Just Say “No” to Interim CEOs

In September, Chief Executive Jeff Smisek and two senior officials of United Airlines stepped down in response to a federal investigation into whether the airline had traded favors with the chairman of the Port Authority of New York and New Jersey. The scandal involved United agreeing to reinstate money-losing flights to the airport nearest the weekend home of the authority’s chairman, David Samson, in return for improvements the airline wanted at Newark Liberty International Airport, where it is the biggest carrier.

The resigning CEO, the former Chief Executive of Continental Airlines, has led United since the two airlines merged in 2010. United’s performance since the deal, however, has lagged rivals’ and alienated passengers. But Smisek will be handsomely rewarded. Experts placed the value of Smisek’s severance package at $8.4 million at the time of his ouster.

The Board then invited Board Director Oscar Munoz, a railroad executive, to step into the CEO role. In his sixth week on the job, Munoz suffered a heart attack that led to his needing a heart transplant.

Now they have the lawyer, Brett Hart, running things. Hart currently receives a base of more than $42,000 a month, to which he will add an additional $100,000 per month during his tenure as acting CEO. He is also eligible for incentive pay and a variety of benefits. One assumes Mr. Munoz still draws his salary. Anyone doing the math might infer that these totals create a costly way to run a railroad or an airline.

Interim CEOs don’t traditionally serve companies well, but how should decision makers avoid this sort of scenario? Here are some ideas:

• Avoid desperation hiring. Too often companies settle for average performers whom they can reasonably expect to do the jobs for which they were hired. A pattern of this kind of hiring doesn’t always hurt immediately, but it certainly will eventually.
• Identify replacements for key positions as soon as a new person assumes the role. This will avoid desperation promotions.
• Develop people at every level in the organization, especially those in key functions. Make the development of successors an expectation that’s tied to performance ratings and financial rewards.
• Fire immediately for integrity infractions.
• Smisek stepped down after five years of poor performance. No Board should allow numerous years of poor performance from any CEO.
• When emergencies occur, have a well-established plan for who should step in to make decisions and run day-to-day operations, but don’t proclaim this person the new CEO.
• Don’t reward poor executive performance with huge severance packages.
• Establish the length of time a CEO can recover from an emergency before the Board will ask for a resignation and permanent replacement.

Every four years we experience the “lame duck” months between the start of the year and the presidential election. Often volatility in the stock market alerts people to the problem, and businesses sitting on cash and other kinds of cautious behavior also frequently follow. The lame-duck nature of an interim CEO is no different. Companies can’t flourish during uncertainty any more than a nation can, so smart Boards avoid letting that happen.