CEO's Fate Tied To Performance, Not Profits
By Kevin Smith Staff Writer© Pasadena Star-News, June 25, 2006
It's a commonly held belief that CEOs get fired or are forced to resign or retire under pressure because of "current financial performance."
But a new study by LeadershipIQ.com reveals the reasons may be more varied than that.
According to the survey, 31 percent were fired for mismanaging change, 28 percent for ignoring customers, 27 percent for tolerating low performers, 23 percent for denying reality and 22 percent for too much talk and not enough action.
The categories total 131 percent because of overlapping factors in which two or more of the reasons were cited for an executive's dismissal.
The four-year study by LeadershipIQ.com, a world leader in online leadership seminars, compiled the results after interviewing 1,087 board members from 286 public, private, business and healthcare organizations that fired, or otherwise forced out, their chief executive.
"We get fixated on current financial performance," said Mark Murphy, LeadershipIQ's CEO. "But if that was really the whole story, every CEO who ever missed a quarterly target or lost money would be immediately dismissed."
Murphy said many world- class CEOs have seen their stock price dip, missed earnings forecasts, or even lost money for periods of time.
So financial performance, he said, appears to be an inadequate explanation.
"The expectations for transparency are much greater because of Sarbanes-Oxley," he said. "It's a difficult environment for CEOs to operate in and we're starting to see an expansion of accountability. The CEO is no longer accountable just to shareholders, but also to customers, employees and their communities."
As a result, fewer people are seeking out CEO positions, according to Murphy.
"There are many folks who are much less willing to take on that job," he said. "It's kind of like looking at the presidency over the past 200 years. There have been many fabulous candidates who simply didn't want to go through that kind of scrutiny."
The ripple effects that occur when a CEO makes decisions - good or bad - are generally well known throughout the business community.
"If they fail, it will be on the cover of every known newspaper in the world," Murphy said. "It's not just about delivering performance against a clearly defined set of rules. It's about what customers and employees expect. What does service mean...and do how they define that?"
Gary Kaplan, president of Gary Kaplan & Associates, a Pasadena-based executive search firm, said the role of CEO has been heavily impacted by the "Enron factor."
"Up until very recently, an inordinate number of companies had boards of directors that were closely aligned with the CEO - almost hand- picked," he said. "But we've gone from that sort of rubber-stamp model to boards that are beginning to take their fiduciary responsibility much more seriously. They are doing their due diligence."
Kaplan agreed some CEO candidates in today's business climate are showing a little more reluctance to take a top executive slot. But that feeling is not necessarily pervasive, he said.
"There is a lot of concern about scrutiny and liability in serving on boards," Kaplan said. "But in the searches we just did, we didn't find that very often. And let's face it, these board positions often pay very well - and you're also given stock options in many cases."
Kaplan figures most chief executives are still let go for a very basic reason.
"From my view of the world, I still think disproportionately that CEOs are let go for lack of bottom-line performance," he said. "Above and beyond all of the other things, it really is about deliverables - shareholder value and net income."
In fact, a CEO that delivers solid, bottom-line performance for a company will likely be afforded some flex room, he said.
"If a CEO is effective at doing that...it will mask a multitude of other sins," Kaplan said.
