Here’s a question I wish I had asked: Why aren’t more CEOs fired?
Regular readers of this blog (and of that other popular blog I used to write over at Workforce) know that I often rant and vent about what I call “our 21st Century Divine Right of Kings,” or why unemployed CEOs seem to never have trouble finding a new job.
As I’ve noted before, there’s no unemployment crisis if you happen to be an unemployed CEO because there is a revolving door when it comes to CEOs. The reason? Well, there is this overblown notion in this country that CEO skills are something handed down from God and are incredibly rare and hard to find.
That’s complete and total nonsense of course, and one only need look at the track record of all-too-may recycled CEOs (like the guy who ran Circuit City into the ground, or much of Bob Nardelli’s tenure at Home Depot and Chrysler), to know it.
The question of why more CEOs aren’t fired, however, popped up this week in Philadelphia Inquirer columnist’s Mike Armstrong’s Philly Inc. blog when he referenced a paper by Luke Taylor, an assistant professor of finance at the University of Pennsylvania’s Wharton School, on this topic.
Taylor listed four reasons why corporate boards are slow to get rid of underperforming CEOs, and Armstrong summarized those reasons at Philly Inc.:
- It takes a CEO at least a year to learn his or her job – “and boards are slow learners when it comes to figuring out whether a CEO is any good.”
- There are real (and usually substantial) costs to firing a CEO. “Severance alone can run into the millions of dollars. Plus, there are costs to retain an executive-search firm, hire a new CEO, and even replace other senior managers.”
- There’s a certain inertia at the board level. “Good CEOs could simply be unlucky, leading their companies during a recession. A bad CEO could benefit from a robust recovery. With so much out of the CEO’s hands, why bother to change?” And,
- Because firing a CEO can be “personally costly” to board members – often the CEO’s friends – “and that has nothing to do with maximizing shareholder value. Though the stress and anxiety caused by firing a peer count as intangible costs, they weigh on board members greatly. Taylor calculated the value for this “entrenchment” cost at $1 billion. He said the direct costs of firing the CEO of a large firm average $300 million. But their reluctance to fire CEOs shows boards tend to believe that doing so would cost their companies $1.3 billion.
What strikes me about these four “reasons” why CEOs don’t get fired more often – and Philly Inc. notes that “on average, just 2 percent of chief executive officers of Fortune 500 companies are fired annually” – is that any other manager or HR professional in a company would get fired themselves if they tried to fall back on these excuses if they were applied to just about any other potential employee termination in the organization.
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And when Philly Inc. asked Taylor what the firing rate of CEOs would be if there were no entrenchment costs, he calculated that 13 percent of CEOs of Fortune 500 companies, or 65 executives, would be fired annually.
“Boards act like it is really, really painful to fire a CEO,” Taylor told Philly Inc. “But it’s not that painful.”
Taylor is spot-on about that; it’s NOT all that painful to fire a CEO. There are a lot of good ones running American companies, but there are a lot of dogs, too. Perhaps if CEOs were dealt with when they underperformed more the way other employees were handled when that happened, we might have a different and more equitable dynamic at work in American business today.
There’s a lot more in the news this week this week than how hard it is for CEOs to get fired, and here are some other HR and workplace-related items you may have missed while trying to improve your own job performance. This is a weekly round-up of news, trends, and all sorts of information from the world of HR and talent management. Yes, I do it so you don’t have to.
- Microsoft sues over employee jumping to rival. Microsoft isn’t big on suing former employees for breach of contract (they last did it in 2005), but according to the Seattle Times, they’re doing it to stop a former worker by the name of Matthew Miszewski from jumping to Salesforce.com. “This case involves an employee with knowledge of Microsoft’s sensitive customer and competitive information going to work for Salesforce.com, a direct competitor, in a job that is focused on the same solutions and customers,” David Howard, deputy general counsel at Microsoft, said in a statement. But maybe, this is about more than just one employee because last year, “Microsoft sued Salesforce over patent infringement,” the Times said, and Salesforce counter sued. The two companies settled that skirmish, but now, “Salesforce is also trying to recruit workers away from Microsoft to open a new office in Seattle.”
- Two workers win $2.6 million reverse discrimination case. According to the Kansas City Star, two veteran budget analysts (both female and over age 50), “who had always received exemplary performance evaluations” sued the city of Kansas City for wrongful termination after they were let go in 2009. A jury agreed with the attorney for the fired budget analysts who claimed that they “were unfairly treated and terminated, while younger employees or minorities with less experience and lower performance evaluations were kept on. He alleged they were also retaliated against after they spoke up against wrongful treatment…The jury awarded $863,100 in compensatory damages and $1.8 million in punitive damages in the lawsuit filed by Jordan Griffin and Colleen Low against Acting City Manager Troy Schulte and the city of Kansas City.”
- There’s a worker shortage – in Key West. Foreign workers help fill in the employment gaps in Key West, Florida, The Miami Herald says, because “there are jobs that Americans just won’t do, as the lodging and restaurant industries have found out,” said Jodi Weinhofer, president of the Lodging Association of the Florida Keys and Key West. “Americans don’t want to clean toilets and wash dishes for a living.” And the newspaper adds, “International workers have long been a necessity — dating to the 19th century when Bahamians filled jobs as wreckers and spongers — to supplement the limited local labor pool.”
- How to be a good boss. I’m not a big fan of columnist Harvey Mackay, but sometimes he has some good things to say. This recent column of his, published in the Des Moines Register, talked about the value of a great boss in getting good work out of people. “A truly great boss will engender loyalty before any of those other factors will,” he says. “A committed boss works hardest at positive leadership and a professional environment. A perceptive boss remembers her own early challenges and draws on those experiences. A responsible boss understands that mentoring his staff members and helping them develop skills reflects positively on him.” Good words of wisdom for ALL managers and bosses to remember.