The process of letting the chief executive go is made easier when the directors keep the best interest of the company in mind.
It is said that courage is one of the important traits a director needs when the board is firing the CEO. It’s a trait that Justine Tobin, advisory board member of First Citizens Bank Charlotte and Mobilads, hints at when she says, “I value my fellow directors who are able to deal with confrontation at times when you have to keep one’s cool in a potential confrontation.”
But courage is not the only trait that comes in handy when a board is forced to make the difficult choice to fire the lead executive. Lisa Greer Quateman, director of Western Asset Mortgage Capital Corporation, ITR Concession Company LLC and Scherzer International, and advisory board member of Lyles Diversified Inc., believes that listening skills are essential when it comes to such a sensitive personnel matter.
“A director who can listen to all sides of the story, all sides of parties’ legal positions, all points of view of crisis consultants, financial advisors, fellow board members and others who may weigh in, and who can maintain a level-headed disposition through the process, will help a company make the best decisions and achieve the best results under the circumstances.”
Kay Plantes, Ph.D., director of Joint Commission Resources and advisory board member of Automation NTH, agrees that listening skills are a must in such a precarious situation, while also stressing the need for clear communication skills, investigative proficiency and objectivity. Another trait Plantes identifies is consensus-building ability, something that is clearly necessary when looking to receive buy-in from shareholders to carry out a step as bold as firing the CEO.
“As a board member goes through their checklist in prepping for the board meeting regarding the potential termination, they need to consider the shareholders who they represent on the board. But that is often a pretty easy box to tick because the larger shareholders are typically present on a private company board or have a good idea of what is going on. The board might want to touch base with them. The smaller shareholders are being represented by the board members, and there is a traditional understanding that board members make decisions without getting approval of every shareholder.”
Reasons to fire the CEO
While it is easy to think of examples of CEO firings due to gross misconduct, such as romantic relationships with subordinates or discoveries of fraud, Plantes says that most CEO firings are much more simple, deriving from poor performance by the CEO or the need for the company to find a chief executive with a different set of skills.
“Companies go through different stages, and it is no surprise that organizations need different skill sets in the CEO position over time. An organization I was involved with required a CEO who could build a superb leadership team. But when the strategy required an organizational transformation, the CEO was much less capable in that area.”
The relationship with the departing CEO can be complex. Tobin notes that in private companies the CEO can often be a founder, a primary shareholder or a family member of a primary shareholder. “In these cases, the CEO might only be fired for an illegal or unethical episode or a very poor fit with the core values of the company,” she says. For CEOs who are not owners, shareholders or family members, it is much more likely that they may be fired for a lack of performance, but only after significant guidance and performance improvement conversations have occurred.
“Being terminated for lack of performance should never be a surprise for anyone, including a CEO, except under unusual circumstances.”
Documentation of CEO performance
Quateman says that when a CEO is being fired for poor performance rather than misconduct, it is vital to review the CEO’s employment agreement and become familiar with the rights and obligations of the CEO and the company, since clauses in that agreement may supersede a company’s employee handbook or other generally applicable employment policies and procedures.
“Those agreements will often contain a process of progressive discipline, in which case warnings may be required. The employment agreement ideally will contain a roadmap regarding what constitutes “cause,” any applicable notice provisions and/or severance payment arrangements.”
A system of consistent feedback from the board to the CEO on CEO performance is essential. While Tobin says that feedback often tends to take a backseat when things are going well, when things are going poorly, “performance improvement conversations and protocols are necessary and are normally conducted through a series of board meetings.”
It is usually in the best interest of both the company and the departing CEO to avoid acrimony. Quateman says a negotiated settlement with confidentiality and nondisparagement provisions may be appropriate but warns against condoning bad behavior with a lack of transparency.
“In cases of bad conduct by the CEO, the company must carefully manage public statements as facts are becoming known.”
Plantes acknowledges that one way to mitigate acrimony as a CEO departs is through a negotiated compensation settlement. She says boards should ensure that the payment does not result in reputational harm for the company.
“Sometimes, the expenditure makes sense based on the contract and the risks of the legal battle. But solidly justified cases for dismissal should not be accompanied by a significant payoff to the CEO.”
The firing process
While it is often said that the board’s most prominent job is to hire and fire the CEO, when it actually comes down to communicating the vote of the board, the role falls upon the board chair or the lead director, often with participation of the company’s general counsel, the chief human resources officer and/or outside employment counsel to the company.
Tobin believes the involvement of legal counsel to be the most important step in the CEO firing process. “There should be a strong employment contract in place with the CEO so that the board can terminate the CEO directly following the course of action lined out in the CEO’s employment agreement. If not, the board’s legal counsel may be deployed to terminate the CEO and to anticipate problems.”
How directors must act
Firing the CEO can be difficult for a director, especially if they have had a hand in the original onboarding of that individual, but the process will be eased somewhat if the needs of the company are kept front and center.
“The board’s role is to represent those needs, but the CEO often hand-picks board members precisely to reduce the risk of dismissal or increase control over the board,” says Plantes. “Even if you are a friend or were part of the CEO hiring team, directors must be objective and ask probing questions to ascertain accountability. It helps to remember that CEOs are often happier once they leave a role for which they are not well-suite.”
Tobin is even more blunt. “If it is difficult for a board member to fire a CEO, then maybe that person needs to think twice about serving on boards. To keep the firing from becoming personal, guidance from the board should have preceded the termination and the CEO should have been able to see it coming.”
Protecting the company long-term should be the number one goal for directors going through a CEO dismissal. To Quateman, that means understanding and respecting the relative rights and obligations of the concerned parties, lining up the right advisors, developing and implementing an effective communications plan and planning ahead where possible. To Tobin, that means having an interim CEO lined up prior to the firing.
“That individual should always have been in the wings as a known successor, or they should be a member of the board who can fulfill the role, if all else fails, while the next CEO is searched for and selected. Also, the CEO’s direct reports need to be followed up with immediately after the termination and the plan to replace their boss should be communicated.”
To mitigate long-term company damage, Plantes advises boards to quell any rumors in advance of the decision and to stick to any plans for public communication that were agreed to by the CEO and the board. But she also urges board members to consider the alternative.
“Recognize that while firing or replacing the CEO comes with a risk, the most significant risk to the organization is keeping that CEO in charge. ‘Waiting out’ a retirement or voluntary exit can be very costly to morale and performance.”