What to do when there's double trouble at the top?

By David Peters
Heidrick & Struggles

Image caption,
Sometimes drastic action is needed at the top of a firm

When a crisis of global proportions impacts a company's reputation, it is usually the chief executive or chairman who bears the brunt of media and shareholder criticism.

Just lately, we have seen a spate of crises so serious in their implications for the companies concerned (along the lines of failed takeovers, environmental disasters and global product recalls), that in certain quarters, previously unthinkable scenarios are being discussed.

These thoughts are along the lines of "what would happen if a company needed to remove a CEO and a Chairman at the same time?"

Is it even possible? Even if a board decided that it was in its best interests to do so, what would constitute final authority in this scenario?

Would it be the rest of the board, the shareholders, or a combination of the two?

Removing a chairman

Among the non-executive directors on the board of public companies there is a senior independent director (the SID).

Broaching a subject as delicate as the potential exit of a chairman is a job for the SID and not in any circumstances the responsibility of the chief executive.

Image caption,
When things get bad no-one is safe

Under the combined code that governs how public companies are run, it's not possible to force a chairman out, (you'd need a special vote at the AGM or an EGM for that to happen).

This is highly unlikely because if it ever got to that point, it would be tantamount to the chairman admitting to the shareholders that he or she had lost the confidence of the board.

In reality, "soundings" are taken in private conversations until it becomes clear to the SID that the view of the board is that the chairman must go.

It is also very likely that one or two major institutional shareholders would be consulted at this point before any action was taken.

A quiet word from the SID followed by an elegant exit would then be the most likely way forward.

Removing a chief executive

The chief executive on the other hand can be removed by the chairman with the support of the board, particularly if the chairman is also head (as is the usual practice) of the nominations committee.

This means that the chairman is normally front and centre in any discussion about replacing the chief executive.

Again, because it's market sensitive information (meaning that a badly handled departure is likely to send share prices plummeting), it's quite normal to consult the largest of the institutional investors before such a decision is taken.

Double trouble

If the situation was ever so dire that only a complete clean sweep could possibly restore confidence in an organisation's leadership, there would still need to be a logical sequence of events to ensure that proper procedures were followed.

In which case the logical process would be for the chairman to complete the process of replacing the chief executive and then arrange for his or her own succession.

This unprecedented scenario raises the serious question of best practice in succession planning.

It's not merely good business practise, it's also good governance to know where your next chief executive and chairman are coming from (to the point of it being a dereliction of duty if there's no plan in place).

If the internal candidates being groomed for leadership roles aren't quite ready, then the company may be forced to bring in an outsider.

The question on everyone's lips at this point is how to mitigate the risk of failure, even if someone has been successful in their last role?

There are many factors beyond relevant experience - such as culture and people skills that impact how a person copes in a new environment - and chief executives and chairmen are no exception.

Input sought

The answer is that external experts are brought in to conduct extensive detailed due diligence that specifically looks for evidence that candidates for the top jobs have the necessary experience and leadership competencies to handle it.

This is more than just skilled interviewing, although a three hour session with two people firing questions to explore relevant experience is pretty tough going.

It also involves 360 degree referencing where people above, below and alongside the candidate are all asked for their input.

In summary, however beleaguered, companies need to be well prepared before they think about creating a void at the top because people with the necessary experience to lead in troubled times are rare and much in demand.

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