Can The Board of Directors Fire The Owner?
The question “Can the board of directors fire the owner?” is becoming increasingly contentious.3 min read
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.
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.
If you need help with protecting your position as CEO, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with companies like Google, Menlo Ventures and Airbnb.