CEOs must adhere to the demands of shareholders and a board of directors, but can Shareholders fire the CEO of a Company? read to know the same.
Overview
The chief executive officer (CEO) must fulfill the demands of a board of directors and shareholder obligations, but changing the leader of a corporation may be tricky when co-owners enter into a partnership.
Role of a CEO
CEOs command disproportionately higher salaries than anyone else within their organization because of the impact of their tasks and administration techniques, which is why the roles are kept in place by contracts and their salaries are determined by the company’s board. In fact it is one of the highest positions in any company.
CEOs are responsible for improving the company, and increasing the overall profitability, and in the case of public companies, they focus on the share prices. However, there are no clear specifications regarding the amount of time a CEO needs to spend at work. Some are hands-on managers, while others prefer to delegate responsibilities and only actively participate in the managing process for a few hours every month.
Firing a CEO
When an organization fires its CEO, it usually indicates that something terrible has occurred and the corporation is in trouble. The CEO may be a poor selection from the beginning, impugns the judgment of those who hired him, and makes those who hired him look foolish. CEOs are therefore not fond of this decision, and owners and boards are reluctant. It’s no wonder that when this is required, it’s difficult to do. However, when is it appropriate to fire a CEO?
If you find that your CEO doesn’t match your company’s needs, one can fire him under these circumstances:
(1) your CEO’s skills are not up to the mark
(2) your CEO has transgressed your company’s core values,
(3) you have viable alternatives for the post, with manageable consequences that will almost always be positive.
Reasons to Fire the CEO
Poor Management Skills
CEOs may face termination if they lack effective management skills, hindering the successful implementation of companywide transformations. The inability to motivate employees or foster cooperation during change initiatives can lead to board decisions for replacement.
Wrong Assessment of Employees
CEOs must promptly address underperforming team members to maintain efficiency. Failure to identify and act on weak links within the workforce may erode board trust, impacting the overall productivity and performance of the organization.
Ignorant Attitude
CEOs ignoring customer requirements and modern business trends risk losing revenue and board trust. Active engagement in understanding customer behavior and staying informed about contemporary techniques is crucial for sustained business success.
Flawed Mindset
CEOs with flawed thinking may struggle in executing business operations, sharing objectives with divisions, and achieving desired results. Negative traits or reputations can lead to poor performance and subsequent termination by the board.
Poor Performance
CEOs are judged on company performance, and failure to meet expectations can result in dismissal. Factors like declining sales, missed financial targets, or shrinking profit margins can lead to replacement, even considering external market factors.
Ethical Lapses
CEOs face termination for ethical lapses, including fraud, harassment, or discrimination, as their actions directly impact the company’s reputation. Boards are compelled to take action to preserve the company’s image.
Some Strategic Missteps
CEOs are accountable for strategic decisions affecting growth and profitability. Strategic missteps, such as failed investments or market expansions, can lead to a loss of confidence from the board, prompting replacement.
Cultural Mismatch
CEOs misaligned with company values and culture may create conflicts, prompting the board to remove them. Harmony with the company’s core values is essential for a CEO to set a positive tone.
Poor Relationship with the Board of Directors
Effective collaboration with the board is crucial for a CEO’s success. Strained relationships, ignoring concerns or feedback, can lead to termination, as a breakdown in communication impedes progress.
Financial Performance
CEOs failing to meet financial objectives may face termination, especially if the company is underperforming. Repercussions extend to the company’s public image and investor trust, warranting board intervention.
Leadership Style
Ineffective leadership styles, such as over-controlling or micromanaging, can lead to conflicts and low employee morale. Boards may opt for a replacement to improve the overall work environment and productivity.
Can Shareholders Fire the CEO of a Company?
well, not directly. The CEO is appointed and fired by a board of directors chosen by the shareholders. In this scenario, 100 shareholders elect a board of directors, and then that group of directors can fire the CEO on behalf of the shareholders. Even if there are two shareholders, and one of them holds more than 50% of the shares, the board can fire the CEO if the board chooses to do so.
The shareholders can, of course, lobby the board to remove the CEO, and a single shareholder with more than 50 % of the shares can, through the board, effectively fire the CEO. A shareholder with less than 50% of the shares has limited power in a company unless they are in sync with other minority shareholders. An aligned group of shareholders can wield significant power when all the rights are filed in a shareholders agreement.
CEOs and Stockholders
Company founders are not immune to being ousted by one or more of the firm’s stakeholders. That is why Steve Jobs was fired by Apple. It is not uncommon for a company to be founded, and then one or more of its stakeholders fire the chief executive officer. In this way, one of the company’s founders can be ousted even if that person created the company.
In the case of Apple, Steve Jobs was displaced for some time. When a company grows in size, its stock gets diluted, decreasing what was once a majority share to less than 50%. poor management and execution prevent companies from scaling.
CEOs and company founders must take precautionary measures and establish close relationships with board members and stockholders to survive in such a demanding job. To survive in this job, CEOs must recognise the volatility and get written promises from important members of the organisation. There will be groups of people pushing for a new CEO in any major corporation, but to remove him or her, the board must make a decision. The very same individuals who are entrusted with keeping the CEO intact also have the duty of defending him or her.
The Board and CEO Relationship
CEOs do not operate alone. CEOs receive direction from the board and provide feedback, so establishing a good working relationship with the board is critical. A good chair, if not the CEO, should be prepared to assist the CEO with questions concerning the board’s desires. The chair may roll up its sleeves and help the CEO during a crisis.
The CEO and the board should have a good relationship if issues arise. It might be worthwhile for the CEO to meet with the board in person rather than just reviewing their resume if the board members are busy. The board members should be able to tell whether they can build a partnership with the candidate. The ability to speak candidly and honestly is imperative.
There is seldom a clear distinction between the level of decision-making at which the CEO sits and that of the day-to-day operations of the firm. When problems arise, the board may wish to get involved. For example, a CEO may have to handle a state attorney general’s investigation into the firm, or an attorney general may prosecute the firm for a legal matter. In these situations, the board must act as a conductor, ensuring that the CEO and other managers are addressing key issues, without making them prisoners to them.
Differing Responsibilities
The exact definition of a board’s and CEO’s responsibilities is determined by corporate policy, not set in stone. In some companies, the CEO sits on the board, even serving as chair. Board responsibilities include choosing and firing the CEO, approving major programs and initiatives, and making major choices. Board members monitor the CEO’s performance and profitability as well as the company’s long-term benefits to ensure profitability and longevity.
The annual meeting is the only time the board gets to review the company’s performance and plan for the future. The CEO makes all the decisions daily, following the board’s directives. CEOs make operational decisions and set company policies. The board is kept up to date on corporate activities and is asked to make recommendations.
How Vakilsearch Can Help in the Removal of CEOs
Choosing Vakilsearch to remove a director from your firm is the right decision, an expert from Vakilsearch will walk you through the process and help you get your job done quickly and efficiently. Our wide range of services includes drafting a resolution and filling out forms. We’ll also help you with any questions you may have.
Frequently Asked Questions on Removal of CEOs
Is the CEO more powerful than shareholders?
The CEO's power is based on the board and shareholders, but the CEO isn't inherently more powerful than shareholders who ultimately hold decision-making authority.
Does the CEO answer to shareholders?
Yes, the CEO is accountable to shareholders, working to align company strategy with shareholder interests and delivering results that benefit them.
Is the CEO higher than the owner?
The owner typically holds the highest authority, as the CEO is an employee responsible for day-to-day operations and strategy execution.
Who is bigger than the CEO of the company?
No one is inherently ‘bigger’ than a CEO within the company, as their role is crucial in leading and managing operations.
Who appoints the CEO of a company?
The board of directors, often elected by shareholders, appoints the CEO, emphasising their pivotal role in corporate leadership selection.
