The Ripple Effect
By Richard Sterling, Managing Director at AltoPartners Australia
This article was first published via the AltoPartners Australia website, to view the original article click here
Reading this article as a Chair or as a Board member you might start having images from apocalyptic movies flash through your mind and if you are a CEO reading this then take heart, tomorrow will be better.
CEO failure! It may be self-inflicted by stupidity, criminality, hubris, sex or by a host of character faults. Then there is CEO failure because of errors of judgment or poor strategies or simply becoming worn-out in the job. The one failure and the most avoidable is the flawed hiring process that put the CEO in the hot seat where failure can be the only outcome. Just add time.
Media is littered with CEO failures. Just type “failed ceos” into your search engine and your screen will explode with over 8 million entries. Type “bad ceos” and you’ll get over 22 million entries. Many of these entries address the direct costs of CEO failure but very few will go to what I call the hidden price tag.
The fallout from a CEO failure ripples out in all directions and the cost is much more than just dollars and cents.
Trying to financially measure all the direct costs is reasonably straight forward but to calculate the indirect cost is problematic because there are many moving parts, many of which are hidden and others that play out over a considerable period.
Here are 10 obvious costs of CEO failure - easily calculated and known relatively quickly:
- Salary payout as per the contract
- Buying-out of options, shares and other incentives and benefits as per the contract
- Compliance and regulation- preparing and filing the paperwork and authorities
- Deploying public and investor relations to manage the fallout
- Unrealised sunk costs - the point at which new leaders have contributed as much value to their new company as they have taken from it
- Outplacement service – depending on why the CEO is leaving
- CFO time to run the calculations
- Legal time to advise and prepare a deed of separation
- Other staff leaving because of the CEO departing (revisit points 1 to 8 and 10)
- Hiring a search firm to find a replacement CEO
Now here is the hidden price tag.
Many costs stay hidden and only become known with the passing of time. Consider these costs, from the difficult to measure through to the almost impossible to measure:
- In the case of listed companies, the reaction of shareholders followed by the potential of ongoing share price volatility (extent and duration).
- For private equity backed companies the potential loss of confidence that curtails the appetite for further investment or disrupts a trade sale or derails an M&A activity.
- Outcome of insurance claims and class actions (if any).
- Damaged confidence in the whole Board or perhaps just the Chair leading to further instability.
- Media – the adage of all news is good news is rubbish. Bad News is BAD NEWS.
- Opportunities missed, market-share slippage, confidence and reputation damage.
- Loss of morale within the C-suite and at heads of function level potentially cascading to all levels of staff with the possibility of less than optimal customer service, disrupted or frozen contract negotiations, declining sales, paused innovation programs, slowed or halted strategy deployment and the skewing of the company culture in a negative direction. How do you begin to measure all of this?
This is Depressing! Is There Any Light at the End of the Tunnel?
Well there is a bright light at the end of the tunnel, I promise. Before letting it shine I need to share just one more piece of bad news.
CEO failure is also the failure of the Board. There are three parts to this statement.
Part 1: Was the selection process used by the board may be flawed?
This could be for an array of reasons such as the selection panel lacking structure - (very common), reliance on a limited network of referrers, poor or ill-defined understanding as to what the incoming CEO is meant to deliver - (very common), insufficient diversity of talent, the wrong selection criteria - (again very common), culture and values not understood or mismatched, ineffective interviewing, dysfunction at the board level, ego and disinterest.
Part 2: What happened with the on-boarding?
Although a good start it’s really not about the first 90 days or the first 100 days. The board must make sure that there is a deliberate and well-designed on-boarding program.
It’s about giving the CEO enough time and support so that they can explore the business fully, examine the alignment of key staff with the essential functions, delve into the culture, investigate and interpret what the data and the market has to say, construct a high calibre team and establish the strategy and priorities.
Part 3: Is the Board Being Vigilant?
Boards add value when they are vigilant. Boards can change the balance of power and assuage a CEO’s hubris. They can coach their CEO by reading market change signals and tapping their networks and resources. Boards can and should guide their CEO. Their success is the success of the business and therefore the success of the board.
** A CEO does not fail in isolation**
Now Here is the Bright Light
The news cycle will very quickly find other companies with failing CEOs and your failed CEO story will start its journey down the rankings of search engines.
If you are a listed company your share price will eventually recover, and volatility will settle once you announce an acceptable new CEO. Private equity will find their confidence with the appointment of a suitable CEO and customers are very forgiving if you have great products, services and authentic relationships with them.
And the Lesson for Tomorrow
Learning from a failed CEO experience is what the Board must embrace.
There is no more important role for Board than selecting next CEO.
At AltoPartners, experience has proven that the best outcomes are achieved when the right people are brought to the table to make the selection, the role specification is designed with the future in mind and that every facet of a candidate’s profile and capabilities is assessed.
The immense pressure to decide quickly must be resisted. Only with time and effective processes and the right support can a fully informed decision be made.
To discover more about how you can avoid the ripple effect of the hidden price tag call Richard Sterling +61 413 755 568