December 05, 2021
By G. Bradford Bulkley
“What would you do?”
On its face, it’s a simple question. But it can belie the complexity and depth of the circumstances, who is asking, and why. This was the case when a friend and business acquaintance called me recently to ask that question.
My friend is a brave entrepreneur, an accomplished private holding company chair, and an experienced independent director. When it comes to management and leadership issues, I’m more likely to take cues from him, so his query caught me off guard.
His question pertained to what he and his colleagues—as independent chair and directors—should do about an underperforming CEO. Simple enough, I thought. I’ve worked through my fair share of tough issues, both as a business owner and outside director.
However, the CEO, my friend said, was also the company’s majority owner. Moreover, by some fundamental measures—profitability being one—the company was performing reasonably well. But the board’s concern was that the company should be doing considerably better, with the CEO identifying new areas for growth and stewarding fresh expansion strategies. Instead, the well-meaning but underqualified and risk-averse CEO was inhibiting stronger performance and growth.
The problem was so intractable—the CEO so blind to his own shortcomings—that one director threatened to resign. Another wanted to summarily remove the CEO. Tough to do, my friend said. The dilemma was causing significant friction among board members. It was a troublesome situation from every angle and did not bode well for the company’s future.
My friend’s issue clearly is one of the toughest challenges a board will ever have to face—taking action to address an underperforming CEO who is majority owner, a fellow director, and, likely, the person who gave board members their seats.
Thinking through the answer to “What would you do?” raises a host of other deeply incisive questions:
These types of issues are sometimes even tougher to address within a private, closely held company, especially when family relationships are woven into the fabric of the business. They become personal, even though they shouldn’t.
Indeed, what would you do?
The Role of the Board
When faced with difficult decisions in any setting, it often helps to revisit the basics.
The fundamental truth in corporate governance is that the CEO—even an owner—reports to the board. It’s true in the public company universe and it’s true in the private company universe—but not always followed. It’s not about exercising power. It comes down to the foremost reason for creating a board, which is to establish CEO accountability in the best interest of all shareholders.
This reporting construct must be firmly established in a formal board charter. Without this, the board is ineffective, a rubber stamp. Still, it’s a hard truth and it takes a courageous CEO to cede that much power and authority.
Some owner-CEOs believe it’s heresy: as the owner of the company, why would they ever give up control? These are the owners whose boards are populated with college pals and golf partners. With rare exception, they are not real boards and it’s likely that their companies are not performing optimally.
The board’s role is governance, not management. Effective boards provide guidance from 30,000 feet, being cautious not to get mired in everyday corporate activities, processes, or problems.
One of the boards’ primary governance roles is CEO assessment. This should be conducted regularly—at least annually—based on the CEO’s individual targets, the company’s goals, and performance metrics. Governing by the rule of “no surprises,” the board should review and approve these performance plans prior to the beginning of the calendar or fiscal year.
Assessment against a set of goals and metrics satisfies another board mantra—it’s never personal. We’re human and emotions can all too easily enter and potentially cloud our better judgement. Well- defined goals and metrics backed by CEO and board agreement minimize that possibility. And, the question of “What defines struggling?” can then be answered objectively.
In my friend’s case, I recommended sitting down one on one with the owner-CEO to explain what’s working and what’s not. Ideally, this would be done in the context of a regular performance review, before matters escalate. If reviews are conducted consistently there are, again, no surprises. It would still be a difficult discussion, to be sure. But bringing tough issues to the fore often reduces tension and facilitates solutions-oriented discussion.
The discussion also should help identify the owner-CEO’s shortcomings. Are they operational? Or are they leadership-related? Operational shortcomings are easier to address and can potentially be solved by looking internally and redeploying that expertise to support the CEO. If not, recruiting outside talent could be the answer.
Leadership shortcomings are the more difficult issue. Experienced directors understand the requirements of leadership and typically recognize those qualities—or the lack of them—in others. This is where independent directors earn their keep—providing fresh, objective perspectives, delivered directly in what can otherwise be a highly charged situation.
Ultimately, the board should make a realistic assessment to determine if the CEO can perform at expectation levels. It will be necessary to reach a consensus among directors, including the CEO, exercising impartiality and fairness so as not to draw premature or illogical conclusions.
A critical factor is the CEO’s acceptance of what should be a fact-based discussion. Unreasonable resistance or outright rejection of constructive feedback could be grounds for removal.
Removing the CEO
Before discussing removal, the board should make every effort to support to the CEO. After all, the board is in place, in part, as a management resource, and should be committed to helping the CEO achieve success. However, if a leader is clearly incapable of performing at the level required, prolonging a change can worsen the situation and create long-term damage to the organization.
This, of course, is where emotion enters. Initiating action to remove the CEO is likely to cause ego damage and give rise to resistance and bitterness. Acknowledging the intensity of the situation, an unemotional, reason-based approach is most effective—explaining, for example, that if the CEO is a major shareholder, it would be in their financial best interest to enact change. Even if not a shareholder, sustaining a situation where the CEO is performing poorly or even marginally is not helping them or the organization.
While removal may be necessary, separation from the organization may not. Is there another, more appropriate role the individual can play within the organization? Was the CEO promoted beyond their true skill set or simply because of their stock holdings or last name?
This may be a highly effective solution in a family-owned business where a family member CEO has established strong relationships with customers. Offering the CEO a diminished role also may take an emotional toll, but facts, reason, and the lure of continued substantive involvement in the family business can be very persuasive.
While decisions on issues such as this can be quite challenging, a board’s duties are clear: to look out for the company’s and stakeholders’ best interests and maximize value. And the board should have the courage to act accordingly.
That’s what I would do. What would you do?
Bradford Bulkley is founder and CEO of Bulkley Capital, which assists middle-market and privately held companies in executing mergers and acquisitions and financial and strategic decision-making. He is currently lead director for Denihan Hospitality Group. He also serves as an advisory board member for MJM Yachts and is a director of Meriton.