Firing The CEO

A major responsibility of the Board is selecting the CEO. It must therefore ensure that it picks the right CEO and puts in place a succession plan that allows for smooth transition. With increased responsibilities and more stringent regulatory oversight, Boards need to ensure that they appoint CEOs who will allow them to go to sleep with both eyes closed. The Board also has the responsibility of setting Key Performance Indicators against which the CEO’s performance will be measured and appraised. More often than not, the KPIs are tired to corporate performance and many Boards don’t have a formal framework for appraising the CEO’s performance. It is good practice for the Board to define robust KPIs for the CEO beyond corporate performance. These should include the CEO’s leadership of the team, client/customer relationship management, corporate culture, employee development, managing key stakeholders, etc.

Closely following the responsibility to select a great CEO is that of ensuring that a succession plan is in place. Oftentimes the Board does not pay sufficient attention to the senior leadership pipeline and delegates this responsibility to the incumbent CEO. The Board should ensure that there is appropriate capacity and competence at the level below the CEO and indeed across the organization. It should not take the CEO’s word for it, but sufficiently engage to ensure it has comfort in this regard. With a healthy pipeline of senior leadership, the impact of sudden CEO exit can be minimized.

Firing the CEO is one of the most difficult tasks any Board will have to deal with. However, there are times it becomes inevitable to do just that. Where the CEO persistently does not meet set KPIs, fails to execute strategy, delivers non-inspiring leadership or “puts the company in trouble”, the Board may be left with no choice but to let him/her go. Firing the CEO could negatively impact the organization. For sure it comes at a significant cost. Some of the costs of firing a CEO are easy to measure. “Golden parachute” severance pay for example, are sometimes included in CEO employment contracts. Unless the CEO has been found complicit in some criminal or other underhanded matter, the company usually must pay up according to the terms of the contract. Some severance pay run into multiples of annual salary and bonuses.

Another cost is that of replacing the exited CEO. Great CEOs don’t grow on trees and the process of recruiting the ideal candidate is not cheap. Beyond the fees of executive selection firms (many of these firms charge a percentage – sometimes in multiples – of the CEO’s salary and bonuses), the sheer time and effort that go into an unplanned exit, cause the Board to give careful thought when taking a decision to fire the CEO.

There could also be the cost of losing business relationships which the departing CEO brought on board and nurtured. Some clients may choose to take their custom elsewhere with the departure of the CEO who courted them. Depending on the depth and nature of business, the effects of these could be significant. The peculiarity of some businesses makes it difficult for the Board to mitigate the likelihood of this happening. Sometimes, the CEO’s personal connections constitute a large chunk of the patronage.

Non-financial but equally damaging effects of the CEO’s unplanned exit include the impact on employee morale, especially among senior managers, who may wonder if theirs will be the “next head on the chopping block”. If the CEO was fired for taking a “risky bet” which went awry, employees will be less willing to take risks – a situation that will inevitably impact performance. There is also the possibility of mass exit – especially if the CEO was admired by his colleagues and goes on to either set up his own shop or to another organization from where he “poaches” his ex-colleagues. To be sure, some clients would also move with the CEO, particularly if the perception is that he/she has been unfairly treated.

There is also the cost of perception. If not properly handled, the CEO’s exit could send negative signals to the public. It could create the impression that the company is “in trouble” and inevitably affect the share price – at least in a mature stock market.

According to James McRitche in his article “When the CEO Really Must Go” (2011), there is never a “good time” to act, “so do it when you make the decision”. Many underperforming CEOs think they are doing a good job. In this regard, the Board must tell the truth early on. The CEO shouldn’t get a bonus he/she doesn’t deserve because the Board doesn’t want to “demotivate” them. If the Board is not getting the expected results, it should communicate this clearly to the CEO.

Upon coming to a decision that firing the CEO is the best in the circumstance, the Board needs to handle the exit with great care. The CEO should be allowed to exit “with grace”, quietly so that both parties can move on without bad blood.

Bisi Adeyemi is the Managing Director of DCSL Corporate Services Limited. For comments and reactions, kindly contact [email protected].


Contributing Advisors