5.3 CEO Turnover: Different Scenarios, Different Challenges

A top executive’s departure has a significant impact on a company’s operations, culture, morale, and ability to execute against objectives. This is particularly true when the departing executive is the CEO.This section draws on “The board of directors’ role in CEO succession,” (2006) interview with Heidrick & Struggles, “Building high-performance boards”; and Lucier et al. (2006).

The reasons for a CEO’s departure generally fall into one of four broad categories: (a) the CEO leaves to become the chief executive of another company; (b) the CEO retires or takes an extended leave of absence; (c) the board decides to replace the CEO with someone better suited for the current environment or for likely changes in strategy or market conditions; or (d) the company’s board fires a failing CEO.

These first two scenarios force a board into a reactive posture; the departing executive initiates the event and the company must respond in some way. A board’s ability to effectively respond to such a scenario depends on many factors, but its preparedness and the amount of time it has to react are perhaps the most important. Unless comprehensive succession plans have been in place for a while, boards may have little choice but to recruit an outsider. One of the most compelling reasons for an effective succession-planning process is that the board will have a better understanding of the skills and competencies needed to lead the company going forward, and therefore will be in a better position to decide whether to go with an insider or an outsider and what qualifications the ideal candidate should have. Thus, a well-thought-out succession-planning process enhances the board’s ability to make an informed choice among prospects and broadens its portfolio of alternatives.

The last two scenarios involve a proactive change initiated by the board, and therefore represent different challenges. As painful and disruptive as it can be, the dismissal of a CEO often provides companies a much-needed opportunity to reexamine goals, strategies, and values. One scenario involves the replacement of an incumbent CEO who has been successful up to the present time but may not be the best person to lead the company in the future. Examples include the replacement of a company’s founder whose decisions have become detrimentally biased by emotion, of a private-company’s CEO by a professional manager with experience in taking companies public, of a growth company’s CEO in need of a leader familiar with rapid multinational expansion; or of a CEO of a company facing unprecedented competitive demands. A second even more traumatic scenario involves the dismissal of an underperforming CEO or a firing for cause.

A board’s decision to appoint transitional leadership during turnarounds, mergers, or acquisitions, initial public offerings (IPOs), restructurings, or other times of substantial change provides another example of a proactive change. The right interim CEO—tested in crisis and trusted by employees, creditors, and shareholders—can steer the company through its volatile period while the search for a permanent successor continues.