Key Takeaways

  • A board of directors can fire a CEO—even if they are the founder—if they do not hold a controlling interest.
  • Common reasons for CEO termination include poor financial performance, ethical issues, leadership conflicts, or strategic misalignment.
  • Boards are under increasing pressure to prioritize company performance and governance over founder loyalty.
  • CEOs can protect themselves through strategic relationships, well-crafted contracts, and maintaining control over voting shares.
  • The firing process for a CEO should be handled legally, fairly, and with the company’s best interest in mind.

The question “Can the board of directors fire the owner?” is becoming increasingly contentious. CEOs and founders of companies often find themselves out of a job after being fired by means of a vote undertaken by the board of the company. If the person in question is not the owner of a controlling share in the company, there is not much they can do to avoid being fired.

Sharing the ownership of a company leads to loss of total control over it. As external investors are brought in, owners' shares get diluted, and the founder of a company can often find that he or she owns less than half of the shares in that company. This leaves him or her at risk of being fired.

If a CEO has a contract in place, he or she may get fired at the end of that contract period, if the company has new owners or is moving in a new direction.

The CEO, despite being the person who incorporated the company, often gets fired in times when the company is experiencing a slump in financial performance. This is because internal company politics and differing leadership styles render people vulnerable.

If a founder gets fired, then the company's investors have obviously lost confidence in that founder's ability to establish profitability. Or, in the case of a company that is already turning a profit, they do not consider the founder capable of helping the company grow and evolving to meet the needs of a changing market.

Strategies for Avoiding Dismissal

Tech Crunch advises executives to always remain defensive, working with key players and building personal relationships with board members and shareholders. These, according to Tech Crunch, are the most important strategies in defending oneself from being attacked by the board of one's own company.

Founders and CEOs need to focus on more than the fact that they are indispensable – they also need to recognize the areas in which they are vulnerable. They can do this in a number of ways:

  • Knowing whether or not a board vote is enough to fire them,
  • Being aware of whether or not alleged wrongdoings need to have taken place in order for them to be dismissed,
  • Keeping one's ears open to listen for complaints and expressions of discontent, and
  • Being careful of the contracts that they sign.

An important step that CEOs can take to protect their position is to get all promises in writing. A CEO should never trust anybody who claims to always have his or her back.

Common Reasons Boards Fire CEOs

While poor performance is a frequent catalyst, there are several reasons a board may decide to fire a CEO:

  • Failure to meet financial targets: Persistent underperformance or missed earnings can erode investor and board confidence.
  • Loss of trust or credibility: Scandals, ethical violations, or public controversies can prompt swift action.
  • Inability to scale or lead through growth: A founder-CEO may lack the skills required for the next phase of expansion.
  • Conflict with the board or investors: Tensions over strategic direction or management style can result in termination.
  • Toxic workplace culture: A CEO who fosters or fails to correct a harmful company culture may be seen as a liability.

A study by Harvard Business Review noted that many boards increasingly act on these issues rather than allowing them to fester, especially in public or investor-driven environments.

Legal and Procedural Considerations When Firing a CEO

Firing a CEO is a major decision and must follow proper governance procedures:

  • Corporate bylaws and board charters typically outline the procedures for removing an officer.
  • Board resolution and majority vote are standard requirements. In most corporations, this is the minimum legal threshold for dismissal.
  • Employment contracts may include severance terms, notice periods, or cause definitions that impact the process.
  • Due diligence must be followed to avoid wrongful termination claims, especially when a CEO has equity or founder status.

Boards should also consult legal counsel to ensure that their decision aligns with state corporate laws and fiduciary duties.

Examples of Companies Parting Ways with Founders and CEOs

A number of battles in boardrooms across the USA in companies such as Lululemon Athletica Inc., American Apparel Inc., Best Buy Co Inc., and Men's Wearhouse Inc., have showcased the challenges that companies face when parting ways with their founders. All four of these companies faced scenarios in which the board had decided that it was time for the founder of the company to step down as Chairman or Chief Executive Officer. In each of these cases, this move was met by strong objections from the founders. In some cases, the founders used their high equity stakes as muscle with which to fight back.

Experts in corporate governance expect to see many similar corporate dramas play out. This is due to the fact that shareholders are increasingly tending to hold boards responsible for matters such as investment returns and succession planning, as well as general fiduciary duties. This means that boards are flexing their corporate muscles more often, which can bring them to loggerheads with founders and CEOs.

Nowadays, boards are under unprecedented pressure to think about the type of CEO and the type of leadership that will drive the company to continued success in the future. This is particularly applicable when the current CEO founded the company. In cases like this, the board is faced with a major conflict between paying homage to the successes of the past and thinking about the type of leader that will drive growth and future success.

Some examples of CEOs being fired or stepping down include:

  • Dov Charney from American Apparel was fired for the misuse of corporate funds and for distributing compromising pictures of a former employee.
  • Chip Wilson from Lululemon stepped down after a product recall proved damaging to the company.

Power Struggles Between Founders and Boards

It’s not uncommon for founders to clash with the board once outside investors become involved. While a founder might have built the business, investor interests often take priority once external funding dilutes ownership. These power struggles typically involve:

  • Loss of majority shareholding: Without more than 50% of voting shares, a founder can be legally removed.
  • Shifts in board composition: New investors may place their own representatives on the board who are less loyal to the founder.
  • Differences in long-term vision: A founder's attachment to their original mission can conflict with market-driven strategies preferred by the board.

One prominent example is Steve Jobs, who was ousted from Apple in 1985 due to strategic conflicts with the board, despite being its visionary co-founder.

What CEOs Can Do If They’re Fired

A CEO who is removed—especially if they are also a founder—has a few possible paths forward:

  • Challenge the removal legally, if they believe their termination breached contract terms or fiduciary duties.
  • Sell or leverage their remaining shares, particularly if they still hold a significant equity stake.
  • Launch a new venture using the experience and network built from the previous company.
  • Negotiate a graceful exit with favorable severance, NDAs, and possibly advisory roles.

Importantly, a founder-CEO’s public reaction can affect their future credibility with investors and other ventures, making strategic diplomacy critical during such transitions.

Frequently Asked Questions

  1. Can a CEO be fired if they are the founder?
    Yes. If the founder does not own a controlling share of the company, the board can vote to remove them as CEO.
  2. What gives the board authority to fire the CEO?
    The board typically has this authority through corporate bylaws and fiduciary responsibility to act in the company’s best interest.
  3. What are some warning signs that a CEO may be fired?
    Missed financial goals, board disagreements, leadership gaps, scandals, or shareholder pressure are all warning signs.
  4. Can a CEO fight their termination?
    A CEO may challenge a dismissal if there was a breach of contract or procedural error, but success depends on the legal agreements in place.
  5. How can a CEO protect themselves from being fired?
    By negotiating strong contract terms, maintaining key relationships with board members, and retaining a significant ownership stake.

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