Firing the Founder
Firing the CEO or founder of the company is possible and not an irregular occurrence via a vote by the board of directors.
As a child, I vividly remember myself glued to the television screen as it played Sam Raimi’s iconic blockbuster Spiderman (2002) which launched the Sam Raini Trilogy, a franchise that still reserves a special place in every spidey fan’s heart. With the pandemic’s glorious end in sight, I indulged myself in rewatching the nostalgic spidey-centric classic over the weekend, perhaps in hopes of capturing the same sense of adventure and self-discovery in the coming summer.
In one unforgettable scene, Norman Osborne, CEO of the fictional Oscorp Industries, delivers news with a beaming face to his board of directors: the company has become the “principal supplier to the United States military,” leading to greater revenue, lower costs, and soaring stocks. However, Norman’s smile suddenly contorts into a look of disbelief and disgust as he’s told that the board decided to accept a buyout offer from a rival company that includes his resignation as a condition. In what many consider an impressive show of acting, Willem Dafoe, playing Norman, cycles through the five stages of grief in a matter of 40 seconds. As he stares at the board in incredulity, he utters softly “You can’t do this to me. I started this company.” He then lashes out, yelling at the top of his lungs, “Do you know how much I sacrificed!?” This scene captivated younger me because though I couldn’t quite grasp what had occurred between these people in suits, I could tell he was gripped with crimson rage over the ordeal. Now it stands out to me for a different reason: How could they have done that in the first place? How could the C.E.O. or a founder of a company be compelled to resign? Is it possible?
The answer is a resounding yes. This is usually carried out by means of a vote by the board of directors, a group that exists for every public company and some private and non-profit organizations. The board of directors is a group of people — typically numbering anything between 3 and 31 members — elected to represent shareholders’ interests. They meet regularly to handle decisions concerning executive compensation, employing and discharging senior executives, approving annual budgets, dividend policies, and options policies. More broadly, this group is responsible for supporting executive duties, setting general objectives, and ensuring the availability of adequate financial resources. Specific details like the number of board members, the frequency of meetings, and the manner of election is decided by the company’s bylaws and constitution (specifically the articles of association) as well as government regulations. Although the board is elected by shareholders, they are nominated by a nomination committee. The same year that Spiderman hit theatres, the NYSE and NASDAQ mandated that independent directors create the nomination committee.
So now that we’ve established that the board’s responsibilities and powers, let’s investigate how this allows them to fire the CEO. The heart of what it means to be a board member is being a fiduciary, a person ethically and legally obligated to act in the best interest of their client — in this case, the shareholders. Further examples of fiduciaries include money managers, financial advisors, insurance agents, executors, etc. The point is that the board’s allegiance lies in the interests of the shareholders, which means that when the CEO is fired, it often reflects investors’ waning confidence in the CEO’s capacity to establish profitability or help the company adjust to shifting market conditions. However, past studies by Mark Murphy found that CEOs don’t get fired over poor financial performance but soft issues like ignoring customers, tolerating low performers, denying reality, and failing to turn talk into action. Perhaps their leadership style, which happens to be competitive and directive, doesn’t fit quite nicely with collaborative and innovative corporate culture. In other situations, the CEOs’ contracts can be concluded with a change of the company’s direction or ownership, giving way to their discharge.
Note that as I mentioned above, one of the duties of the board is handling the compensation, benefits, salaries, and ultimately the employment of senior management. Recall that the most common corporate organization in the U.S. includes a board of directors and the management team. The management team, hired by the board of directors, would include several titles like Chief Financial Officer (CFO), a Chief Operations Officer (COO) and a Chief Executive Officer (CEO). Explicitly, the board has the authority to fire the CEO, often through a vote, which we will explore later. However, what sometimes complicates this ordeal is that although many boards include members outside the company to make impartial decisions, the insider members may also be members of the management team. So the CEO could be part of the board and sometimes is designated as the chair of said board (COB). This is problematic, given that the ideal COB serves as a link between the board and upper management. So for the most part, the CEO shouldn’t also act as the COB, maintaining a healthy balance of power.
So where do founders fit into all this? Founders are people who started their own company by coming up with the business idea and acting on it. Acting on it entails securing the funding, promoting the brand, and bringing the resources. Further down the road, the founder might hire a CEO or may themselves assume the role. A readily available example for the latter is Jeff Bezos, who started the behemoth Amazon as an online bookstore in 1994 from his garage along with a few employees. Having founded the 300 billion dollar company, he was also the CEO — until July 5, that is. Being a founder is not a legal term but being one usually means owning most of the shares and consequently exerting control over the company. The issue is that the founder doesn’t necessarily retain this control in the future after many rounds of dilution. Even if they no longer own the majority of the shares, they retain the title of founder. This control of shares can be critical to clinging to power thanks to cumulative voting.
Cumulative voting is a procedure followed when electing a company’s directors. In this system, the shareholder can vote proportionally to the number of shares they hold. The rule of thumb is that shareholders who control 51% of the vote can elect most of the board and most of the board may terminate an officer. So if a director has a lot of shares, he or she is usually protected and when the converse is true, he or she is vulnerable. For instance, entrepreneur-investor Michael L. F. Slavin wrote about firing his own co-founder. Each of them owned 46.75% of the company but Slavin persuaded their four investors who owned what remained to grant him a proxy to vote their shares. He then was able to fire him, having been in control of 53.25 percent.
So the short answer is yes, founders and CEOs could be readily fired by the board of directors, an occurrence that’s not uncommon. Steve Jobs, widely considered a tech genius of his time and a pioneer of the personal computer revolution, was famous for being ousted from a company that he and Steve Wozniak built together in 1976. At the company’s inception, Jobs took the role of Chief Visionary, responsible for delivering the next revolutionary product, the Macintosh computer. He also convinced John Sculley, the then CEO of Pepsi, to join Apple. However, disappointing sales and plummeting stock prices from the launch of the Macintosh frayed Job’s relationship with the CEO he helped recruit. This was exacerbated by widespread complaints of Jobs being too demanding. In 1985, a power struggle between Sculley and Jobs saw the board side with the former, which meant Jobs lost command over the Macintosh project and was stripped of many of his previous responsibilities. For all intents and purposes, he was out. Of course, he would return 11 years later in a spectacular second act, ultimately becoming CEO until his death in 2011.
What does this mean for founders? It’s not surprising that establishing one’s own company demonstrates extraordinary grit and vision, but ultimately, the company will always end up bigger than its founder. No matter how expansive and brilliant one’s vision is proven to be, one can never be indispensable in as dynamic a world as business. As per Jobs’ story, perhaps it speaks to the unacknowledged importance of working well with others. It’s certainly ironic for people you hire to end up ousting you isn’t it? One might argue that various factors like current performance or following the company’s values should always dictate status more than history. Still, what comes to mind is Norman’s impassioned rage as he asks the board “Do you know how much I sacrificed!?” Norman Osborne, though fictional, still finds himself with good company: Steve Jobs (Apple), Jack Dorsey (Twitter), Palmer Luckey (Oculus Rift), and Travis Kalanick (Uber). Nonetheless, I can’t say the same for the others who find themselves in league with an explosive pumpkin throwing ego-maniac!
Sources:
https://hellofocus.com/blog/how-can-a-ceo-or-founder-be-fired-from-his-organization/
https://www.ringcentral.com/us/en/blog/founder-vs-ceo/
https://www.investopedia.com/terms/f/fiduciary.asp
https://www.investopedia.com/terms/b/boardofdirectors.asp
https://smallbusiness.chron.com/can-done-owner-corporation-not-his-job-37089.html
https://www.upcounsel.com/can-the-board-of-directors-fire-the-owner
