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The Role Of The Board In Appointing And Dismissing The CEO

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The Role Of The Board In Appointing And Dismissing The CEO

"The most important job of the board is to decide whether a CEO’s time is up or not"

Friday, August 7, 2015

By Karen Higginbottom,

The ousting of Anthony Jenkins as chief executive of Barclays Bank has highlighted the transitory nature of being a chief executive officer (CEO) in a FTSE100 firm. Jenkins has been temporarily replaced by the new Chairman John MacFarlane who has only been in the post since April this year. Is it better for a board to act rapidly when it comes to getting rid of a CEO? I asked experts for their views on the role of the board in selecting and dismissing the CEO.

On July 8 this year, Barclays announced that Anthony Jenkins, who had been brought into the bank as chief executive three years before to instigate a culture change was being sacked. The non-executive directors led by Sir Michael Rake, deputy Chairman and senior independent director explained that “new leadership was required to accelerate the pace of executive going forward and that John McFarlane was ideally qualified in this respect until a permanent successor was appointed.” Barclays denied that Jenkins’s sacking signaled any major change in strategy.

The whole incident brings into question the role of the board and Chairman (and on rare occasions, Chairwoman) in selecting and dismissing the CEO. The U.K. Corporate Governance Code sets out a code of conduct for the Chairman and non-executive directors of publicly listed companies in the UK. However, this code isn’t legally binding and is based on a “comply or explain” approach. The code by the Financial Reporting Council states that the board should “set the company’s strategic aims, ensure that the necessary financial and human resources are in place for the company to meet its objectives and review management performance.”

The most important job of the board is to decide whether a CEO’s time is up or not, remarks Andrew Campbell, director at Ashridge strategic management center. “Inevitably, one goes down a slippery slope as you have more discussions with directors as to whether the time is right for them to go and somebody calls a vote of no confidence and you either vote for or against the person.

The board has several layers of responsibility towards the organization, said Anthony Hesketh, senior lecturer at Lancaster University Management School. “Their responsibility is to make sure there is complete strategic clarity about the business and there is a fiduciary responsibility that capital structures look right.”

The tenure of a CEO in a publicly listed firm has become shorter over the years, according to research by the Conference Board. Their research found that the average tenure of a departing S&P 500 company CEO has decreased in recent years from roughly 10 years in 2000 to 8.1 years in 2012. Colin Price, Chairman of the Co Company, a consultancy that specializes in organizational health remarks that the tenure of CEOS has become shorter over the last fifty years. “One reason is the Lehman Brothers collapse. One positive thing is that thirty years ago, the average tenure of a CEO was 15 years and that’s too long as you run out of energy and there is a danger you end up with an oligarchic organization. However, the contrary argument is that if it’s too short-term, then it’s not long enough to implement fundamental change.”

The relationship between the Chairman and the CEO is of fundamental importance, said Hesketh. “It sets the tone in the boardroom. The board gets split into two: what is going on at an operational level and they also focus on the long-term strategy. The Chairman and CEO will regularly meet to have discussions about the implications of economic events on the business.”

The reasons for the dismissal of a CEO are varied, said Campbell. “There are ethical reasons you might get rid of a CEO such as fiddling expenses or it could be a strategy disagreement. Or it could be simply promising to do something but failing to deliver on it.” Hesketh commented that a CEO’s tenure will be short-lived if they fail to convince the board that they are in charge of the strategic direction of the firm. “If they also lose the relationship in the boardroom then they won’t last long in the organization.”

There are consequences for organizations that abruptly dismiss a CEO without a succession plan in place. A “2014 study of CEOs, governance and success” study of 2,500 large public companies worldwide by PricewaterhouseCoopers found that CEOs who came in after a forced succession have shorter median tenures than those coming in after a planned succession –only 4.2 years compared with 5.6 –indicating that companies without good succession plans are setting themselves up for more frequent turnovers.

Campbell argued there are benefits for the organization if the board acts quickly in getting rid of a CEO. “If the CEO has a poor strategy then that person can do a lot of harm. Many discussions at the top of the organization are semi-intuitive and if a CEO’s intuition isn’t appropriate then the sooner you move them out of the position the better.”

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