A board handles a variety of topics, but interestingly, only decides formally on one: hiring and/or firing the CEO. One may ask the question “If there is only one formal switch to flip when a company isn’t performing like expected, is the board ultimately going to end up firing the CEO?”1 What are the best practices in initiating this often sensitive topic? And finally, are there possible ways to assess if this is likely to be the right call?
To start sharing a perspective on this topic, we need to first get an understanding of how often a start-up CEO is replaced. In a study of the Chicago Graduate School of Business, 50 venture-backed companies that evolved from business plan to IPO were tracked. They found that management turnover is substantial. In the US, founders get eliminated quite quickly along the way; only 49% of VC-backed founders stayed on until the IPO2. Furthermore, Harvard Business School conducted a survey over 212 US companies and concluded that by the time ventures are three years old, 50% of founders were no longer the CEO; in year 4, only 40% and fewer than 25% led their companies to an IPO.
Although these numbers are focused on the US market, it feels safe to state that there is a realistic chance, also in Europe’s ecosystem, that a CEO of a venture is often being replaced. So if there is a realistic chance, how to go about this as a board?
What are the jobs of a CEO?
In their book, Startup Boards3, authors Feld and Ramsighani determine three key jobs specific for a CEO. This seems like a valid starting point in setting up a framework for CEO transitions. The three key jobs described are:
- Setting the overall vision and strategy of the company and communicating it to all stakeholders
- Recruiting, hiring, and retaining the very best talent for the company
- Making sure there is always enough cash in the bank
It is the board’s responsibility to always clearly communicate to a CEO that these are his/her key jobs and metrics by which the board will assess their performance. This requires planning ahead, starting this conversation with the entire leadership early and especially one-on-one with the CEO, and then (on a yearly basis) plan evaluation moments in which a board evaluates itself, but also the leadership of the current CEO.
Evaluating CEOs’ performances
In practice, this sometimes sensitive topic (especially when founders are being replaced) can be handled upfront and in a transparent way through clear communication from the board. CEO evaluation is, in my opinion, an especially important topic to address when a board is formed, or a new board member is installed. It’s only logical to determine what parties expect of each other in cooperating in the venture’s (new) governance structure.
Looking at the three key jobs, at the end of year a board needs to have an answer on the following questions to make a good evaluation:
- How did the company and the CEO perform? Together with the CEO, annual metrics for performance need to be established. A CEO should be able to control these metrics and have adequate resources to execute the plan. All parties know the signals involved when performance is starting to fall short.
- What is the chemistry and cohesion within the company? Performance matters, but so does the ability to build a cohesive team. Is the CEO attracting great people to the company? And is he/she able to retain the most important people?
- What is our decision on the CEO position? How did we come to this decision? A board should offer clear warning signs to alert a CEO if it feels there is a lack of performance on the three key jobs of the CEO. It’s very important to create a certain trust among parties in which these warning signs can safely be shared without jumping to conclusions. If, at the yearly evaluation, the board feels there is too little progress on the warning signals, a decision has to be made.
Looking at the process, a question remains. What are typical warning signs in falling short on the three key jobs of a CEO? What are triggers for a board to assess if firing the CEO is likely to be the right call? Although not exhaustive and ultimately dependent on the type of venture, a few are discussed here:
- Misalignment with the stakeholders (for instance investors) about the purpose and goals of the company (job 1)
- A high turnover of key personnel in senior positions (job 2)
- Difficulty in attracting talent to the company (job 2)
- Irresponsible use of resources, either time or money (job 3)
- Difficulty in raising additional investment for the company (job 3)
Unsurprisingly, it’s all about communication
At the end, it is all about communication between a board and the leadership of a venture. Outcomes of a CEO transition process can range from CEO’s working together with a board to find a replacement to painful conflict situations. A board needs to handle in the best interest of the company. Even if this means making that one board decision to fire the CEO and hire a new leader for the company.
Based on my experience in the ScaleUpBoard program I feel that, while this may be an example of one of the hardest calls a board has to make, there are a lot of similarities in all other board activities. Looking at a best practice framework in the book Startup Boards, it is about having a human conversation upfront, managing expectations and (maybe) hoping you never have to make this call. When all parties involved in the discussion trust each other, then this topic can be discussed in a safe way. I feel that once this topic can be discussed openly and transparently, there are not a lot of other topics that could be off limits. It’s this kind of radical candor that makes a board highly effective, in my opinion.
- “Your Board of Directors is Probably Going to Fire You”, Jerry Neumann (2021) [Blog Post]
- /3. Startup Boards: Getting the most out of your board of directors. Brad Feld, Mahendra Ramsinghani, 2014
Ralph Hunnekens is the Investment Manager at the Scale-up team of LIOF, is the regional development and investment company responsible for the Dutch province of Limburg. In his role, Ralph actively supports scale-ups with growth funding, network and expertise. He has a long track record supporting start-ups and scale-ups in the Dutch market, with a focus on digital innovation. In Ralph’s words, he is inspired by “applying my knowledge and network to help dedicated, visionary entrepreneurs innovate”.
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