When leaders lose their ship

KAMAL KARANTH | Updated on April 11, 2018 Published on April 11, 2018

ICICI’s Chanda Kochhar   -  Paul Noronha, AFP


Should CEOs resign when there are propriety issues?

Boards and CEOs have a dynamic relationship. CEOs are put on pedestals when they are hired or when the revenues of their organisations are heading north. The flip side is that whenever there is any PR or performance crisis they become easy fall guys.

But, not all organisations are trigger-happy. Some boards immediately stand up for their CEOs and back them even when it seems like an uphill task. What explains this duality?

Is it the personality of the CEO and the criticality of their presence to the company’s success? Or has the CEO become so synonymous with the brand that removing them creates another kind of crisis?

The boards of Uber, HP, Yahoo!, Volkswagen and now Deutsche Bank, ICICI and Cricket Australia have been in situations requiring them to take a call about their CEOs. The boards can act in three different ways: Immediately sack the CEO, take time to decide till clarity emerges, back the CEO unconditionally. But all three pose challenges.

Quick response manifestations

Sacking a CEO due to a dip in performance or PR-related embarrassments may earn immediate brownie points from the stock market. Some of the bosses tend to do this to keep their own jobs. But, it could hurt employee morale and hiring of future leaders. This could hamper internal succession too as aspirants would be hesitant to take up the leadership role with a trigger-happy board. Once I joined an employer where two of my predecessors were unceremoniously sacked as CEOs. Later, when I wanted to expand my leadership team the external candidates were not enthusiastic. One of them even said, “You stay for two years, then it would be easy to decide based on your stability”. Even my own team mates were sure that I would not last. A trigger-happy board can create anxious future CEOs who may focus only on short-term results, hurting long-term interests.

Procrastination mode

Some boards are cautious. They tend to form an independent committee to investigate and collect more data to see if it is a crisis that warrants decision-making. This also gives them time to plan for a successor. Sometimes this also gives some interim relief from angry stock market reactions. But, most importantly, this gives the CEO a fair chance to come clean. Though this can be termed as less decisive, it’s a step that treads the middle ground. This is likely when CEOs have had a good track record. In my view a move like this is likely to benefit most stakeholders. A CEO who takes absence of leave during the crisis eases all concerns and also increases his or her own credibility. Not many CEOs have been gracious or gutsy on this front.

Stubborn boards

A few boards don’t buckle down. They back their CEOs from the word go, even if there is circumstantial evidence to start with. Some of the promoter-driven boards tend to support the CEO unconditionally, especially if the CEO has been appointed by the promoter or is the Chairman’s blue-eyed boy/-girl. We have seen boards that have had to eventually swallow their pride and give in when they realised that the CEO’s tenure was untenable. They eventually bowed down to pressures from the shareholders or stock market or regulators. The only persons who can save the stubborn boards have been the CEOs themselves. Either they perform outstandingly quickly and regain the confidence or come clean if there is an accusation of propriety or integrity.

The reason some boards support or sack immediately may have nothing to do with the immediate situation. Most often it would be due to the past track record or behaviour of the CEO. If the leader in question has had enough crosses against his/her name the latest trigger would bring the axe down. On the other hand, if the leader had no past transgressions, the board would possibly support them unconditionally. I always believe that unless it’s a serious fraud or a sexual harassment case, boards tend to support the CEO. How else would you explain CEOs of large car makers, energy companies and pharma majors continuing in their roles in spite of large vehicle recalls, oil spills and drug recalls?

I think boards do give people in leadership roles a second chance, whether it is performance or behavioural shortcomings. Often the cases which may appear as one-off to the outsider tend to be accumulated discontent against the CEOs exploding one fine day.

In addition, psychologically it’s a difficult space to be in. It takes about two decades of hard work for most to reach the corner room. Giving it up overnight requires a different kind of courage. CEOs may feel that like many other storms of the past, this too may pass. It’s difficult to predict which one will pass or take you along. That dilemma tends to make them indecisive and they leave the call to their boards.

Or could it be that the CEO may not step down because stepping down immediately may be seen as an admission of guilt?

Resilient CEOs always fight back when there are performance challenges. But when there are questions about propriety or any major scandal around their role/behaviour, stepping aside – even temporarily – enhances their integrity. Having said that, it’s easier to make these judgements from a distance when we are not in the firing zone.

Kamal Karanth is Co-Founder of Xpheno, a specialist staffing firm

Published on April 11, 2018

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