Public companies are governed differently. And boards of directors, half of whose members must be independent, take their legally established responsibilities seriously.
For example, their fiduciary responsibility requires directors to act in the best interests of the corporation. Their supervisory role involves oversight of the CEO and other officers. And their duty of care obligates close and regular attention to the functioning of the corporation.
With these duties in mind, boards have ousted CEOs – or, more commonly, forced them to resign.
Often, boards simply lose faith in the strategy the CEO is pursuing. That’s what happened at Hewlett Packard when the board fired Carly Fiorina in 2005, a few years after the disastrous acquisition of rival computer maker Compaq destroyed half of HP’s market value.
But boards have also been known to step in – and are doing so at an increasing pace – when the personal behavior of the CEO crosses a line and threatens to harm the company’s well-being.
For example, in early 2017, Uber’s financial performance under founder Travis Kalanick seemed just fine. But board members were growing alarmed by the results of an internal employee attitude survey and shocked when a smartphone video captured Kalanick shouting at his Uber driver. By March he was gone – not fired but clearly forced to step down.
And just a few months ago, the tenure of another iconic founder, Papa John’s very own John Schnatter, came to a similar end. There were no complaints about business performance. The issue was his use of racially charged language, which led the board to force him out of the chairman’s seat – only a year after he lost the CEO role for other disruptive behavior.
A key point in these examples is that even though the executive’s behavior triggered the removal, the company’s financial performance was still at the top of directors’ minds. For example, Papa John’s sales plunged when word spread of his use of a racial slur. Bad behaviors by the CEO will eventually reflect poorly on the company and hurt its performance.
The reality is that boards can lose confidence in their CEOs for many reasons. When that happens, governance rules demand that they take action in the best interests of the corporation.
And this is where the importance of independent board members – who have no ties to the CEO or another employee of the company – comes in. They regularly review the CEO’s performance and are responsible for hiring outside auditors to ensure appropriate and reliance internal control systems.