The Magazine of Corporate Responsibility

That’s No Way to Say Goodbye: The Business of Firing a CEO

by Gael O’Brien

CEOs for all their talents are not magicians. There isn’t a wave of the wand for a quick turnaround or a potion that will drive up a stock price. Or at least there aren’t ones available so far. Short of the disguised super hero, boards have to rely on their due diligence and judgment in assessing the right candidate.

PrintSometimes that doesn’t work out well.

Reader’s Digest CEO Tom Williams was fired in September 2011, less than five months after he took the job, replaced with a board member; Also in September, Hewlett Packard (HP) CEO Leo Apotheker, fired after eleven months, was replaced by board member Meg Whitman, former candidate for Governor of California and former eBay CEO. Other recent high-profile CEO firings include Carol Bartz at Yahoo! and Ernst Lieb at Mercedes-Benz USA.

In monitoring CEO departures, firings are often cloaked as resignations or retirements, and are under-reported. In the monthly reports done by outplacement firm Challenger, Gray & Christmas through the end of third quarter 2011, 922 CEO departures were tracked. September’s tally of 108 was the highest since September 2010.

The firing of a CEO and how he or she leaves their position often reveals a lot about them, their bosses, and their organization. At HP and Yahoo, for example, expectations about turnaround progress and financial results weren’t being met. For Daimler AG, Mercedes-Benz USA’s dazzling results in luxury vehicle leadership didn’t excuse the CEO’s failure to meet Daimler’s zero tolerance for ethical violations.

Apotheker hasn’t discussed publically his reaction to how he was fired. He had to have seen the media reports that HP shares rose 7 percent on the rumor September 21 that he was being replaced by Whitman at a board meeting the next day. He is reported to have gone to the meeting prepared to discuss strategy, the meeting’s original purpose.

Immediately upon being fired, Apotheker sent an upbeat email to employees thanking them for their efforts, accomplishments together, and dedication which he said inspired him. His consolation prize? A rich severance package that critics argue perpetuates the practice of rewarding CEOs for failed performance. During Apotheker’s tenure, HP’s stock price dropped $16.00 a share.

In an effort to distance the current HP board from the board 11 months prior that hired Apotheker, the new executive chairman Raymond Lane, went to lengths to point out that most of the 13 board members, including Meg Whitman, were appointed in 2011 after Apotheker’s selection. Lane said the new board evaluated Apotheker and found him lacking in leadership, execution and communication. Lane, sensitive to criticism HP’s board has faced in the past (a 2006 pre-texting scandal and the departure of former CEO Mark Hurd) is positioning the board as being new; however six of 13 members were on the board when one or both issue(s) came before it.

Yahoo has had its challenges. Bartz was hired in 2009 to replace co-founder Jerry Yang and lead a turnaround. Half the board members who voted to fire Bartz hadn’t been on board when she was hired. Shares increased from $12.90 to $13.70 in after hours trading on news of her firing September 6, 2011; financial results were about the same as when she had been hired.

Board chairman Roy Bostock, chair when Bartz was hired, fired her over the telephone when she was out of town on business - not a technique likely to catch on as an effective way to show respect and contain damage. (Yahoo is now pursing potential buyers for Yahoo’s core businesses as well as a CEO search.)

Bartz responded by emailing Yahoo’s 14,000 employees that she’d been fired over the phone by the board chairman. She wished them the best, saying it had been her pleasure to work with them. The next day she gave an interview to Fortune detailing how Bostock had handled the firing. She called the board members “doofuses” and used the salty language she is known for: “These people f---ed me over,” she said.

John Challenger, CEO of Challenger, Gray & Christmas, referred to Bartz’s exit as the “burning the bridge method.” Generally boards and leaders are cautious on the leader’s exit, Challenger said in a recent interview. “These issues are delicate and most people don’t want a messy divorce. The ideal is to do it quietly, and both parties move on.”

What is the best way for a leader to leave? “With grace,” Challenger replied, “because there is usually fault on both sides.”

Some CEO departures seem like the proverbial bolt out of the blue. Mercedes’ Lieb enjoyed a five-year tenure of successful turnaround, great sales results, market leadership, industry respect, and high dealer approval. But that wasn’t the whole story.

In April 2010, Daimler AG and its subsidiaries in Germany, China and Russia pleaded guilty to violating U.S. anti-bribery laws and were fined $185 million. As part of a deferred prosecution agreement with the Justice Department, changes were made in how Daimler handled compliance throughout the world. Changes that apparently Lieb didn’t apply to himself. He is reported to have used company money for personal expenses, disregarding warnings he received.

Lieb was fired October 18, 2011. He remains with Mercedes in a capacity the company hasn’t yet explained. He has made no public statement. Mercedes USA CFO Herbert Werner replaced him, pending finding a permanent replacement. By removing Lieb from his CEO post, Daimler Chairman Dr. Dieter Zetsche sent a message throughout the Daimler organization that achieving outstanding business results doesn’t supersede compliance and ethical behavior.

So what lessons can be drawn from all this?

First, and maybe most importantly, hire the right CEO to begin with. Given the turnover in boards, directors would be well served to read the excellent, and still relevant, 2002 Harvard Business Review article Don’t Hire the Wrong CEO by Warren Bennis and James O’Toole.

Turnaround situations have little margin for error so how a board and CEO work together requires a unique partnership. Neither the executives nor the directors came off well in the Yahoo and HP examples. Each turnaround has to balance the urgency of expectations against the reality in which a CEO needs to create success. In the search for the winning strategy, how Yahoo and HP directors work with their changes in leadership this time around will reveal what, if anything, has been learned.

Shareholders aren’t served by blame games – where leaders call boards incompetent or boards make leaders scapegoats. If directors and leaders don’t take the time to develop the skills to work through difficult conversations in the boardroom, the issues when they surface in the media undermine confidence in the company.

Modeling and following ethical standards matter. Lieb apparently didn’t understand what was at stake for Daimler in needing to raise the bar on its adherence to compliance and ethics.

Just as there is no magic wand to deliver results, there is no short cut to understanding what is expected. Leaders rise and fall on how they get that message.

Gael OBrien_ID_CropGael O’Brien is a Business Ethics Magazine columnist. Gael is a thought leader on building leadership, trust, and reputation and writes The Week in Ethics.

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