Ian Robertson is executive vice-president of communication strategy at Kingsdale Advisors.
Over the past few months, the media has been full of headlines about high-profile chief executive officers being forced out. From international giants such as Boeing, McDonald’s and Nissan to Canadian companies such as Roots, CannTrust and TMX Group, boards have demonstrated a willingness to show their CEOs the door, especially in instances of scandal.
But are Canadian companies moving fast enough when it comes to terminating CEOs for poor performance?
A CEO who is not up to the job can have their poor performance masked when they are able to ride the coattails of a strong market and deliver shareholder returns, as was the case in the cannabis industry recently and has been true of the gold industry in the past. Too often, it is only when the shroud of market performance is lifted that boards finally take action.
When directors abdicate their responsibility to ensure a CEO is performing and delivering returns for shareholders, shareholders are demonstrating that they’re prepared to take back that authority and exercise it. Last year, of the 23 board-related proxy contests launched, one-third included or resulted in a change in CEO within one year – and this is only what has been disclosed publicly. You can bet when carefully worded press releases announce a CEO’s surprise departure, more often than not, there was some lobbying for change behind the scenes.
Shareholders have especially become critical of CEOs who don’t have enough “skin in the game” – by both owning a meaningful amount of shares and having compensation plans that ensure their pay aligns with the experience of shareholders.
Company founders who are also the CEO have found themselves particularly vulnerable, especially in the cannabis industry. We’ve seen a growing pattern of founders who have shown an inability to match their entrepreneurial innovation with sustained execution and encounter new, more sophisticated shareholders who joined as the company has grown and conclude the founder provides no real value any more.
In the cannabis industry, Aphria and Canopy Growth were among the first companies to show their first leaders the door. Freshii’s CEO-founder curiously announced he was firing himself, recognizing “that the skills that allowed me to lead the brand to where we got are different from the skills required to get us where we want to be,” then immediately rehired himself as a “new” CEO. The stock’s continued poor performance suggests this might not have been the right call.
Why do so many poorly performing CEOs stick around longer than shareholders want?
The average lifespan of a CEO – excluding CEO-founders – for TSX companies is six years, suggesting that many boards do understand that a company can outgrow its CEO and the job description may change. Others don’t get it until it is almost too late.
This is not to say in every instance that it makes sense for a board to remove a CEO. Far from it. But in instances where it has concluded it’s time for the CEO to go, the board must act boldly.
Some boards, however, are handcuffed by a lack of clarity about what happens the day after you fire your CEO: Is there a candidate or even interim candidate? Decisions to remove a CEO get tougher when there has been insufficient capacity building at the board level and succession planning at the management level.
We’ve also seen some boards put the brakes on what should be an obvious termination because of financial speed bumps, such as a high termination payout. In Canada, termination for cause is rare. As such, many CEOs come into a role, are well paid for their service and then are well paid on their way out for not performing.
Finally, other boards fail to pull the trigger simply because of ego or an inclination by some directors in Canada’s clubby boardroom environment to avoid conflict with other directors or the CEO. When a CEO is hired, the board peddles an image of an individual who is uniquely qualified, eminently capable and the key to the future success of the company. Even entertaining the notion that the CEO may now need to go requires them to first come to terms with the fact that they got it wrong, publicly, which may call into question their own suitability as directors.
Removing the CEO is not advisable in all situations, particularly when a board has failed to deliberately and thoughtfully evaluate the role and the individual. But when a board has properly constructed a CEO scorecard and evaluated all the metrics, the decision should be clear. Taking too long to fire the CEO only compounds the problem: Performance worsens, and recruitment is forced to move from methodical and intentional to a fire-drill that signals to the market this is a board that is not in control.