Decision to Keep or Fire an Embattled CEO is All About Timing

The road to choosing whether or not to remove a leader from a company can be a bumpy one for boards of directors, Joann S. Lublin of the Wall Street Journal reported today. If directors wait too long, they may risk letting a bad situation worsen, and if they move too quickly, they could short-circuit any possible recovery and create a “demoralizing power vacuum,” Lublin wrote.

Directors currently act reluctantly in making the decision, and board members feel uncomfortable pushing aside a CEO whom they chose and like, Jeffrey Sonnenfeld, a senior associate dean at Yale University School of Management, told the Journal, adding that many have told him, “’The devil we know is better than the unknown.’”

Still, the article explained, directors tend to lose confidence and replace a CEO when they see major ethical lapses. Among other factors that may tip the balance are a pattern of business mistakes, concealment of critical information from the board, and an extensive exodus of senior management.

In reaction to a recently concluded labor agreement by General Motors Corp. allowing it to cut costs by billions of dollars and shift health-care expenses to a union-administered fund, Charles Elson, head of the Weinberg Center for Corporate Governance at the University of Delaware’s business school and a director at AutoZone, Inc. and HealthSouth Corp., says things for the company have improved since CEO Rick Wagoner seemed endangered last year as the company’s sales fell and as shareholder Kirk Kerkorian pushed for changes.

Regardless, Kerkorian eventually unloaded his stake and Wagoner remained in charge. “The company is looking better,” Elson told the Journal. “It’s a classic example of where the board stuck by the CEO.”

But Elson also says that directors of Home Depot, Inc. should have moved earlier to oust former CEO Bob Nardelli, who resigned in January, and thinks the directors were slow to react to growing investor concerns about Nardelli’s sizable pay package, management style, depressed share price and inroads by rival Lowe’s Corp. “It will take a long time to reinvigorate the morale of their employees and get customers back,” Elson told the Journal.