How to cope when the CEO suddenly goes

Yesterday, the CEO of a listed technology company, TZ (ASX:TZL), suddenly resigned. John Wilson had been negotiating a lucrative deal for the young company, and it fell through. The board has temporarily installed the company’s executive chair, Mark Bouris, an experienced – if busy – entrepreneur. (Bouris is also chair and founder of another listed company, Yellow Brick Road (ASX: YBR).

The sudden departure of a CEO is a crisis that tests the prowess of the board and the calibre of the leader, Martin Nally, managing director of human resources company, hranywhere, tells LeadingCompany. “It is important for any business to have sorted out a succession plan, and it is one of the litmus tests of a strong leader is that they are grooming a strong replacement,” he says.

In reality, however, few companies are ready to cope, says workplace lawyer, Andrew Douglas, a principal of M+R Lawyers. “The truth is that it normally blows up suddenly. There is a disconnect between the CEO and the board, and then there is a crystallisation of the truth and reality hits.”

The imperative is to stabilise the company’s leadership as fast as possible, but Nally is not a fan of using board members to do so. “I feel boards should be NIFO – nose in, fingers out!” he says. “Interim executives can sometimes work. You can parachute someone in to hold the fort.” (See: Guns for hire: the rise of the interim executive, by Myriam Robin).

Failing to meet a milestone, such as securing a major contract, can be a trigger to end a CEO’s employment contract, Douglas says. “In any substantial business, the CEO will not come to you unless they have a fixed-term contract that reflects the business case,” he says. “In all businesses, there are short-term incentives, milestones such as profit marks, and long-term incentives based on delivery of the business case. If a fundamental part of business is getting a contract in, failing to do so is a fundamental breach of contract.”

Boards need to raise the breach, reach a quick settlement and get the person out before internal gossip leaks and starts to damage the company, the CEO and the brand. “That series of conversations must start quickly. Once you are starting to get brand damage you must get the person out,” Douglas says.

Leading companies that have started grooming successors may not have a replacement who is completely ready for the permanent role. But they can give a talented prospect a chance to step into a leadership breach and prove themselves.

Nally says, “Part of succession planning is development and you can sometimes unearth a star. If you have groomed someone it can be a fabulous opportunity. They can act as CEO for six months and demonstrate their capacity.”

Organisational psychologist, Leanne Faraday-Brash, says staff who are loyal to a departing leader will feel their loss keenly. “It is not the extreme emotional expression as the loss of a loved one,” she says. “But the cycle of adjustment can be similar.” (To find out more about what organisational psychologists do see here.)

At best, the departure creates an atmosphere of intrigue, which is distracting. As worst, a group of people who were deriving meaning and purpose from their relationship with their leader will feel “torn asunder”.

“If they depended on the person who has left for guidance, there will be a loss of comfort,” Faraday-Brash points out. “They may be worried how their competence will be viewed by the next leader, and having to prove themselves all over again.”

Nally says remaining staff and executives will watch how the departing leader is treated. If the board handles it unfairly, they will also leave as soon as possible. “The economy is in suppression, not recession, and when it does uncoil, people will look at opportunities differently if they are not dealt with well in the tough times,” he warns.

As an executive chair, Bouris is already well known to the staff at TZ, but they may still have preferred the management style of TZ’s exiting leader.

CEOs are measured on meeting key performance indicators; they may still be liked and respected as leaders even if they fail to meet their KPIs and lose their job.

Incoming or interim leaders are usually an unknown quantity, and staff will experience a loss of control. They have to establish a new relationship, Faraday-Brash says.

“When a leader comes in hot on the heels of someone who is popular and admired, the new boss can show respect for the old relationship by talking positively and respectfully about the former leader,” Faraday-Brash says. “If they are not respectful, they will confirm staff fears that the organisation under new leadership is a terrible place to work.”

Douglas says that boards are too lax about corporate governance, accepting the CEO as the source of all information about the company’s performance.

“Australia’s relaxed attitude at the board level of upper and mid-sized businesses persists,” he says. “If there is a key risk event [such as losing a contract], they should look for the most skilled person in the executive to return to business as usual as soon as possible.”

Nally says fast, open and transparent action by the board will secure staff loyalty. “If you are upfront, decisive, transparent and keep the process going, people will respect that, and loyalty to the company will overtake loyalty to the departing leader.”