How to Prevent a Faltering CEO from Damaging Your Company
The source of the problem emerged in a strategy presentation to the board when an astute director suddenly recognized the devastating impact of the pricing power of Amazon and Walmart. This episode showed that there was reason to be concerned about the acumen of a chief executive who had failed to identify the culprit for so long. The board chair or lead director and the chairs of the audit and compensation committees are particularly well situated to sense an early warning signal because of their interactions with management.
But any director can be the first to take heed. Directors who speak up soon after joining the board may find they are respected for asking tough questions. In the rest of their working lives, most board directors are strong, confident leaders, but in the context of a board, they often hold back. Nobody wants to be branded as a troublemaker who tries to take out CEOs, and board members know that the chief executive will almost certainly find out which director raised questions.
It can also be hard to question a CEO without seeming disrespectful and unappreciative if he or she has taken the company through a difficult period or has a strong track record. Speaking up sooner and making clear that the purpose is to test instincts will make it easier, and will reduce the risk of harsh reactions.
A board member may also approach the CEO and discuss his or her concern directly. Then, together, they can ask the non-executive chair or lead director to bring it up for further discussion. Tightly scheduled committee meetings and executive sessions drive out candor, so board leaders should reserve time for directors to air concerns. In particular, the chair of the compensation committee and the lead director or non-executive board chair, if there is one should solicit such comments and guide the dialogue when issues are raised.
At the start of the executive session, he puts those issues on the table without attributing them to a specific person. As he concludes the session, he reminds the group to call him if any other issues come up. This same lead director also keeps the CEO informed about questions the board raises. Conversations of this sort may be time consuming, but they are crucial to maintaining trust.
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Any negative issue that gets raised among board members will probably reach the CEO anyway, often with a lot of distortion. A backlash from other directors is an ever-present risk that the lead director should manage. If the lead director is passive, other directors will have to intervene, citing specific examples and observations.
Once the board is on alert, decisiveness is crucial. A delay of that sort can set a company back considerably.
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The board leader generally sets the pace. Deliberations about the CEO should be kept steady and constructive until the facts come into focus, then consensus should be reached rapidly about what course of action to take: support, coach, or dismiss. Supporting the CEO is sometimes the right choice. At one large company, the lead director tried for months to get the board aligned, but three directors kept challenging the CEO and urging the board to begin a search.
Finally, the lead director declared that it was time to put the issue to rest, and asked for a show of hands. The majority voted to support the CEO, who went on to lead the company successfully for the next six years. The dissenters left the board soon after. Alternatively, directors may agree to get a faltering CEO back on track by coaching him or her. The board chair or lead director often takes on this role, and it can work beautifully, provided the director has the expertise, judgment, and temperament for it.
As board chair of Apple, Edgar S. Woolard was a mentor pdf to Steve Jobs after Woolard lured him back to head Apple for a second time. A mediocre or misfit chief executive does more than hold a company back. He or she occupies a position that a great CEO might otherwise step into. At another company, some board members complained to the lead director that the CEO was doing a poor job and said they wanted to look for a successor.
The lead director carried this message back to the CEO, who was at first put off by the comments. But they worked together to lay out the strategy and milestones more clearly, and the other directors came to see that the CEO had a good plan after all. Coaching also helped turn around a CEO who was overly protective of a group of subordinates — and who had been putting off an unpleasant confrontation with one of them for several months.
That chief executive later told me that a private meeting with the board chair gave him the courage to act. One top executive was clearly problematic, but the CEO depended on him to manage the integration of a major acquisition. The board supported that reason for postponing a change. Face the facts and raise the issue of dismissal. Even a newly hired CEO may now be a poor fit, and a CEO who is under siege may be unable to regain investor confidence. Some boards postpone the decision until their best internal succession candidate is ready.
But the lack of a prepared internal successor is not a good enough reason for delay. One of the most serious mistakes a board can make is to underestimate how quickly the company can decline under the wrong leadership. A faltering CEO simply cannot be allowed to stay in the job for long. The board may have to take some risk to unexpectedly seek an outsider, find ways to accelerate a successor, or get creative to shore up a CEO candidate who is not yet fully prepared.
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The opportunity cost can be immense, and reversing the downward trajectory later can be costly and painful think, for example, of the massive layoffs that sometimes ensue. Of course, you and the other board members will never truly know if you were right until the results of your decision become clear. But you were invited onto the board in the first place, presumably, because of the quality of your judgment.
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Illustration by Lars Leetaru. Related Stories. From this new location, she will be able to have an even greater impact, serving as a constant reminder to companies and investors that having women in leadership is good for business. Fearless Girl is truly reinventing investing because she is changing the way we think about corporate performance. On the same day we placed Fearless Girl, we called on thousands of companies in our investment portfolio in the US, UK and Australia to increase the number of women on their corporate boards.
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We issued guidance to help them take action and became the first large US asset manager to announce that we would not hesitate to use our proxy voting power if companies failed to take action. We use a systematic, risk-based approach to overseeing environmental, social and governance ESG issues and each year prioritize engagement efforts around themes and sectors we believe to be especially relevant.
We share insights with our portfolio companies into both the best practices and cautionary tales we derive from our engagement on ESG issues around the world and across multiple sectors. Our overarching focus is on ensuring effective, independent board leadership. We believe that a strong board with relevant skills, and diversity of backgrounds and viewpoints, and which is not held captive by management is best positioned to focus on articulating a long-term strategy and holding management accountable for delivering on that strategy.
Research shows that companies with strong female leadership perform better than those without. A January Conference Board report indicates that companies with stronger female leadership not only perform better but also experience less fraud, bribery, corruption and shareholder conflict, and attributes the outperformance largely to the independent perspectives women bring to the boardroom. The research tying the presence of women on boards to performance drives our conviction that increasing gender diversity in company leadership will benefit our clients and the economy over the long term.
In its second year, the Fearless Girl campaign expanded to also include pushing for board diversity in Japan and Canada, and the effort continues to drive impact globally. Additionally, in September we announced an escalation of our board diversity voting guideline. The initial voting guideline dictated that State Street Global Advisors would vote against the nominating and governance committee chair if the company failed to commit to action in the near term. Under the enhanced guideline, we will also vote against the entire slate of committee nominees if a company does not take action within a specific timeframe of three years.
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