Do boards learn about their CEOs' capabilities during crises? A new study in the Journal of Banking & Finance answers this question

A new study written by Prof. Dr. Peter Schäfer (Chair of Business Administration, in particular Management Accounting and Control) and published in the Journal of Banking & Finance shows why good leadership counts, especially in difficult times - and how supervisors learn from it. The link to the study (open access) can be found here:
https://doi.org/10.1016/j.jbankfin.2025.107513

What is the study about?
The study examines whether supervisory boards learn more about the skills of their CEOs in times of crisis than in good economic times. The basic idea: in a crisis, it becomes particularly clear whether someone can lead. Those who make quick decisions, make clever use of scarce resources and keep the company stable make their strengths and weaknesses more visible than in boom years, when many things go well by themselves. The author analyzes extensive US data, over 500,000 "CEO months" between 1993 and 2020, and examines how often a CEO has already gone through crises, how successful they were and how these experiences influence later decisions about their removal.

What are the key findings?
The results show: The more often a supervisory board has experienced a CEO in difficult times, the less a dismissal depends on the current company development. Obviously, a particularly clear picture of capabilities emerges during crises. In addition, performance counts more in crises than in other phases. Good results in difficult times protect the CEO much more against dismissal than comparable results in boom years. It is also noticeable that weak bosses in particular stand out more quickly in crises: Managers with lower ability have a significantly higher risk of being replaced in times of crisis, while they are hardly at a disadvantage in good times.

The study thus provides a plausible explanation for an old puzzle: why are more CEOs fired during downturns? Apparently not because supervisory boards wrongly blame management for external crises, as was previously believed, but because crises reveal a great deal about the actual strengths and weaknesses of managers. In practice, this means that appraisals should pay close attention to how managers act in difficult phases. For investors, in turn, it means that many changes in times of crisis are not automatically a bad sign - they can also be an expression of well-informed decisions by supervisory boards.