When Should CEOs Be Fired?

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A board might do better to let a good CEO correct a mistake because most will learn from their errors and work hard to fix them and prevent a recurrence. Second, boards need to realize that each CEO brings a unique portfolio of skills and experience, and they are not dealing with replacement parts that fit a slot the same way every time and provide the same level of functionality. Third, CEOs are not readily available.

There is a war for talent that can guide companies to the next level of profitable growth. Many candidates view the CEO job as less attractive today. Contrary to some assumptions, there is not an infinite supply of leaders. It is no different with coaching in sports. For every coach who consistently drives a team to victory, there are more with indifferent records or with only spurts of success as opposed to a long-term pattern of superior performance.

Truth be told, most companies have not implemented leadership development or succession planning successfully and, as a result, do not have managers prepared to step up to the CEO job, particularly on short notice. That is another strong reason for boards to support the chief executive.

Finally, replacing a CEO is time-consuming, expensive, and potentially disruptive. Premature replacement can result in company decisions left in limbo, plummeting morale, executives nervous about their futures, the risk that a new CEO won't perform any better, and time lost while a new chief learns the business and figures out how to grab hold of power. A board needs to balance the costs of replacement against potential benefits.

The Freedom to Lead

Conversely, leadership matters, character counts, and judgment has consequences, both positive and negative. Boards should act decisively to remove a CEO who demonstrates poor leadership, poor judgment, and/or questionable character. Of course, if a CEO has engaged in illegal or unethical activity, a board should depose the CEO immediately.

Since the passage of the Sarbanes-Oxley law and changed rules at stock exchanges, CEOs have been held to tighter accounting standards and subject to increasing scrutiny from their boards, institutional investors, shareholder advocates, and the media. Increased accountability, global risks, and greater complexity make the CEO's job more difficult and the chance of a mistake more likely.

Boards should understand, even if regulators and activists do not, that CEOs should not be constrained to the point that their job becomes impossible or unattractive. It is easy for Monday morning quarterbacks to say what CEOs should have done. It is more difficult in the fray of competing risks, opportunities, options, and increased scrutiny to steer a company in the right direction. CEOs will make mistakes—they are human. While "being human" is not an excuse for a devastating error in judgment, neither is it always sufficient reason to fire a person.

Thomas J. Neff is chairman of Spencer Stuart U.S., a global executive recruiting firm. His consulting practice focuses on CEO and board of director consulting and searches.