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Utah Business

It's best to start thinking about succession planning before your CEO is forceably removed from office. Here's how.

Your CEO Might Get Fired (Here’s How To Plan For Scandal)

In 2017, Uber’s Travis Kalanick resigned as CEO in part because of the mishandling of reports that Uber’s workplace culture fostered sexual harassment and discrimination. Apparently, Mr. Kalanick wound up in hot water less over naughty actions of his own and more for his inaction with regard to the malfeasance of his subordinates. Mr. Kalanick’s sudden resignation became a high-profile event, but it was only one of a steadily growing trend. 

“Contrary to the typical view that corporations are solid, invincible organizations,” says corporate attorney Joseph Rust of Salt Lake City-based Kesler & Rust, “they are quite fragile entities.” Large, midsize, or small, “much of the success of the company can be traced back to one individual.” The CEO―or top executive―exercises disproportionate influence over a company’s fortunes, and the removal of said CEO can have catastrophic effects.

“Failure to plan creates the risk of chaos, confusion, [and] power struggles,” says Mark Rinehart, a Bountiful-based corporate attorney. It can paralyze a company at precisely the moment when leadership is needed the most. 

Uber’s transition created a media frenzy, but it highlights a very real issue: transitions of power can wreak havoc on an organization… or they can occur with relative ease. “Corporate succession,” says Mr. Rust, is about planning ahead so that a company can “move forward smoothly, effectively, and possibly even more successfully.”

When Scandal Strikes

According to a 2001 PxC study, “The new normal is an early departure for the CEO… The premature departure of a CEO—a ‘retirement’ that, however described, is not voluntary, and that in years past befell only the unlucky or ineffective—is no longer an exceptional event, but the rule.” 

These “premature departures” usually—as in the Uber scenario—come in the form of an abrupt “resignation”—which is corporate-speak for “stepping down rather than being fired for doing something bad.” Or, as in Mr. Kalanick’s case, not doing something when others are engaging in bad behavior.

According to a PwC study of the world’s 2500 largest companies, CEO resignations “soared to a record high of 17.5 percent in 2018—three percentage points higher than the 14.5 percent rate in 2017.” 2018 represented the first time in PwC’s history of conducting the study that ethical lapses brought more resignations than financial performance or board struggles.

Those ethical lapses can manifest as prevarication. Samsonite ousted its CEO, Ramesh Tainwala, last year. Mr. Tainwala hadn’t been entirely truthful on his resume: a stated doctorate had never been conferred. Symantec’s CEO, Greg Clark resigned after an accounting probe revealed “irregularities” in the company’s books. Wells Fargo’s Tim Sloan, resigned after heat from the company’s “secret customer account” scandal reached its boiling point (it’s unclear how much of the blame fell on Mr. Sloan himself, but such things always tend to come back to the leader).

Sometimes, a CEO’s choice of relationship partner can even lead to early retirement. REI’s Jerry Stritzke resigned after an affair came to light. The affair was “a personal and consensual relationship,” but apparently shareholders took umbrage at the fact that said affair was with “the leader of another organization in the outdoor industry.” Similarly to Mr. Stritzke, Brian Krzanich violated Intel company policy by having a relationship with a company employee, resigning as CEO after the relationship came to light.

Another cause of sudden resignation of a CEO: poaching. For example, JC Penney CEO, Marvin Ellison abruptly left to lead home improvement giant, Lowe’s.

Our own state is not without its examples of sudden executive departure. Sterling Van Wagenen, who cofounded the Sundance film festival with Robert Redford, is appearing in court over allegations of sexual abuse of a minor.  He plead guilty to two counts of aggravated sexual abuse and faces six years to life in prison. 

Powdr CEO, John Cummings resigned last year to focus on “increased roles at organizations outside Powdr.” The Park City company, which owns a number of outdoors recreational properties, scrambled to appoint two co-CEOs from among its C-suite.

Sudden removals aside, an aging executive cohort alone is cause for concern. “Right now,” says Mr. Rust, “there are numerous ticking bombshells in the form of companies whose senior leadership is now reaching an age of retirement and which have no proper succession plan.”

Fifty is now the average age of a CEO in the US, meaning that half of all CEOs are older than 50, with many in their 70s or even 80s. Though death or disability can strike even a young person unexpectedly, six, seven, or eight decades increase the odds of the mortality tab coming due. 

Have A Plan In Place

“Corporate succession planning,” explains Mr. Rinehart, “is an arrangement for transition of leadership of a company.” The keyword being arrangement. If company stakeholders have agreed and rehearsed in advance, the loss of a leader entails not a catastrophe but the implementation of predefined steps.

Corporate succession planning (CSP) becomes even more relevant for privately-held corporations, explains Mr. Rust, as the president usually maintains control over hiring and firing decisions. They own a majority (if not all) of the stock, which can lend itself to difficulties later on. In the case of publicly-held companies, the board of directors can remove a leader. Private companies have no such body and the CEO sits at the pinnacle.

It stands to reason, then, that the main barrier to proper succession planning is often the president or CEO, who probably avoids dwelling on the vision of a company devoid of their leadership. Maybe they think themselves above sexual misconduct―maybe they really are above it―or, maybe they engage in sexual misdeeds and assume they’ll never be publicly shamed. Or perhaps, they don’t want to ponder their own death. Whatever the reason, forming a plan based on their absence tends to be extremely low on their (extremely long) priority list.

Even when a leader considers CSP, the difficulties of picking a successor often lead to paralysis. Company rivalries, conflicting loyalties, and shifting allegiances can create a minefield. The most common CEO response, says Mr. Rust, is “let me think about that,” which means “I can’t decide because I see no easy answer and therefore I will hold off making a decision as long as possible.” Consequently, nothing happens.

Mr. Rinehart recounts examples of “the second generation of a family-managed corporation fight with each other over who will run the company,” a dynamic that inevitably leads to “costly litigation” and even “the liquidation of a company.” In other words, game over.

Uncomfortable or not, a president or CEO really, really needs to develop a CSP for the sake of all involved. Arguably, a proper CSP is even an ethical issue, considering its impact on so many of the people who depend on a company’s stability.

Mr. Rust recommends that a CEO take a high-level, objective view of the options for a successor. Removing personal connections to the situation, he says, allows the CEO to “look at the whole situation and give the best possible advice under the circumstances.”

Mr. Rinehart says that a good CSP includes “a good severance arrangement, a buy/sell agreement [if] current management is also a significant owner of the business, [and] one or more replacements” groomed in advance.

It’s never too early; there is no minimum size at which a company should start considering the succession issue. “Because the cost of succession is almost always small compared to the benefits,” says Mr. Rinehart, “I think every company should develop a succession plan.”

Jacob Andra is a writer, award-winning digital marketer, and technologist living in Salt Lake City. Specialties include account-based marketing, growth hacking for startups, blockchain, fintech, and international issues. He enjoys history, the outdoors, podcasts, and a good book.