1.81 .09 Military directors on NC −.30 .20 Military directors not on NC −.47 .04 Firm performance ×Military directors −2.88 .04 −2.35 .01 −3.35 .00 −2.74 .10 Military directors −.15 .36 −.14 .46 −.13 .41 −.09 .57 Firm performance −.73 .14 −1.01 .36 −1.63 .00 −.31 .73 −1.30 .17 Firm size .17 .09 .14 .42 −.26 .18 .05 .77 .05 .78 Financial leverage −.01 .59 .01 .82 −.05 .18 −.03 .34 .05 .20 R&D intensity −.10 .65 −.58 .45 −.23 .16 −.07 .68 −.35 .39 Capital intensity −.63 .60 .69 .45 −1.07 .67 −.07 .90 .48 .40 Diversification −.05 .36 .05 .54 −.20 .09 −.09 .29 .06 .44 Military contracts −2.73 .27 −1.17 .53 −.05 .99 −1.30 .72 −1.41 .46 Board size .06 .16 .12 .08 .09 .18 .15 .02 .15 .04 Board independence 1.41 .12 1.33 .29 2.78 .06 1.49 .20 1.99 .14 Hiring directors −.03 .44 −.04 .43 .07 .21 .09 .11 −.07 .25 CEO ownership −.04 .20 −.03 .26 −.04 .26 −.04 .30 −.02 .45 CEO tenure −.03 .21 .00 .94 .00 .99 .01 .77 −.01 .82 CEO duality −.39 .03 .37 .44 −.26 .31 −.20 .42 CEO age .04 .00 .04 .08 .05 .02 .04 .07 .04 .05 CEO gender .41 .23 .29 .59 .29 .61 .77 .16 .39 .48 Internal CEO candidate −.33 .11 −.07 .82 −.62 .06 −.15 .56 −.18 .56 Intercept −7.51 .00 −9.03 .00 −9.15 .00 −9.93 .00 −9.52 .00 N (firm-years) 7443 3860 3878 4123 3236 Log-likelihood −754.56 −302.46 −303.39 −352.52 −270.55 Note:NC=nominating committee. Unstandardized coefficients (b) are reported with pvalues. Two-tailed tests for all coefficients. Year effects are included in all the models. 806 PAVI  CEVI  C and KEIL combines standardized values of CEO ownership, CEO tenure, and CEO duality. The results of Model 2 in Table 4indicate that performance does not predict the dismissal of powerful CEOs (b=−1.01, p=.36); however, it does so in the presence of military directors (b=−2.88, p=.04). Subsequently, we extended our analyses to subsamples based on individual indicators of CEO power. In Models 3 and 4, we observed similar results to our main results for CEOs whose power emanates from substantial stock ownership (b=−1.63, p=.00; b=−2.35, p=.01) or from lengthy tenure as CEO (b=−.31, p=.73; b=−3.35, p=.00), respectively. However, the results did not support our hypothesis in the context of CEOs who also hold the position of board chair (Model 5: b=−1.30, p=.17; b=−2.74, p=.10). As one military director explained, “When there is one person acting as the CEO and board chair, that gives them a very powerful position, but it also makes them fully accountable. Such CEOs are not held accountable by the board; they are held accountable by the external parties.”Overall, these results suggest that while military directors may trigger the dismissal of powerful (stock owner or long-tenured) CEOs, CEO duality is a boundary condition for the influence of military directors on CEO dismissal. 7|DISCUSSION In this study, we address a recent call to “depart from agency-centered or situational explanations”of CEO dismissal (Park et al., 2020: 109) by examining directors' military backgrounds as a critical determinant of the heterogeneity in CEO dismissal across firms. Prior studies investigating why some boards dismiss underperforming CEOs while others do not have overlooked the influence of military backgrounds despite it being frequently present on boards of public firms (e.g., Fedaseyeu et al., 2018; Koch-Bayram & Wernicke, 2018; Marino, 2015). Our argument, supported by empirical evidence, suggests that directors with military backgrounds uniquely influence a board's approach to executive accountability, subsequently affecting the removal of poorly performing CEOs. This finding enriches our understanding of the factors that drive CEO dismissal and paves the way for further investigation into the effects of directors' backgrounds on CEO dismissal. This line of inquiry is important because directors' backgrounds are multifaceted, varying along a wide range of demographic, business, and nonbusiness characteristics (Johnson et al., 2013), many of which can influence their approach to CEO accountability and, ultimately, their decisions on CEO dismissal. For instance, regarding demographic background, prior research has shown that directors with Ivy League education highly value R&D (Dalziel et al., 2011). Consequently, such directors may be less inclined to dismiss a CEO who underperforms but is committed to investing in R&D. Similarly, in terms of professional backgrounds, prior research has shown that directors with financial backgrounds are highly sensitive to CEOs' grandiose actions, such as large acquisitions (Jensen & Zajac, 2004). Such directors may prompt boards to hold the CEO strictly accountable for the failure of such actions. Therefore, a fruitful direction for future studies on CEO dismissal is to systematically examine various types of director backgrounds. Prior studies have emphasized that CEOs with military backgrounds, owing to their integrity, are less inclined to engage in fraudulent activities (Benmelech & Frydman, 2015; Koch-Bayram & Wernicke, 2018). We complement this research by underscoring that a military background is also linked to values and beliefs regarding accountability, shaping how directors approach the accountability of executives. Given the unique values and beliefs held by military directors, it is plausible that their impact extends beyond the context of CEO dismissal induced PAVI  CEVI  C and KEIL 807 by performance-related issues. For example, as a logical extension, future research should investigate whether the presence of military directors encourages boards to hold CEOs more accountable through dismissal in cases of financial misconduct (see also Park et al., 2020). Furthermore, recent research has revealed that even though boards are expected to act fairly, they display gender bias (Gupta et al., 2020) and outgroup bias (Thams & Rickley, 2024) when deciding upon CEO dismissal. It would be interesting to examine whether military directors, guided by their values and beliefs, help mitigate these biases. This exploration can also be extended beyond the context of CEO dismissal. Our interviews suggest that military directors often employ a structured approach to performance evaluations, another crucial element in ensuring CEO accountability. This raises the possibility that boards with military directors may be more likely to link CEO compensation tightly to their performance. Future studies can explore this possibility. The results from our supplementary analyses, coupled with insights gathered through interviews with military directors, suggest that the influence of a director's background on CEO dismissal might be contingent upon the board structure and the composition of its committees. For example, we find that military directors exert less influence on CEO dismissal on boards featuring dual CEO-chairperson roles. In contrast, when military directors serve on a nominating committee, their impact on CEO dismissal is more pronounced. While our study was not explicitly designed to unearth the interplay between director backgrounds and contingency factors, these preliminary findings imply the need for a more robust theoretical integration that considers such an interplay of director backgrounds and the structure of boards and their committees. Such an integrated approach will be essential for obtaining a more complete understanding of CEO dismissal. The impact of military directors on board decisions should also be analyzed in conjunction with the other characteristics of directors. Recent research suggests that directors with specific ideologies, such as political liberalism, are more inclined to attribute performance shortfalls to external factors than to the CEOs themselves (Park et al., 2020). It would be intriguing to explore the outcomes of boardroom processes involving such directors and military directors. Similarly, recent qualitative research points out that female directors place greater emphasis on accountability during board meetings than do their male counterparts (Wiersema & Mors, 2024). Hence, it would be interesting to determine whether and under what conditions female directors and military directors complement or substitute each other in directing the board's attention toward executive accountability. In developing studies along these lines, researchers could draw not only from military science, as we did in this study, but also from the wealth of research on accountability in fields such as social psychology, politics, and justice (Lerner & Tetlock, 1999; Tetlock, 1985). In addition to influencing the board's approach to executive accountability, military directors can impact the firms they oversee in other significant ways. Previous research has demonstrated that CEOs encounter substantial challenges during crises, often leading directors to exit the company (Withers et al., 2012). Therefore, it is worth investigating whether military directors exhibit a greater propensity than other directors to stand by the company during a crisis, share responsibility for strategic decisions with the CEO, and contribute to the firm's resilience in the face of adversity. As one military director we interviewed said, “Firms are looking for people who will make the right decision in somewhat painful situations, and every firm faces numerous those different situations throughout its life.”Exploring the impact of military directors on the decisions made by firms during turbulent times could provide valuable insights. 808 PAVI  CEVI  C and KEIL More broadly, since directors' backgrounds and accompanying values and beliefs strongly “reflect directors' assumptions about how to achieve effective corporate governance”(Gupta et al., 2022, p. 1476), future research should investigate how boards align their decisions with the values and beliefs of military directors. In undertaking this investigation, it is crucial to recognize that while military directors on boards may offer advantages, there may also be associated costs. One potential advantage, as we also observe in our data, is that boards comprising military directors tend to be more protective of well-performing CEOs, diminishing the likelihood of their dismissal. Additionally, research in military science has debated the extent to which military decision-making is procedurally rational (Shortland et al., 2020), which suggests that military directors may shape the comprehensiveness of board decision-making processes (Pavi cevi c et al., 2023; Pavi cevi c & Keil, 2021). As a potential disadvantage, we observed that the influence of military directors on board decisions strengthens with increased board representation, which may indicate a potentially heightened susceptibility to groupthink within the board, a phenomenon often associated with adverse outcomes (Janis, 1982). Additionally, if many military directors encourage boards to hold CEOs accountable even for temporary decreases in performance caused by external factors, this tendency could lead to frequent CEO dismissal. However, frequent CEO turnover is generally not beneficial for firms (e.g., Schepker et al., 2017). Hence, future research should strive to present a balanced view of the potential benefits and costs of having military directors serve on the board. 7.1 |Limitations Directors are not explicitly requested to disclose their military background in any of the data sources we exploited. Although we used multiple data sources to mitigate the risk of omitting directors' military backgrounds during our coding process, we cannot fully rule out the possibility of measurement error in our moderator variable. Relatedly, we posited that military directors contribute accountability values and beliefs to the board, enhancing the board's readiness to enforce CEO accountability in cases of subpar performance. To test this assertion empirically, however, we did not directly measure these values and beliefs; instead, we inferred them from the directors' military backgrounds. Although similar nonintrusive approaches have been used in previous research on CEO dismissal (e.g., Park et al., 2020), future studies should attempt to validate our findings by accessing primary data related to values and beliefs. This research is also important because directors with other backgrounds, such as healthcare, may harbor strong accountability values and beliefs due to the nature of their work. In boardrooms, “accountability is realized through a wide range of behaviors—challenging, questioning, probing, discussing, testing, informing, debating and exploring”(Roberts et al., 2005, p. 12). While we enhanced our theorizing by conducting a series of interviews, which provided insights into how military directors may engage in these behaviors to hold CEOs accountable for poor performance, our data did not allow us to directly observe the specific content of board meetings or the actions of individual directors. Hence, future research should attempt to collect transcripts from board meetings or conduct interviews with directors during periods of poor performance, enabling closer examination of how boards realize executive accountability. We examined CEO dismissal within US firms. The level of CEO accountability for poor performance varies by country (Crossland & Chen, 2013). This variation may influence the strength of the relationship between military directors and CEO dismissal. Future research PAVI  CEVI  C and KEIL 809 should explore this possibility. The length and nature (voluntary vs. mandatory) of military service can also differ among countries, resulting in variations in the values and beliefs held by military directors. While some studies have suggested that military culture is universal (Soeters, 1997), further investigation is necessary to understand the impact of military directors on CEO dismissal in non-US firms. 8|CONCLUSION This study explains how military directors influence CEO dismissal. Our primary contention is that military directors exhibit a strong sense of accountability, prompting their boards to hold the CEO accountable via dismissal when firm performance is low. Through a combination of quantitative analysis of CEO dismissals and qualitative insights derived from interviews with military directors, we present evidence supporting this argument. From a theoretical perspective, we hope this study inspires scholars to delve more deeply into director backgrounds as they strive to develop an accountability perspective on CEO dismissal. From a practical standpoint, we underscore that integrating the accountability principles cultivated through military service into corporate governance could be valuable in holding executives accountable for their actions and performance. ACKNOWLEDGMENTS The authors gratefully acknowledge the editorial guidance of the associate editor, Yan Anthea Zhang, and the invaluable comments from two anonymous reviewers. The authors also thank Yuval Deutsch, Jerayr (John) Haleblian, Pasi Kuusela, Taco Reus, Georg Wernicke, and seminar participants at Nanyang Technological University, Singapore, and Hong Kong Polytechnic University, Hong Kong, for their feedback. ChatGPT and Grammarly were used to enhance the grammar and clarity of the sentences. DATA AVAILABILITY STATEMENT The data that support the findings of this study are available from commercial vendors such as BoardEx, US Executive Compensation Database, and Compustat Database, as well as public sources such as the System for Award Management (SAM) of the US Government and the electronic filing system (EDGAR) of the US Securities and Exchange Commission. ORCID Stevo Pavi cevi chttps://orcid.org/0000-0001-6842-0405 Thomas Keil https://orcid.org/0000-0001-6124-0655 REFERENCES Adams, R. B., Akyol, A. C., & Verwijmeren, P. (2018). Director skill sets. Journal of Financial Economics,130(3), 641–662. Allison, P. D. (1999). Multiple regression: A primer. Pine Forge Press. Angrist, J., & Krueger, A. B. (1994). Why do World War II veterans earn more than nonveterans? Journal of Labor Economics,12(1), 74–97. Angrist, J. D. (1990). Lifetime earnings and the Vietnam era draft lottery: Evidence from social security administrative records. American Economic Review,80(3), 313–336. 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