Signs That A Board Should Consider Replacing The CEO

Several months ago, I posted about Pascal Levensohn’s great white paper titled “After the Term Sheet: How Venture Boards Influence the Success or Failure of Technology Companies.” This is a must read for any entrepreneur who is raising or has raised venture capital, as well as every VC.

Pascal is now working on a new white paper titled “Ten Signs That It’s Time to Make a CEO Change In A Venture Backed Company.” He reached out to a number of VCs, including my partner Heidi Roizen, and asked the question, “What are the five most important signal indicators to you that it’s time to replace the CEO of one of your portfolio companies?”

Heidi did a great job of responding and covered most of the areas that I would have. So – rather than coming up with my own list, I thought I’d republish Heidi’s answers (with my editorial changes). Following are the answers from a VC perspective.

  1. I never hear from the CEO (other than at board meetings) except after I initiate the contact (or worse, when he does not respond even when I send an email or leave voicemail (i.e. avoids responding to me.))
  2. All communications from the CEO are “sales pitches”. If the news is all good, I know something is wrong. If all communications are “presentations” (instead of interactions), something is wrong. The corollary to this is when any bad news comes to me from a back channel (i.e. a customer, another board member, or (most often) another employee of the company.)

  3. There is odd body language / eye contact in management (board or otherwise) meetings among the direct reports. This is hard to articulate, but I can just see/hear/feel it when the management team disagrees but does not feel that they can have a dialogue about the issues.

  4. The “opportunities” always turn into “learning experiences” – that is, when I am constantly told about great deals about to happen, and then it always ends up that the deal doesn’t come in as planned. This is okay if it happens occasionally, but not if it is common practice. This dynamic would be fine if the plan were being met, but it never is in this scenario.

  5. There is a revolving door at the VP level. I get very suspicious when lots of people leave for “lifestyle” issues, particularly when they are hyped as heroes when they are hired, yet I am told when they are leaving that “it is actually good this person is leaving as she wasn’t very good.” A corollary to this is when the CEO constantly blames (or complains) about one of his direct reports but then hangs onto that person because confrontations are unpleasant and/or they don’t want to deal with the pain of going through the replacement process.

Following are three more that are not really signs that you should replace the CEO, but rather are signs that you should have ALREADY replaced the CEO (and that you are now likely in deep shit.)

  1. Not facing fiscal reality. For example, the company is 3 months away from running out of cash, there is no clear financing in site, and the CEO is still refusing to take “survival measures” to cut staff or do whatever it takes to keep the company afloat. As my partner there are often very good reasons why the plan is not met. Early in the life of a company, there is huge uncertainty around the revenue line (although the expense line should easily be managed to.) If the CEO is unable to determine and articulate the reasons why the plan is missed and make appropriate course corrections, that is an issue. In addition, as a company matures, if the financial miss becomes endemic, the CEO needs to go. At the end of the day, if you can’t manage your business to revenue and cost targets, you will be out of business.

    Pascal also asked a second question, which I’ll address in a later post. I’m looking forward to Pascal’s new paper – if it’s half as good as the last one, it’ll once again be a necessary read for entrepreneurs, VCs, and board members.

  • It's all about honesty

    It wasn't a coincidence. The great quote of the day resonated so good with today's blog of Brad Feld: To give real service you must add something which cannot be bought or measured with money, and that is sincerity and

  • What a great list – I only wish I had this two years ago – this is a must for any board member of a public or private company.

  • It’s all about honesty

    It wasn’t a coincidence. The great quote of the day resonated so good with today’s blog of Brad Feld: To give real service you must add something which cannot be bought or measured with money, and that is sincerity and

  • Great instructive stuff. In helping to articulate #3 – I can see it extended to situations where the CEO trys to control too tightly which manager says what in the meeting. While board meetings can be sensitive and shouldn’t be a free for all, having a CEO orchestrate every presentation, jump in to answer every question or re-spin every answer can be painful to watch.

  • Suzanne Tufts

    I have a different kind of perspective – I work with the boards and staff of not for profit organizations and find that all too often, it is the Board that fits the criteria listed and the CEO or Executive Director really should be thinking about ‘how to fire the Board.’ This is not a legal or fiscal reality for the senior staff person at a tax exempt organization. Although I realize this site and posting board is dedicated to ‘for profits’, I figure that people reading this are also philanthropically and civically involved, and so note this observation to say ‘if you are serving on a not for profit board, try to help the Exec. Dir. and make sure the Board is fulfilling its roles, facing reality, not ducking hard situations, etc.’ You will help your not for profit accmoplish a lot more a lot more effectively.

  • It might also be nice to see a whitepaper on the reverse topic of keeping the CEO. It seems as this is a subject that is not talked about very much, but I have heard some VCs talk about how swapping out a founder or CEO too early can kill a vision.

    I would suspect there is more information “out there” to support swapping out a CEO, but I wonder if anyone’s ever delved deeply into the “less swap is more” flavor …

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