For the last several years, many venture-backed startups have been backed by funds that call themselves "founder friendly." This means that as long as the founders keep the startup barreling to an IPO, the venture capitalists who fuel that growth will let them get away with all sorts of shenanigans.
Founder-friendliness works out very well for investors and founders until it suddenly doesn't. Two examples that come to mind: short-term office rental purveyor WeWork and its CEO Adam Neumann and blood testing startup Theranos and its CEO Elizabeth Holmes.
Both companies gave unfettered control to their CEOs. But they suffered different fates. Neumann was booted out of his company -- which is now struggling to survive under a new CEO -- in September 2019, after its vaunted IPO was pulled due to investor outrage over his mismanagement. Holmes stepped down as CEO in June 2018 and by September 2018 -- after the company defaulted on a $100 million loan -- Theranos began shutting down.
I do not know what happened behind the scenes for these former star CEOs to lose the support of their boards. However, a bad leader cannot be replaced unless two conditions are satisfied: First, the CEO must not be able to replace the board instantaneously and second that board must abandon its support for the CEO.
Once those tests are passed, here are four steps to replace a bad leader.
1. Investigate the current CEO to gather evidence on which to base their departure.
In anticipation of a difficult conversation with the CEO, the board must create a committee charged with investigating the CEO's alleged conduct. This board committee should hire investigators with expertise in the relevant areas and set them loose to gather facts.
If that fact-gathering yields evidence that confirms the offending conduct, the board should prepare to negotiate the terms of the CEO's departure. In that case, the CEO will likely hire advisors and the negotiations will begin.
2. Convene a board committee to set the criteria for selecting a new CEO.
Unless it is essential for the CEO to depart immediately, the board should not initiate the conversation about the CEO's departure until a search for a new CEO is well underway. While this is not polite to the incumbent, it is also bad for the company to rid itself of an old CEO without a better person who can take charge right away.
The board should convene another committee charged with setting the criteria for evaluating new CEO candidates. Such criteria should vary depending on the company and the specific business challenges that will face the incoming CEO.
For example, for WeWork, an ideal candidate would be someone who knows WeWork's people and its business challenges, had deep commercial office leasing industry knowledge, strong financial restructuring experience. and a track record of successful turnarounds.
3. Engage an executive search firm to find and interview candidates.
Once the board committee gains consensus on the search criteria, it should hire an executive search firm to identify and screen candidates. The best ones should interview with the board committee.
The executive search firm should then scrutinize the best one or two candidates. If they check out, the leading candidates should be interviewed by a broader segment of the board.
4. Hire the best CEO candidate and set the terms of the incumbent's departure.
Ideally the incumbent should depart the day before the new CEO begins work. To that end, the board may begin negotiating the terms of departure for the current CEO around the same time that the board makes an initial offer to the incoming CEO candidate.
In practice, this synchronization is not likely to work all the time. In that case, the company should appoint an experienced board member or long-time financial executive to run day-to-day operations until the best CEO candidate has signed a contract and is able to take over running the company.
If your company needs to replace a bad leader, these four steps can get you there.