How to exit your CEO

With Guardian chief executive Katya MacLean stepping down from her role, and Boots CEO Sebastian James moving on following failed merger bids, hardly a week goes by without a high-profile CEO exit. As recent research shows, more than a quarter of bosses who left global-listed companies last year were fired. While the optimal period in position for a CEO is estimated to be seven to 15 years, the average UK CEO tenure is less than five years.

Yet behind the headlines and controversial payouts, there’s a sensitive HR issue at stake, and the difficult process of deciding to exit your lead executive; a decision that is inevitably disruptive to your people and potentially damaging to your reputation. 

A CEO’s performance (or not)

While misconduct or crisis issues can be the catalyst to CEO exits, in the main, it comes down to performance of the business or organisation. It is highly unlikely that a CEO will be put on a performance improvement plan (PIP) but, where they are consistently not meeting key performance indicators, the board is more likely to decide the CEO’s time has come to an end. This is usually after an honest conversation; often the usual processes are not followed as the ‘grown up’ conversation takes place with an exit on agreed terms. 

There are few unfair dismissals claims from CEOs – because the cap is too low given the financial package for a CEOs and because the next job may be affected by the reputational damage of a CEO being exited for poor performance. It is a risk to consider, however.  

HR must be clear on the rights and obligations of the CEO’s service agreement and issues around shareholdings or stock options may be complex. Account should also be taken of any restrictive covenants, confidential information and intellectual property.

While there may not be a formal PIP, a CEO will want to know what the evidence of poor performance is and which supports any decision to end their relationship with the organisation, ideally indicating problems and trends where they have failed to meet expectations. This could also include poor stakeholder feedback, unprecedented leadership and people turnover, or tumbling customer satisfaction scores. 

Having clear evidence of underperformance means you have the basis of a conversation to support a clear exit process – now. Firing or replacing a CEO always comes with risk; the greater risk is keeping an underperforming CEO in role. 

Take good care of the legals

The CEO relationship with an organisation is uniquely complex – they are usually an employee, a director and a shareholder. This means each of these relationships has to be considered from a legal perspective as you make the move towards exit, which takes considerable preparation. 

You’ll need to work closely with your legal partners, adhering to the course of action outlined in the CEO’s employment contract or service agreement, the shareholder’s agreement and the articles of association. If there are stock options in place, you will also have to be clear on how vested and/or unvested options are to be dealt with and the terms of the relevant scheme.

It’s always in the best interest of both the company and individual to avoid acrimony. While a negotiated, confidential settlement is always preferred, you also want to avoid obfuscating any issues of misconduct or mismanagement, to safeguard the integrity and reputation of your business long term. 

Manage your message

Throughout the process of a CEO exit, ensuring the company’s long-term success should always be kept front of mind. It’s essential to develop a communications plan – for internal stakeholders as well as external – so you can manage the messaging around your CEO being let go. Because of the sensitivity of the issue and the visibility of the role, it’s essential to scaffold potential rumours and misinformation in advance of your announcement. 

It can be a delicate balance; you’re offsetting potential reputational risk while ensuring your CEO’s own personal integrity and future career path remains intact. HR and/or the board should work closely with the comms teams to ensure language is clear and not open to misinterpretation, and messages are effectively communicated.

Remember to be human

It’s a cliché that the board’s biggest job is to hire and fire the CEO. But it’s not a process board chairs or C-suite colleagues relish. Transitioning out of the CEO role is more than a logistical process; it can also have profound psychological implications. CEOs will usually be dealing with the impact of not meeting expectations, and the legacy of failure. For many, this will be tied into their identity as a leader, in a public role, as a lifetime goal comes to an end or as a springboard to something else. For HR there’s an opportunity to bring empathy and compassion to the process, while also managing the wider impact it has on remaining colleagues, as people adjust to the change, ideally an incoming CEO, and a new direction for your organisation.

Helen Goss is an employment law partner at Boyes Turner