This article also appeared on Finweek on 20-Aug-2013
Often, we assume CEOs get fired because poor financial performance. But there is more to it than that. Sometimes they are their own worst adversaries. This article unpacks some of the underlying reasons why companies send CEOs packing.
Back in 2000 the tenure of a CEO was 10 years on average. In 2008 it was down to 8½ years. According to global outplacement firm Challenger, Gray & Christmas (CGC), in 2011/2012 the figure dropped to 8.1 years. Why the decline since 2000? Because boards and shareholders are demanding more corporate and brand accountability. “Stakeholders are much more vigilant than ever before. Not only shareholders, but employees and even the public have their eye on the performance of companies,” CEO John Challenger asserts, and the CEO is the public face of that performance. “When things go wrong, [those] constituencies demand action, which often starts at the top,” he points out.
So if CEO tenure is coming down, the logical question to ask is: why do CEOs get fired?
Many will tell you that it is because of “current financial performance.” But that’s just the easy-measure symptom of bigger underlying causes, according to LeadershipIQ.com. Their pioneering study of 1,087 directors uncovered that:
- 31% of CEOs get fired for managing change badly,
- 28% for not paying attention to customers,
- 27% for putting up with poor performers,
- 23% for not recognising reality, and
- 22% for too much talk and too little action.
In the words of LeadershipIQ’s CEO Mark Murphy: “CEOs get fired when the board of directors or shareholders have lost confidence in the CEO’s ability to generate sufficient financial returns in the future. And this study explains why boards lose confidence in their CEOs.”
The fall of Ron Johnson, former CEO of retailer JC Penney, is an example of exactly this. He was given his marching orders after only 17 months on the job. Why? He instituted an ambitious turnaround that failed dismally. jcp (Johnson’s reinvention of the well-known company name) plummeted almost a billion dollars in 2012, and sales free-falled nearly 29% compared to a year before. To make matters worse, JC Penney’s shares fell to half their value while Johnson was CEO.
Why did this happen? According to experts in the industry, the initiatives that Johnson launched reduced levels of customer engagement compared to their competitors. Based on a 2013 Customer Loyalty Engagement Index of department stores, overall engagement levels Macy’s, Kohl’s and other retailers came in at around 80% (when benchmarked against a category ideal of 100%). JC Penney’s rating, in the eyes of their own customers, was a dismal 70%, very low as far as department store retailing goes. Some of the initiatives that Johnson introduced while he was CEO: he got rid of sales, brought in low-price guarantees, cut brands and “fake prices,” and created new brands. Then he brought back sales and coupons, and planned to revamp stores. Oh, and he re-instituted “fake prices” again. All of these efforts failed. Understandably, the board of directors lost confidence in Johnson’s capacity to produce future financial returns.
Sometimes CEOs are their own worst adversaries. According to technology analyst Rob Enderle and other experts, here are some of the traps that CEOs themselves cause, that can cost them their jobs:
- CEOs shouldn’t be executive chairmen. The CEO role has few controls and little management from above. Their one saving grace is an independent executive chairman, Get rid of the chairman, however, and the danger of a CEO acting badly only compounds. Why? Because they effectively become their own boss. Frequently, an experienced chairman can mentor a CEO and stop them making preventable errors. CEOs relish taking over the chairman role because it gives them power. However the truth is, it can give them the weapon they need to destroy themselves. Looking at HP’s four fired CEOs, two appointed themselves executive chairman first. Mark Hurd was arguably the best example for this, hiring soft porn actress Jodie Fisher. Intervention from an executive chairman who wasn’t thinking with his other head might have stopped this happening.
- At the helm too long. We all recognise the pattern: A CEO takes up his or her new position, starts building knowledge and experience, and is soon launching projects that raise the bottom line. Fast-track 10 years, and that same CEO is risk-averse and sluggish to embrace change—and the company’s performance is heading south. At this point it’s usually time to inject fresh new CEO blood into the company (and the same could be said for presidents of countries, like our own).
In their recent research, Luo, Kamnuri and Andrews examined 356 US companies between 2000 and 2010. They measured CEO tenure and determined the strength of the company-employee relationship annually (by assessing retirement benefits, layoffs and other parameters), plus the strength of the company-customer relationship (by assessing product quality and safety, etc.). They then measured the extent and movement of stock returns. Based on this data, they calculated the ideal CEO tenure at 4.8 years. So at 8.1 years, many CEOs could well be past their sell-by date.
- CEOs that micromanage. Large firms are simply too intricate for micromanagement. So if their CEOs are micromanagers, the job could burn them out, or worse, kill them. Why? Because involving your CEO at all levels of the business and deferring all decisions to them could prove too stressful and force them to quit due to deteriorating health. Steve Jobs is an example of exactly this. Nobody disputes that he was the consummate executor who reinvented Apple. However, at what cost? Many believe that his life was cut short by the stress and commitment that he took on for too long. Even after he had been diagnosed with cancer, he battled to divorce himself from his position in order to concentrate on his health.
- Letting CEOs have free rein. Even if they don’t take on the role of executive chairman, at times CEOs can believe that the rules just don’t apply to them. Early on in Steve Jobs’ career, and without proper approval, he had his stock options backdated. Although he survived the scandal, it almost cost him his job. (Not to mention that former Apple chief financial officer Fred Anderson and former Apple general counsel Nancy Heinen were charged by the SEC for their supposed roles in backdating Apple options). HP’s Carly Fiorina lost her job largely because she acted as though she was above the rules, a belief that came about through the use of company jet, exclusive benefits and not enough board intervention.
- CEOs going it alone. If a CEO is scared that someone else wants their job, they won’t create a strong team around themselves. This is especially true when you hire a CEO with scant industry experience, which happened with Carol Bartz at Yahoo and HP’s Carly Fiorina. Fiorina was from the telecoms field, which most mistakenly assumed was similar to IT. Some argue she didn’t want to risk having anyone near her who might consider her unqualified for the CEO job. That’s why she got rid of ex-Compaq CEO Michael Capellas. Wall Street had lost confidence in Fiorina, and HP’s stock prices rose once news broke that HP’s board forced her out. Compare this with IBM: their board brought on CFO Jerry York, a talented turnaround guru, to ensure that CEO Louis Gerstner would build a strong team that could make up for his own scant industry knowledge.
- Having a “yes” team. This destroyed IBM’s John Akers. He was arguably one of the best-trained CEOs in the IT field. However his demise came about because he was surrounded by people who told him what he wanted to hear. He didn’t see IBM’s near-downfall coming and he earned the infamous title of the only CEO that IBM ever dismissed.
Being a CEO is no easy job. Many want your position, while others want you to fail. Avoiding some of these traps can help. But the reasons why CEOs lose their jobs are complex and it is not for the faint-hearted.