The real cost of firing a CEO: showing top execs the door can be an expensive proposition — and not just because of hefty severance packages - Corporate Governance - Statistical Data Included

Chief Executive, The, April, 2002 by Pamela Mendels

Mattel declined to comment on the lawsuits, because it does not discuss pending litigation, says spokeswoman Lisa Marie Bongiovanni. As for the uproar over Barad's severance, Bongiovanni says Mattel's board honored previous commitments to Barad, recognized her 20-year tenure with the company and "did what was necessary at the time so we could move on." Barad declined to comment.

The public may also view an unexpected exit as less a reflection on the person than the company. That's what happened in the immediate aftermath of Rakesh Gangwal's resignation from the ailing US Airways' Group on Nov. 27, 2001. Richard Gritta, a business professor at Oregon's University of Portland and an expert in airlines and investment, said at the time that he was uncertain whether the decision came at the behest of the company's chairman or at Gangwal's seeing "the handwriting on the wall" about the company's future. Gritta adds today that when a company is doing well, Wall Street and the public can shrug off a sudden departure. But "if the company is in serious trouble and a key person leaves, the perception is 'something bad is going on- and this person is either quitting or was fired."' As it stands, US Airways' stock price has fallen 40 percent to $5 per share in mid-February from $8 on the day Gangwal's departure was announced.

A spokesman for US Airways declined to comment on Gangwal's departure beyond a statement released to the airline's employees when it was announced he would leave. The statement says that Gangwal's departure was based on his decision to work in venture capital, that the company was disappointed by the decision but wished him well and that the company's focus going forward would be "on operational excellence and creating shareholder value." Efforts to contact Gangwal were unsuccessful.

Finally, if board members are not careful, the firing can set them up for more grief. Rakesh Khurana, an assistant professor at Harvard Business School and author of a soon-to-be published book called Searching for a Corporate Savior that examines CEO recruiting, says that too often the board that dismisses the CEO also fails to give the proper time and consideration to finding the right successor.

Disgraceful replacement

Khurana believes that many board members have become star-struck, convinced that what ails a company can be cured by putting a big-name executive from outside the organization at the helm. One example, Khurana says, is what he considers to have been the rn-advised decision by Xerox's board to put Thoman, an IBM alumnus and relative newcomer to Xerox, in the top slot. Xerox, Khurana says, was one of "the supposed built-to-last companies with great cultures," and an insider would have been better able to navigate the terrain.

A Xerox spokesman, William A. McKee, retorts: "You can look at any hire in hindsight and say, 'You could have gone in a different way,' but I don't think it's appropriate to speculate." What's important, he says, is that Xerox is on a track back to profitability. Indeed, in late January the corporation announced an operating profit in its 2001 fourth quarter, excluding the impact of unhedged currency and restructuring charges. McKee adds that Thoman's severance was comparable to the "going industry rate." Thoman declined to comment.