BY JAMES BECK
Firing the CEO can be one of the most difficult decisions a board can make – it will also be among the most critical. However, many boards, including those of non-profit organisations, will resist bringing up the need to fire their CEOs, while other boards will be far too quick to fire their chief executives.
There are many reasons a board may be slow to act when it comes to CEO dismissal:
- In the case of the CEO demonstrating to the board that they are unable to cope with the demands of the position, one reason a board might not handle worsening situations such as this well is that directors may not know of the abilities of the managers already present inside the organisation or what is reasonable performance for the sector in which the organisation operates.
- Directors may also be concerned about how key stakeholders, such as major clients or funders, may react to the potential removal of the CEO.
- Other reasons for the board not acting include concerns about finding another CEO with the appropriate skills and experience to take the job; or the CEO’s contract includes a large termination payment; or in other cases, the board may wish to avoid open conflict with the CEO, particularly if the CEO dominates the board.
On the other hand, firing the CEO too quickly can mean the organisation may lose a good CEO, who just needed to learn from their mistakes and prevent a recurrence. For example, the CEO’s leadership style may be highly directive, while the previous CEO was collaborative, which may upset both the board and the CEO’s direct reports. Boards must recognise that each CEO brings a unique set of knowledge, skills and experience, and they will not be the same as the previous CEO or any other CEO the board was hoping to emulate. It should be noted that CEOs are not always readily available. Further, most organisations will not have developed succession plans successfully and, thus, will not have managers prepared to step up to the CEO position, particularly at short notice, which is another reason to think carefully about firing the CEO too quickly.
Replacing a CEO is time-consuming, expensive, and potentially disruptive – the implementation of board decisions can be left in limbo, staff morale can plummet and there is always the risk that the new CEO will not perform any better. Before rushing to dismiss the CEO, the board must balance the costs of replacement against the potential benefits.
When the board does make the decision to dismiss the CEO, there generally two major reasons:
- A sudden crisis involving the CEO such as a breach of the law or the organisation’s code of conduct or actions that are so damaging to the organisation and its reputation that the CEO must be removed.
- Ongoing pattern of non-performance, e.g.
– Failure to live up to the agreed-upon standards of performance;
– Inability to fit into the culture of the organisation or lead effectively; or
– Inability to implement the agreed strategy or adapt to a changing environment, which is often the case in the non-profit sector.
Many organisations now contract their CEOs on a continuing contract, but subject to the board having the power to terminate the contract for either any disclosed reason or non-disclosed reason, upon a notice period, often either 3 or 6 months.
In addition to the normal CEO assessment process, which should provide feedback from the board and the CEO’s direct reports, the board is responsible for ensuring there is a process to bring any issues with the CEO’s performance to them as soon as they occur, for example, workplace bullying accusations or loss of a major contract. In other words, the board should provide the CEO with real-time feedback.
Should the board not be satisfied with the CEO’s actions on these matters, it will need to investigate the problems further to find their causes. If these investigations reveal that the CEO is not handling the job well, the board may need to take a more active role in the strategic and functional operation of the organisation. The CEO will need to be set clear objectives and have the consequences of their actions clearly outlined.
By this stage, it is not uncommon for the CEO to realise that the problem is escalating out of their control and the CEO may offer to resign. Alternatively, the board will need to act decisively to limit damage should they need to remove a CEO.
Key questions for the board at this stage include:
- What needs to be considered before determining grounds for termination?
- – The board should understand the organisation’s legal obligations as the CEO’s employer, e.g. contract terms, Fair Work Act 2009 (Cth).
- Who will provide the CEO with notice of termination?
- – For example, in some cases the chair and another director may meet with the CEO to give them a letter of termination, explain the reasons the termination and provide them with the opportunity to ask questions.
- Who will lead the company when the CEO is dismissed?
- – The board should be prepared to appoint an interim CEO for the period of transition.
- Who will be charged with moving the termination process forward and ensuring all arrangements, policies, procedures and legislative requirements are followed?
- – Will an ad hoc board committee be established, or will the chair or a subgroup of directors oversee the process?
- What are the external reporting requirements?
- – If the CEO is on the board of a non-profit organisation, ASIC or the ACNC must be notified.
- What impact will this have on our key stakeholders?
- – The board should consider the impact of replacing the CEO on internal and external stakeholders – a communication plan should be put in place to address any concerns.
Finally, the board should also consider its part in the CEO’s failure:
- Did the board communicate its expectations to the CEO?
- Did it hire the right CEO given the organisation’s strategy?
- Did the board regularly review the CEO’s performance through a formal assessment process?
- Did the board provide appropriate support and feedback to the former CEO?
- Does the board have the expertise needed to make effective decisions?
By reviewing its own part in the failure of the former CEO, the board will be in a much better position to ensure a successful and productive partnership with the new CEO.
About James Beck: Managing Director of Effective Governance, a privately-owned advisory firm that provides expertise and assistance on corporate governance, strategy and risk in Australia and New Zealand to a wide variety of clients including public and private companies, not-for-profit organisations, associations, co-operatives and government owned
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