When a company is in trouble, does firing the chief executive help? While General Motors (GM) investors—to say nothing of the Obama Administration—might like to think so after CEO Rick Wagoner was forced out on Mar. 30, some say changing leaders in the middle of a crisis risks aggravating a bad situation. Other experts argue that complacent corporate boards and fettered shareholders let bad CEOs linger too long, damaging their companies. Whether ousting Wagoner at this point will help GM—or make things worse—isn't clear.
It should never have taken threats of cutting off aid from the Obama Administration to rid GM of Wagoner, says Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware's Lerner College of Business. "He didn't create the problems with the company, but he's been there 10 years," Elson says. "At some point you begin to own the problems. The bigger question is why didn't the board take this action earlier." Elson sees the same pattern at other struggling companies, including the string of financial firms that have collapsed over the past year. Bank boards "basically fiddled while the banks burned," he says.
Since the financial crisis began, more than a dozen CEOs at major companies have been fired or replaced due to the company's failure, such as Lehman Brothers' Richard Fuld; through acquisitions, such as Angelo Mozilo of Countrywide, who left after the troubled mortage lender was taken over by Bank of America (BAC); or because of ongoing coporate difficulties, such as Jerry Yang's departure at Yahoo (YHOO).
But removing executives in a time of crisis risks exacerbating existing problems, argues Edward Lawler, director of the Center for Effective Organizations at the University of Southern California's Marshall School of Business. He says firing Wagoner may send a mixed message that the government is not behind the restructuring he has pursued, even if officials want to send the message that restructuring isn't happening fast enough. Removing a CEO also means finding someone to step in and run the company. (Former GM Chief Operating Officer Frederick Henderson has succeeded Wagoner.) Firing a leader without knowing whether the successor will prove any better is riskier than keeping an executive in place, he says.
What's more, shakeups for the sake of shakeups can spook an organization, making the intended turnaround even harder to achieve, says crisis management expert Eric Dezenhall. "When suddenly the CEO disappears, everybody starts hiding in their offices wondering whether they're going to be next," he says. While there's no rule of thumb about when removing a chief executive is appropriate, Dezenhall says that changing leaders alone does not constitute crisis management. "I've always found it disturbing that the off-with-their-heads theory is often a proxy for decisive action," he says.
Still, some argue that Wagoner's ouster was appropriate because the government has extended a lifeline to the automaker. "GM isn't forced to accept any government money," says Karin Thorburn, associate director of the Center for Corporate Governance at Dartmouth's Tuck School of Business. And while GM's problems may be as much the fault of the poor economy as any decision Wagoner made, Thorburn says companies may need different leadership during a recession. "It may require a different set of skills to deal with an economic downturn than to deal with an economic upturn," she says.
For a look at recently ousted CEOs, see the slide show.
Tozzi covers small business for BusinessWeek.com.