How to avoid firing your CEO.

• Author: CLARKE, RICHARD M.

Noticing signs of potential trouble early on can help a board save time, expense, and, hopefully, the incumbent CEO.

HOW TO AVOID firing your CEO is a timely subject -- especially when the annual rate of CEO terminations is exceeded only by the spectacular rise of the Dow Jones Index. Nearly every newspaper and business magazine now discusses CEO failures (even Women's Wear Daily is a frequent commentator).

The financial markets applaud loudly whenever a corporate board turfs an unwanted CEO, furthering the trend. Boards are increasingly powerful and active in company affairs, largely due to the attention and new aggressiveness of investment funds. Accordingly, the good old days of CEOs riding out the worst of storms protected by their boards may be gone forever. The CEO role has truly moved into unchartered waters.

Certainly the question, "Can a CEO be fired?" has been answered in the affirmative. But this is not the issue. The real question is, "Can you avoid firing your CEO?" To that I answer a definitive "yes." Most directors and observers would agree that many or all CEO terminations could have been avoided. So, what's the problem?

Two years ago The CEO Perspective Group conducted intensive research and analysis on this issue. We found in the vast majority of cases that a termination could have been avoided. More specifically, we found nearly 20% of CEO failures are readily clear within a few months of appointment to the position. Often, CEOs self-identify a wrong fit and depart under their own steam. Others fail so badly early on that the board has no option but to terminate the CEO as promptly as possible. But the overwhelming majority fail over time, hurting the company, shareholders, and employees unnecessarily. (For details of this sophisticated study, including follow-up investigation, contact our firm's co-founder, Dr. Dee Soder.)

This long-term arc of failure is difficult to understand because usually directors are smart people, committed to the company and shareholders. Two questions then arise. One is, "Why did the board take so long to reach consensus that the CEO has failed?" And two, "Why couldn't the board have done something to prevent this unhappy and costly ending?" Most directors would give basically the same answer: "It seemed to take forever for the board to reach consensus that the CEO was failing to lead the company...and even longer to act."

Stating this another way, even today most boards or board members harbor the old myth that if they speak negatively about their CEO, or state serious concerns openly, it will be perceived as nonsupportive to the CEO, negative or disloyal. New directors appear to notice problems more quickly due to heightened awareness and objectivity, but they are reluctant to speak out because they're new to the board.

Not on your board?

Before you raise your voice to say, "Not so on our board!" think back to those board meetings at which one lone director tried to voice a feeling of concern over a rather amorphous-appearing issue. Didn't your board almost lack the patience to hear this director out? If not, then you have a better board than most. Generally, financial performance is slipping and major problems are emerging before boards take action. Then it is much too late to try to salvage your CEO.

Our examination of CEO departures has to be qualified, as precise records weren't always available; however, conservatively, it appears that 60% of terminations would have been avoidable if action had been taken six months to a year earlier.

There are three distinct phases in the process of avoiding a termination:

1. Identifying a problem: Early Warning Signs of Trouble with a...