Words: Paul Potts
Read the headlines on the front page of the Business Section of the New York Times on Wednesday, October 23, 2019. The chief executive, Kevin McAllister, head of Boeing’s commercial airplanes division, was not the only chief executive to get his head lopped off in the middle of a crisis. Volkswagen Group CEO, Martin Winterkorn, resigned during an emissions cheating scandal, and Audi Research and Development head Ulrich Hackenberg was suspended in the same scandal. Regardless if it was hara-kiri or a Board decision, it is unlikely a corporation would be prepared to replace such high-level executives during a crisis – unless they had a plan already worked out.
In the Boeing case, there appeared to be an excess of hubris where several executives ignored warnings from the shop floor, making the chief executive directly responsible. In the Volkswagen case, it appeared clearly illegal manipulation of emission tests was at the center of the public disgrace.
Replacing critical executives under any circumstances is more than a hat trick, especially when there is a mélange of legal and financial issues and client lawsuits all going on at once. Executive talent, with the confidence and perhaps experience to rescue a business in this level of distress, cannot be easily lured to leave a secure position to join a scandal-plagued enterprise on the verge of financial collapse. An existing second-in-command could be promoted into the open slot, but that is rarely a permanent solution. How prepared will the Board of Directors be to hire a new chief executive is the subject of this article.
Planning for Succession
Planning for the succession of the chief executive of a large corporate enterprise or the president of family business are different challenges. Chief executives of large corporations are rarely promoted from the factory floor. Executives of corporate enterprises may be more of a business leader with training in legal issues and economics. On the other hand, the president of a mechanical contracting business will more likely be a former plumber or fitter or someone from the engineering or estimating department.
Large corporate enterprises have much more complicated leadership and business structures than small businesses. A large corporation like Boeing will have stockholders and a Board of Directors. The corporate enterprise may have several unrelated business activities that would require different types of leadership, but the common theme is the executive must have a background in law and economics. It is almost a certainty that anyone considered for positions at that level of a large corporation will have a master’s degree (MBA) or Doctorate in Business Administration from a well-regarded major university.
Replacing the president of a family business can be complicated by interfamily rivalries, or worse, a lack of interest in taking over the business by anyone. There may be several members who feel it is their turn to run the business even though they don’t have the support of other family members and have little business education or experience to offer. While an aging family business leader may not have had any formal education, today’s business leaders need to have legal and business education to run even a small business. Small family businesses often have special difficulty in that younger members are not interested in working long hours or getting the education needed to run the business.
These scenarios should be discussed among the members of a family-owned business acting as the Board of Directors before the day comes that their aging parents retire or pass away unexpectedly. If the business cash flow, client base, and crews of workers are intact, it will likely be worth taking it over when the parents leave. Leadership continuity should be discussed years in advance to give some enterprising family members a chance to get an education in engineering or business that will be useful in running the company. Even if there is no interest in taking over the business, the least that should be done is prepare to sell the hard-earned assets when the day comes.
Corporate Enterprise Executives
The chief executive of a large corporation must be able to communicate with executives and world leaders in other countries. They may need to be fluent in a foreign language. They must be able to speak with confidence and authority when they are talking with foreign leaders. Boards of directors of a large corporation trying to fill the empty seat of the chief executive will have to be prepared to offer a considerable salary and stock benefits to attract anyone who has proven worth in this position. They should study their industry to see what other executives are being paid.
Small Business Executives
A standard definition of a small business is one with up to $7 million in annual revenue and 500 employees or less. The president of a small business must project confidence and honesty and be knowledgeable about their business. They should have credentials in business and engineering. They must be able to put potential clients, political, and corporate leaders at ease when they are speaking with them about a major building project or the purchase of property for a world headquarters. The difference being that a corporate executive of a major corporation can come across as a little haughty, while the president of a statewide business needs to project honesty and confidence.
Planning fort Theft of Documents and Corporate Secrets
When ordinary employees are fired or otherwise forced to leave a major corporate enterprise, they are usually confronted at their desks by security officers and escorted from the property with only their personal belongings. If the enterprise Board were wise, they would take the same precautions with upper-level executives, because these are parties that can do the greatest harm.
Legal protection from the theft of secret corporate documents or expansionary plans rests in the copyright law and confidentiality agreements. Any documents or drawings created by an employee while working for a corporation are considered “Works for Hire,” and the copyright remains with the employer. Ideas for directing the business discussed between executives during management meetings have similar protections but are more difficult to prove.
When executive employees at large enterprise corporations are ousted, the damage they do is not to equipment or stolen property. It is what they know that can be applied to the business of another enterprise. Take the world-famous case of proprietary knowledge theft by Ignacio Lopez, who worked for General Motors.
- When J. Ignacio Lopez and his colleagues took GM industrial secrets with them when they moved to work for Volkswagen, they didn’t take anything physical, but they still committed a crime. While removing physical materials from GM would clearly have been theft, the case revolved around who owned the ideas and industrial processes at the heart of GMs claim. Lopez was mistaken in the notion that processes an employee developed during his or her employment could be taken with them as bait to attract a new employer. This is clearly not the case. Intellectual property created while employed by one employer belongs to that employer as a “Work For Hire” owned by the employer, not the employee who created it. Work for Hire is a central concept of the US Copyright Law. The law complies with the World Intellectual Property Organization (WIPO) Copyright Treaty which was ratified by over 50 countries around the world in 1996.
- The enterprise corporation must discourage intellectual property theft by requiring executive-level employees who will have knowledge of proprietary processes to sign non-disclosure agreements at the start of their employment. This will discourage them from trying to peddle what they know, and it’s easier to prevail in court with a non-disclosure agreement than bringing a case of copyright theft, especially when stolen artifacts are a matter of knowledge that is not written down anywhere.
Board members should constantly be assessing the field of potential outside candidates who might fit into the organization and keeping an eye on the inside talent that could temporarily step into the seat of an ousted executive. It is better to have a list of possible candidates from inside and outside the business ready when an executive quits or is fired rather than starting the canvassing process from scratch. There is nothing more discouraging to a prospective new executive than a disorganized board that doesn’t seem to know the first thing about what it is they want to do.