Sometimes employees don’t work out. That’s part of being in business. But when the employee that doesn’t work out is the Chief Executive Officer of the company, then things can get a bit more confusing. A proper CEO dismissal requires a thoughtful and official process, alongside a vote to board members and key stakeholders, an interim CEO appointment and an official hire for the CEO position as soon as possible to reduce impact on private companies.
But just as with dismissing any employee, CEO firings could be subject to an unfair dismissal claim if they feel they have been dismissed without due cause. Board decisions are still subject to the same scrutiny, so it’s important that any company seeking to remove a CEO first tries to seek legal advice from employment law specialists to ensure everything is carried out correctly.
With this in mind, we’re revisiting advice from Beverley Sunderland today, MD of Crossland Employment Solicitors, specialists in employment law, whose advice is still as relevant today as it was when she shared her thoughts with us back in 2016. Before we get to Beverley’s advice, we’ll also explore the topic more widely to further guide you on how to remove a CEO in the right way.
Table of Contents
What Is The Correct CEO Dismissal Process?
It is often the managing director and board members that handles both the recruitment process and dismissal process for a new CEO. As such, it’s important that they’re familiar with the correct CEO dismissal process to avoid unfair dismissal claims.
- Performance review
- Support in place
- Proper review
- Full dismissal process
- Final meeting
- Notice period and pay
Performance Review
Before any dismissal process can begin it’s important to review your CEO’s performance. This can be based on your CEO’s direct reports, but also on stats and results, and by speaking to members of staff (staff morale is a key indicator of CEO success). If there is an issue that flags up, it’s important to speak with your CEO directly.
Support In Place
Unless the issue is a form of gross misconduct, it’s your duty to support your CEO and try to improve their performance. After all, this gives them the chance to meet your expectations and helps you decide if they are the right CEO for your company or not. Put together a communication plan, targets to be met, and strong data analytics techniques that will help you monitor their progress.
Proper Review
After putting the proper support in place, you should sit down with board members and the CEO and conduct a full review. See how they align with the company’s core values and culture, look at the path they’ve been on with support in place and review their progress towards it. If they’re still falling short, it’s time to start a path towards dismissal.
Full Dismissal Process
Your dismissal process for your company will look different from another’s. Firing the CEO shouldn’t look different to firing anybody else, though, whether they’re a family member or not (as is often the case in smaller companies). Your company should have a detailed disciplinary and dismissal process in place, outlined clearly in the employment contract or employee handbook, and you should ensure you stick to this when dealing with your CEO to remove the risk of an unfair dismissal claim.
Final Meeting
After following the full procedure outlined by your company, it’s time to sit down with your CEO in a final dismissal meeting. Throughout the process you should have documented every meeting, decision, and piece of evidence supporting a dismissal – this can all be used to explain to your CEO the reason for their dismissal.
Notice Period & Pay
It’s important that your former CEO receives the appropriate notice and pay for their service to your company. Even if you have reason to dismiss them, you may be found to have done so unfairly if you do not pay them what is owed.
The CEO Cycle
Of course, dismissing a CEO may not always be due to performance or misconduct, but simply part and parcel of being a CEO at your company. Sometimes new leadership is required so the former CEO steps aside to make room for the next CEO, who will step aside in time, too.
Beverley Sunderland explores this CEO cycle in depth below, and focusses on how to remove a CEO fairly.
Removing A CEO – Beverley Sunderland’s 2016 Advice
Companies have two choices: either agree on the number of years at the outset with the new CEO, in which case bosses are unlikely to attract top talent; or adopt the approach of firing CEOs after five years irrespective of how they are performing, which is likely to have the same effect, particularly if they dismiss top performing CEOs.
Realistically it would need all companies to adopt the same approach at the same time. CEOs hold two positions: as directors they are officers of the company, but they are also employees. To avoid a claim for unfair dismissal, once a CEO is in place for two years, the dismissal must be for a fair reason: redundancy, capability, conduct, some other substantial reason or illegality.
For the “up front” approach, a business might consider a fixed term contract. Much overlooked is the fact that failure to renew a fixed term contract is a dismissal and so for those CEOs employed for five years there still must be a fair reason to dismiss. “We do not want you to become untouchable or unaccountable” is unlikely to fit into any of the categories above, especially if the CEO happens to be doing a good job.
There is no reason why, at the outset, a new CEO and their employer cannot agree that the maximum term will be for five years, that they both agree it will end at that stage and no matter how successful, the CEO will not stay on past that date. When the contract comes to an end at five years, the argument is that it is by agreement rather than dismissal.
However, the UK Corporate Governance Code applies to listed companies and provides for re-election of directors every year for FTSE 350 companies or in the first year and then every three years for other companies. It says that notice should be for no more than a year and poor performance should not be rewarded. The Association of British Insurers (ABI) and National Association of Pension Funds (NAPF) “strongly encourage boards to consider contracts with shorter notice periods.” It also disapproves of “golden goodbyes” – an agreed payment on termination.
For this reason, any contract should clearly define the maximum length the CEO can be in post and that the company can still bring the contract to an end before five years on giving notice limited to one year, less if the reason is capability or conduct.
Looking on the bright side, even if this does not work, the maximum compensation for unfair dismissal in an Employment Tribunal is £78,335 or one years salary, whichever is lower. This is assuming no successful allegation of dismissal because of discrimination or whistleblowing – although, if they were always going to leave then it would be difficult for an employee to allege that they’d been asked to leave because they’d blown the whistle or been discriminated against.
Also, practical issues need to be considered including drafting share options and long term incentive plans which would have to be written on the basis of a maximum five year tenure. The danger is that this might encourage decisions by a CEO which are in the best interests of them maximising their remuneration, rather than the best interests of the company and would call for a strong board to prevent this.
Finally, if a board knows the CEO is going at a fixed point in time, not only will they need to consider succession planning well in advance but this may lead to power struggles or undermining, knowing that the CEOs time is limited.
Whether you agree with Walker’s comments or not, there are definitely pros and cons to limiting the appointment of a CEO, which all need careful consideration whatever decision the company makes.
Similarly, there are steps that can be followed if you need to legally make employees redundant without being the target of unfair dismissal claims.
Beverley Sunderland is MD of Crossland Employment Solicitors, specialists in employment law.
Final Thoughts
It can be a great idea for companies to be upfront and honest about their CEO appointment from the get-go. If they see long term CEO tenures as potentially disruptive to the business because it places a limit on potential benefits, then even good CEOs shouldn’t expect to be in position after the agreed period.
With that said, not all CEO appointments are wise. Where this is the case, it might be necessary to dismiss your CEO earlier than planned due to poor performance. It’s imperative that you follow the same dismissal process that’s in place for other employees, and that you collect evidence at each stage of the dismissal process to protect you from any unfair dismissal claims that might follow if your CEO is upset by their dismissal.
In business, preparation for the future is key, and knowing how to dismiss your CEO the right way could protect your company’s reputation in the long term.
