518 Making Key Strategic Decisions
financing proposals. The board ensures that these proposals are consistent with
the adopted strategy. If they are not, the company can drift off course and may
get into serious trouble.
DEALING WITH MAJOR CRISES
In addition to its regular activities, a board occasionally must deal with crises.
These usually arise unexpectedly and require special board meetings. We de-
scribe two of these: terminating the CEO and dealing with takeover attempts.
Terminating the CEO
There are times when a board must replace the CEO. Failure to act in time is
a major criticism of some boards. Although such criticism may be justified one
should recognize that it is much easier for an outside observer to criticize than
to be in the shoes of the directors who are faced with this decision.
The decision to replace a CEO is subjective and usually emotional. Some-
times there are compelling reasons for taking action—for example, when the
CEO is becoming an alcoholic or when his or her corporate performance has
dramatically deteriorated. In most instances, however, the case is not so clear.
Earnings may not have kept pace with industry leaders because the board dis-
couraged management from assuming additional debt that would have enabled
the company to expand. Or perhaps the board supported a major acquisition
that did not work out. In such instances, it is not obvious that the CEO is pri-
marily at fault.
There are, however, several important signals that can alert a board to
question the CEO’s capabilities:
- Loss of confidence in the CEO. If a significant number of directors have
lost confidence in, or no longer trust, the CEO, the individual should be
replaced. - Continuing deterioration in corporate results.Earnings may be signifi-
cantly below industry norms or below the budget without an adequate ex-
planation. The board must act before it is too late. - Organizational instability.A CEO who consistently has problems retain-
ing qualified senior executives probably should be replaced.
These problems are especially serious in the many new companies spring-
ing up in information technology industries. In these industries, change is
rapid, competition is severe, there are no track records on which to base judg-
ment, and stock prices may change by huge percentages in a few days, ref lect-
ing changes in investors’ opinions about the company’s outlook.
It is one thing for board members to begin to doubt the CEO’s capabili-
ties, but it is quite another thing for them to demonstrate the courage and