Spotting, Catching, or Exiting a Falling CEO

Watch for the critical signs.[1]

by Dan Busby and John Pearson

 

It was obvious to many others that our CEO was utterly failing,
but our board was blind to what was happening
right before our very eyes.

 

Kent was in his seventh year as the ministry’s CEO when questions began to arise about his leadership.

Up to that point, the board had been very comfortable with Kent. There was great synergy between the board and the CEO.

However, Kent did not allow any staff members to be in the boardroom, so the board had little contact with the staff. Board members did not visit program sites, so they were generally disconnected from the services provided by the ministry.

A vacuum of board involvement and information was the backdrop for what appeared to be a successful CEO who was actually failing. The board had accepted an environment with reduced opportunity for the board to spot or catch a falling CEO.

Matters turned so bad in Kent’s eighth, ninth, and tenth years as the CEO that the board terminated him at the end of that period. It should have happened several years earlier.

The board had reached step 11 in their 12-step self-denial program before they could admit the mistakes they had made in the process. When they were finally able to be introspective, it was clear that they should have spotted the warning signs along the way.

It all started with the executive search that resulted in Kent being chosen as the CEO. Board members spent significant time on the long and intensive process. When the final five candidates were presented by the search firm, the search committee did not have high enthusiasm for any of the five, but they held their nose and recommended Kent to the board.

The board should have sent the search firm back to the drawing board to bring them more candidates. However, it had taken so much time and money to get to this point that they couldn’t imagine starting over. Plus, the search firm had told them that the five finalists were all excellent candidates. Though they may have been good candidates, they were not the right candidates for the position. In the end, Kent was hired.

Kent entered the sacred two-year CEO honeymoon period, when CEOs can nearly do no wrong. During this time, the board was euphoric over their excellent choice of a CEO. They did not ask any hard questions.

For the first couple of years, the board completed annual reviews with the CEO. Then the reviews stopped. Kent was doing so well that they seemed superfluous.

What were some of the warning signs that the board ignored? Here are a few:

  • Major programmatic changes. The ministry programs were operating effectively before Kent became CEO. But in the first 12 months of his leadership, he made significant changes in the way the ministry delivered its programs. Some of these changes proved to be ineffective.
  • What the board missed: They should have asked tough questions about the sudden and major program changes.
  • Significant staffing departures. Within the first six months after Kent became the CEO, the ministry’s chief financial officer, chief operating officer, and chief development officer resigned. The positions were filled with Kent’s friends, all of whom turned out to be less effective than those who resigned.
  • What the board missed: The sudden departure of highly valued staff members should have set off alarm bells.
  • Unplanned use of reserves. The first few years of Kent’s leadership were marked by operating losses and significant use of cash reserves. Kent explained away the losses, and the board accepted it.
  • What the board missed: The board should have held Kent accountable to operate with revenue exceeding expenses.
  • Significant loss of major givers. In the early years of Kent’s leader­ship, there was a drip-drip-drip of major givers pulling back on their support of the ministry, and new givers were not identified to replace them.
  • What the board missed: The board did not ask for or receive reports on the loss of major givers.
  • Generic reports to the board. Kent’s reports to the board—at board meetings and between meetings—became more generic over time, reflecting less innovation and less strategic thinking. There seemed to be a shift to less accountability and transparency in these reports.
  • What the board missed:  While the changes in Kent’s reports were subtle, the changes in his accountability and transparency were obvious when viewed in the rearview mirror.

Ed Morgan, President of Inspirational Leadership, LLC, notes that often many people inside and outside the organization know about a falling CEO before the board does. Morgan remarks, “The ‘case of the falling CEO’ illustrates why board governance needs to be taught. How is it that 12 perfectly rational, sensitive, and relationally intelligent people can come together into a group—called a board—and get really dysfunctional? It’s because board governance is a learned skill and learning to behave like a board, not an opinion gathering body, is an acquired skill. Catching and helping a falling CEO—relatively early—may be one of the signature things you look back on with satisfaction in your board service.”[2]

 

BOARDROOM LESSON
_______________________________

When cues and clues begin to accumulate,
a board should be very attentive to the possibility
of a falling CEO.

  Board Action Steps:

  1. Assess: Conduct annual performance reviews of your CEO.
  2. Partner: Utilize a shared governance approach resulting in a strong partnership between your CEO and the board.
  3. Watch: Look for warning signs that your CEO is falling—and address them. (For a deeper dive on this topic, we highly recommend Chapter 8: “Spotting, Catching, or Exiting a Falling CEO” in Boards That Lead by Ram Charan, Dennis Carey, and Michael Useem.)

 

Prayer

Lord, help our board to be properly attentive
to the needs of our CEO—praying, encouraging,
and monitoring progress. Amen.

 

 

[1] Ram Charan, Dennis Carey, and Michael Useem, Boards That Lead: When to Take Charge, When to Partner, and When to Stay Out of the Way (Boston: Harvard Business Review Press, 2014), 139.

[2] Ed Morgan, “Spotting, Catching, or Exiting a Falling CEO,” Lessons From the Nonprofit Boardroom (blog), May 1, 2018, http://nonprofitboardroom.blogspot.com/2018/05/lesson-26-spotting-catching-or-exiting.html.
 

From Lessons From the Nonprfit Boardroom: 40 Insights for Better Board Meetings, 2018, www.ECFA.org/KnowledgeCenter.


This text is provided with the understanding that ECFA is not rendering legal, accounting, or other professional advice or service. Professional advice on specific issues should be sought from an accountant, lawyer, or other professional.

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