Sep 7 2005

Talking To Fellow Directors About Replacing A CEO

I recently posted about the signs that a board should consider replacing the CEO.  My partner Heidi Roizen came up with these as her answer to a question posed by Pascal Levensohn for a new paper that he is writing on the “Ten Signs That It’s Time to Make A CEO Change in A Venture Backed Company.” 

Pascal asked two questions in his interview request.  The first, which I addressed in the other post, was “What are the five most important signal indicators to you that it’s time to replace the CEO of one of your portfolio companies?” The second question was “When you have approached your fellow directors to tell them that you think the current CEO needs to be replaced, what has been the most difficult thing you have had to address in convincing them to support your position?”  As with the previous post, I’ve started with Heidi’s response and edited freely.

Before I dig in, recognize that none of this is easy stuff, for the VC, the CEO, or the board.  So – my comments below are from a VCs perspective and are not intended to be “balanced.”  Rather – I’m trying to give a feeling for what the underlying issues are, what is “good” vs. “bad” behavior, and to address one way to think about this.  I’ve been involved in many situations where a CEO had to be replaced – they fall into two categories “it ends happy” and “it ends unhappy” – I really haven’t had anything “in-between.” 

Interestingly, in many situations the other board members have arrived at the same conclusion that the CEO needs to be replaced.  However, individual directors tend to come to this conclusion on different time frames depending on their personalities, their level of engagement in the company, and their comfort level (or lack thereof) with CEO level confrontation.

The biggest point of resistance among directors is that there is never a “good” time to replace a CEO.  Startups are fragile things and CEO changes rattle customers, employees, VCs, VC’s partners, vendors, parents, children, and pets.  As a result there are often holdouts on the board who want to limp along and avoid dealing with the issue, particularly if there is a “transaction” looming such as a large customer opportunity, another financing, or an M&A deal.  My experience indicates that it is never a good idea to limp along.

Replacing a CEO can be the hardest work a board has to do.  Once the decision is made, you (you – in this case – refers generally to “the board”) have to start by dealing with the issue directly with the CEO.  You have to fire them and then figure out what the transition plan is going to look like (never fun after you’ve fired someone, especially if they don’t think they deserve to be fired, act irrationally, throw things at you, immediately call their lawyer, or simply walk away.)  You then have to articulate what you are looking for in a new CEO.  You have to figure out how to keep the company operational in the interim, both at an executive level as well as across the entire company. If you decide to use a recruiter, you have to find them, spend time bringing that person up to speed, go through interviews, reach consensus, then land someone, and deal with not only their comp but the repercussions on all the other comp and equity holdings among management.   Oh – and most capable new CEOs want to make sure the company has enough capital to insure that it is successful, which often means providing a new financing as part of bringing a new CEO on board.

Some VCs devolve into non-constructive behavior when faced with a CEO that is not performing.  Rather than addressing the issue directly, the VC becomes angry and hostile to the CEO, asks for irrelevant data / meetings / homework assignments from the CEO, and behaves in a surly, unproductive manner at the board meetings, bitching about the CEO in private to other directors, and generally being passive aggressive about the situation.

A wise and extremely successful VC (let’s call him Yoda) once said, “Every morning when you get up, think about your company’s CEO and decide whether you are going to support him or not.  If you are going to support him, do everything in your power to help him make your company successful.  If you are not going to support him, then replace him.”  By saying “help him make the company successful”, I don’t mean that the VC should be only a cheerleader, but that she should include lots of tough love type stuff that may not necessarily feel like support at the time. 

While this sounds simple, I often see VCs become “just another problem” for the CEO. This is a lousy situation.  I’ve personally evolved a very simplistic point of view, which I describe as “I support the CEO’s of my portfolio companies 100%, until the moment I don’t, at which point I act on it.”   With this lens on, I can spend all of my time “working for” the CEO, rather than having the CEO feel like he works for me.