October, 1998 - Volume 3, Number 1

The Price of Firing a CEO

Recruiting the right chief executive is widely viewed as one of the governing board's first tasks. Firing a deficient CEO can be even more consequential, for a board's negligence is doing so in timely fashion can leave a company permanently impaired.

But dismissing a chief executive constitutes an implicit concession that the board had failed in its first task. Accordingly, researchers Andrew Ward, Karen Bishop, and Jeffrey Sonnenfeld predicted that turnover among directors after the dismissal of a chief executive should be far higher than after a normal CEO succession. That is precisely what they discovered.

Andrew Ward and his colleagues followed America's 1,000 largest publicly-traded companies from 1988 to 1992, and they found that 456 of the chief executives stepped down during this five-year period. In 60 of these cases, the CEO did not leave voluntarily, often because the company's performance had lagged, but in some instances because the CEO had clashed with the board on strategy.

Examining turnover among the company's directors, the research team found that during a typical two-year period, one director in ten - 11 percent - left the board. Following a non-forced exit of a chief executive, the turnover rate doubled to 22 percent. But if the board had pressed the CEO to resign, the replacement rate rose to 33 percent. If the board went for an outsider to succeed a fired CEO, the rate reached 37 percent.

The researchers argued, however, that a distinction should be made between boards that did not properly monitor their chief executive (allowing the CEO to slide into sub-par performance before dismissal) and boards that fired their CEO instead because of disputes over strategy. When boards dismissed their CEO for the first reason, turnover among directors during the two years that followed reached the highest rate observed - 40 percent. When boards fired their CEO for the second reason, by contrast, the turnover among directors was no different from the normal rate following CEO succession.

In a related study with the same data, Andrew Ward and Karen Bishop found that directors who fell short in their monitoring obligations received compensation below that provided to directors who fired their CEO for strategic rather than performance reasons. In other words, when company directors initially fail to prevent a CEO from failing at the helm, and then finally force the executive out, many of the directors themselves are later forced out as well. Directors, it seems, are held accountable.

Source: Andrew Ward, Karen Bishop, and Jeffrey Sonnenfeld, "Pyrrhic Victories: The Cost to the Board of Ousting the CEO," forthcoming in Journal of Organizational Behavior; Andrew Ward and Karen Bishop, "Discipline and Rewards in the Boardroom: Performance/Outcome Links for Directors," unpublished article. Andrew Ward can be reached at Andrew_Ward@bus.emory.edu.

REPORT: The Changing American Boardroom

For a quarter of a century, Korn/Ferry International has been conducting an annual survey of directors of large, publicly-traded U.S. companies, and its just released 25th edition reveals a boardroom that:

• Is smaller and more independent of management.The average board today has 2 inside and 9 outside (non-executive) directors, compared with 4 and 10 a decade earlier.
• Pays their directors partly in stock. Nearly four out of five companies offer some stock-based compensation, up from less than one in ten a decade earlier.
• Includes at least one woman and ethnic minority. Presently, 72 percent include a woman and 55 percent an ethnic minority, up from 11 percent and 9 percent in 1973.
• Is constituting committees to review governance policies and practices. Today, 58 percent of the companies have such a committee now, up from 41 percent in 1995.

When the surveyed directors were asked about their greatest challenges during the next five years, they placed two at the top of most of their lists: (1) finding the right talent for top management, and (2) recruiting the right directors to secure the right management talent. When asked what changes must be made to improve their firm's governance in the years ahead, the most frequently cited areas are (1) diminishing the number of insider directors, and (2) instituting formal evaluations of director performance.

Source: Korn/Ferry International, 25th Annual Board of Directors Study (New York: Korn/Ferry International, 1998).

LEADERSHIP DEVELOPMENT: Consulting to the Apex of AMEX

American Express Company operates a selective unit that simultaneously offers consulting services and fosters rising managers for its business units.

Reporting directly to chief executive Harvey Golub, the Strategic Planning Group is staffed by thirty professionals who advise operating presidents on issues ranging from the development of new products to the acquisition of strategic assets. At the same time, the group serves as a conduit for bringing seasoned talent into the company and preparing it for senior management.

The Strategic Planning Group recruits many of its people from outside consulting firms. They work for several years as internal consultants with Harvey Golub and other top executives on a variety of the firm's most challenging issues in the U.S. and abroad. By time they are moved into a top position, group members have acquired direct exposure to the diverse issues that top executives must tackle.

Among the veterans of this pipeline to American Express leadership are Rosa Sabater, who came from Booz Allen in 1994 and is now vice president for Small Business Services, and Kenneth Chenault, who came from Bain in 1989 and is now chief operating officer of American Express.

Information about the Strategic Planning Group is available from its director, Ruediger Adolf at Ruediger.Adolf@aexp.com.

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Leading Change

Wharton Executive Education offers a program for managers who want to become more of drivers of change. It examines the forces for organizational change ranging from new technologies to market globalization; considers how systems often thwart change but how they can also be harnessed to achieve it; and considers what works and what doesn't. One of the faculty instructors, Kenwyn Smith, characterizes a starting premise for the course: "To change others, change yourself." The five-day program, "Leading Organizational Change," is offered December 13-18, 1998, and May 23-28, 1999, and it is limited to thirty participants. Information on the program is available at http://www.wharton.upenn.edu/execed/eecat/loc.html.

"I will continue to entertain the hope that there has emerged a cadre of leaders in my own country and region, on my continent and in the world, which will not allow that any should be denied their freedom as we were; that any should be turned into refugees as we were; that any should be condemned to go hungry as we were; that any should be stripped of their human dignity as we were.

"I will continue to hope that Africa's renaissance will strike deep roots and blossom forever, without regard to our changing seasons."

"Then would history and the billions throughout the world proclaim that it was right that we dreamed and that we toiled to give life to a workable dream."

Source: Nelson Mandela, President of South Africa, address to the General Assembly of the United Nations, September 21, 1998.