In this post I’m going to try to give potential and actual CEO’s (and other C level execs to some extent) some actionable advice when it comes to how they conduct themselves in the hope that this will at some future date save some of you a great deal of misery and in some cases charges of misconduct or worse. My hope is that this will somehow help save a few companies by causing you - the CEO - to change direction before it is too late to do so. As seen from the outside the job of a CEO seems to be composed of equal components motivator, ambassador, networker and the person that ‘sets the example’. And that’s all true but there is also another side to being a CEO, one that is much more formalized and governed by all kinds of rules.
In my practice I come across all kinds of companies (and all sizes) and unfortunately sometimes I also come across companies that are sick, some so sick that they will not survive. The reason I’m writing this blog post is that recently I again was sent in to try to save a company from going under and I feel that if the CEO of that company had read an article like this maybe six months ago this whole disaster could have been avoided.
Companies going under is a real pity, not only for the founders and investors. The real losers in those cases are the employees, the suppliers and the customers. They bet on the wrong horse for something that will now materially affect their lives, they feel (in some cases rightly so) that their trust has been misplaced and in some cases they will feel duped or defrauded.
When the company is doing ok, there is money in the bank, when you’re hiring and the sun is shining anybody can be CEO of a company. But when the bank accounts are running dry, when you have to fire people and when it seems as if there is just no end to the bad news it really matters who is in the driving seat. It seems such a great thing, to be the master of a company but it is a double edged sword. With all that freedom and executive power comes the flip side of that coin: executive responsibility.
Companies being sick is in and of itself not a rare thing, but what bothers me is that, in many of these cases, the company is much sicker than it has to be. The wounds are, to a large extent, self-inflicted, and, if only someone had had the presence of mind to change direction when it was still possible, the company might have survived. Before we go any further lets take a look at what it is that a CEO actually does, what room to maneuver there is, what you’re obliged to do, what you are allowed to do and what you’re explicitly forbidden to do. Once that is out of the way we’ll get to some more general advice. The actual legal situation of what it means to be a CEO varies from country to country, I’ve tried to keep the text presented here general enough that you should get some (or significant) mileage out of it no matter where you are but if you currently are CEO of a company and you are yourself unclear about your role or if you feel that anything here clashes with the way you see things then I would strongly suggest you hire a competent lawyer in your jurisdiction for a couple of hours to let them explain as clearly as possible (and where applicable in your own language) what the local situation is. Quite a few companies that end up dead do not die of external causes. Plenty of them are murdered from the inside, either by bad decisions made on purpose, by inaction, malice or incompetence and it frustrating to see this happen when it could have been so easily avoided. For every company that ever died leaving behind a pile of unpaid bills and ruined lives there was a point in time when it could have changed direction, when there still were options to effect a gentle landing rather than a crash.
No matter where you are, remember this above everything else: As a CEO you are ultimately responsible for whatever happens to and in your company and in some countries that responsibility translates into personal liability if and when things go wrong, especially if it is determined that you did not play by the local variation of the rules and this can have far reaching consequences. In some countries, depending on the severity of the situation this can become a criminal matter so be careful to assume a role that you do not fully understand, the implications of CEO mistakes or misconduct can be very serious indeed.
What you are obliged to do
As a CEO you are obliged to keep the company on the right side of the law.
So, for example, if there is some kind of lucrative short-cut to making a lot of money but it is illegal in your jurisdiction to do so: don’t do it. Even if it means the difference between going under and surviving the long term fall-out of such a decision is potentially much worse than shutting your company down gracefully.
As a CEO you have to avoid at all cost to enter into obligations that you know (or should have known) that the company can not fulfill.
So don’t hire new people when you know that you are low on funds and don’t order goods or services that you know you will not be able to pay for when the invoice is due.
As a CEO you have to be realistic about your expectations for the near future (say 6 months out) in your day-to-day decision making. Hope for the best but plan for the worst and make sure that the company does not become insolvent (that’s a pretty word for being unable to fulfill it’s financial obligations). Do not assume that promises of future contracts, payments or funding will materialize until they do (that is: the money lands in your bank account) and do not let hope guide your decision making, stick to verifiable facts.
As a CEO you are obliged to decide on any major issues facing the company. Inaction, or postponing a decision for so long that a situation spirals out of control is generally speaking not an option. If that is the way you want to deal with problems then it may be better to step down. The rest of the company will look to your office for guidance and resolution and it is not proper for a CEO to meet challenges with a lack of decisiveness, and the usual result of a lack of decision making power will be that small problems become large problems, and will eventually cause the company to go under.
So, for example if the company is being sued do not ignore the suit, if a big customer leaves analyze the impact of this and adjust course if necessary while you still can.
As a CEO you determine the general direction the company will move in, you determine the overall strategy and how that strategy will be implemented. You allocate company resources in order to achieve these goals, though - especially in larger companies - it is common that you will seek input from others and if necessary from outside counsel or the board.
Even so, no matter who advises you and no matter how insistent they are, in the end the decisions are yours and yours alone and if there is a conflict between the direction that you think the company should go in or if there is second guessing of your decisions in the end your word is the one that matters. Nobody - and this is a very important point - can make you do something that you are not comfortable with, if there is a conflict about important matters the board (assuming you have one) or depending on the situation the shareholders can fire you but they can not make you do anything at all that you are not yourself in agreement with. This is especially important when a company gets into hot water (for instance, when it is near insolvency or when the direction others want you to go into conflicts with the law or with what you feel is proper behavior). It is extremely important because even though everybody else may have ideas on what should be done the final responsibility for those decisions lies with you. In plain English: it’s your ass on the line when things go wrong so do not allow yourself to be pushed or intimidated into making decisions that will come back to haunt you later.
So if the board tells you that they want to see you hire more people to push a project forward faster but your bank account does not allow it secure funding first, then hire more people.
What you are allowed to do
As a CEO you are allowed to hand in your resignation at any point in time. Even though you are allowed to hand in your resignation sometimes it is smart not to. For instance, if the company is in hot water and you still have the ability to make things better for entities (people, suppliers, the taxman) the company owes money to, then you probably should do so. You hand over the company to your successor in the best shape possible with a clear eye towards discharging your responsibilities with propriety. The captain should not leave the bridge of the ship until he has done his very best to save as many lives as possible, and only then he gets to save his own skin by jumping overboard. A weak CEO will throw up their hands in frustration and leave when they are needed most, and that’s in my book at least a bad mark against them. But that said, nobody can force you to be CEO of anything, so if you are not comfortable with your role and feel that you are either not qualified or no longer able to function (for instance, due to board or shareholder pressure) it is much better to step down than to make bad decisions or to continue in a direction that you are personally not comfortable with.
If the board or shareholders want you to go in a direction that you are not comfortable with it is also perfectly ok to simply tell them you won’t do it. They may fire you, but that’s much better than to order the company set course in a way that does not sit well with you and that you feel is contrary to good governance.
As a CEO you are allowed to bind the company, your signature will have the power to enter the company into obligations. Of course the company will have to be able to fulfill those obligations. Examples of these kinds of obligations you can enter the company into include contracts with customers, ordering goods and services from suppliers, entering into employment contracts with employees and so on.
So - taking into account the ability of the company to perform - you are free to enter into contracts with others. Keep in mind though that some articles of incorporation put limits on the freedom of the CEO to enter into contracts, there may be upper limits when it comes to amounts or certain classes of decisions. For instance, the articles of incorporation may say that the CEO can not enter into contractual obligations exceeding 50K, or there may be provisions related to relocating the company, putting liens on company property (intellectual or otherwise), starting legal action and so on without specific approval of either the board and/or the shareholders.
A fine point of order here is that even if you exceed your authority the company is still bound by your signature, you may then have a real problem with the board or the shareholders (and may even be liable).
As a CEO you determine the general direction the company is headed in and in the ‘org chart’ your name comes at the top, all the marching orders emanate directly or indirectly from your office and all the day-to-day decisions are made by you or by other people within the organization operating under your orders.
So you have the power to tell your CFO to prepare a report for you, to authorize the payment of invoices (or to delegate such up to a certain amount not exceeding your own authority) and to decide on the creation of a new line of products and so on. The articles of incorporation usually include some passage that states what kind of business the company is engaged in and might put limits on what kind of changes you are allowed to make without approval.
As a CEO you set the rules your company operates under and you determine who else has what kind of powers within the company. For instance, you could delegate some of your work to others that you feel are more qualified or that can help you lighten the load. Even so, you are still responsible for whatever it is that they do and even though it is great to work with others and to be able to trust them because the end responsibility is yours you are still required to check up on them to make sure that they actually do what they say they do. Trust but verify is the mantra of being a CEO (and that includes this text).
As a CEO you are allowed - within the boundaries set by the law - to fire other employees with cause - and in some cases and jurisdictions even without, or in a lesser variation of that to remove powers that you previously handed out.
So if you are not happy with the performance of an employee that was previously hired then you have the power to terminate the relationship. This may cost the company (severance pay for instance, or if the employee feels they’ve been let go without proper cause a wrongful termination suit) but it is definitely within your power to determine who works for the company and in what capacity.
What you are explicitly not allowed to do
You are not allowed to cause the company to break the law.
You are not allowed to enter into obligations that you know (or should have known) the company can not fulfill.
You are not allowed to place your own interests above those of the company, conflicts of interest should be avoided at all times.
Failure to observe these gets you into territory that is labeled ‘improper conduct’ and that is something you really want to avoid.
Some general observations
It is important to note that having a legal advisor that looks out just for you (and that you pay) when you enter into important obligations, when you are doubtful about the direction that others want you to steer the company in or when you are simply unsure about some corporate governance detail is an absolute must. It is much better to pay a lawyer a few hundred bucks (or euros or whatever credits you use) and to become a little wiser than it is to assume that you can wing it and end up with a responsibility that you should not have taken on. Note that legal advisors come in all shapes and sizes and that there are many different specializations within the general profession of legal advisor (or lawyer, if you wish). For instance, there are people that specialize in employment law, intellectual property, tax law, corporate law and so on and depending on the situation you may need one or more of these specialists in order to guide your decisions. Making un-informed decisions could easily cause you to break the law or to cause the company to break the law so make sure that you really know what you are doing. Make sure you get your advice in writing, and that if it still does not sit right with you that you seek a second opinion.
A word on record keeping. As a CEO you will make decisions that can have far reaching consequences. It is important, for yourself today and for your future self in case there should ever be a discussion about your conduct as a CEO to keep track of major decisions, when they were made and what went into the making of that decision. If you have done a proper job of documenting that you did what you could to keep the company on the straight and narrow, that you sought (written) outside advice on areas that are not your expertise and that you made sure the books were kept properly, that you made sure that the company did not enter into any obligations that it could not meet, then you will sleep soundly and will have an easy time handing over the reins of the company to a successor if and when the time comes. Failure to keep records, to communicate your orders verbally and to receive verbal input and to base your decisions on that (such as promises to perform and other vague and ambiguous inputs) can lead to problems. If you are going to make decisions based on factors beyond your control do what you can to nail these things down before committing to an irrevocable course of action. Do not put your signature on a document that you haven’t read or fully understood (and have fully understood all the implications of), know your obligations, your rights and your personal limitations in terms of knowledge and expertise and work with competent advisors (legal and otherwise) to fill any gaps and to ensure that you are doing the right thing. Study up on this stuff and read your corporate documents (for instance, the articles of incorporation) in their entirety and make sure you understand all of them, they may change your position in important ways. If you are both a shareholder and a CEO, note that these are two different roles and that you can not properly function if you are wearing two caps at the same time. In such situations it may be useful to limit your perspective to one of your roles to make sure that you do not end up in a conflict of interest situation.
A note on ethics
Now, all of the above centers on legality, but of course there are other dimensions to running a company. It would definitely make the world a much better place if we didn’t all focus so much on what is legal but if we would also keep an eye on what is right, in other words, to be ethical. If it is legal to pollute, if it is legal to externalize some kind of element that you would rather be rid of knowing full well that it is legal for you to do so but which will cause misery somewhere else then you may be on the right side of the law but you do not amount to much in my book as a human being. To some extent it seems that corporations are driven by people that will do everything they can within the letter of the law while at the same time leaving the world as a whole a much worse place and this deserves significant attention. Unfortunately there is a major drive to achieve wealth (especially for shareholders) at any cost and this is a systemic problem but there are CEOs out there that realize this and that make their companies examples worth emulating. Ray Anderson from Interface comes to mind as one example of a CEO that not only gets the legal bits right but that also steered a major corporation from being a huge destructive force into as clean a company as could be done with the technology of the day.
Goals are rarely in alignment
What is also important to remember is that it is very rare to have incentives for board members, founders, the CEO and shareholders / investors to be perfectly aligned. It is impossible to satisfy everybody’s wishes, desires and demands at all times and it is quite dangerous to assume that such an alignment is in effect when you ask for advice. What is good for the company or for you may not be the same thing as what is good for a specific shareholder, especially if that shareholder has a different approach to risk than you yourself are comfortable with.
Finally, it is ok not to know everything. Nobody does, not even the best CEO’s in the world know everything. But what they do know is what they don’t know, and then they go and get educated or ask for (written) guidance.
Because I feel this is one of the most important blog posts I’ve written to date I would very much appreciate it if you disagree with any of the points here or feel that there is a factual error if that would be brought to my attention (email@example.com).