How safe is a CEO’s job when they work for a publicly-traded company? By definition, shareholders are the true owners of the company and the CEO is just at the top of the executive hierarchy. While the CEO is also typically a shareholder in the company, in the end, they are just another employee. So if the shareholders own the company, can shareholders fire a CEO?
The answer to this question technically is yes, but it does come with a caveat. Shareholders can fire a CEO but it has to be a major shareholder, not just a retail investor that owns a couple of hundred shares of the stock. The true power in determining the CEO’s employment is the Board of Directors.
Now again, the Board of Directors are all likely shareholders as well. Which is why the answer is technically yes. We just have to define what type of shareholder can fire a CEO. In the context of the original question, the true answer is probably no. Not just any shareholder has the power to fire the CEO of a company!
Can Shareholders Fire a CEO?
For publicly traded companies, each shareholder owns a tiny part of the overall business. Does this give them a say over who gets to lead the company? Not exactly. To wield this type of power the shareholder needs to be a majority shareholder. This requires them to own at least 50% of the outstanding shares.
Now, it can be a coordinated effort from the entire group of shareholders. There is certainly power in numbers! If the Board of Directors offers a shareholder vote, the shareholders can elect to remove the current CEO from power. In this day and age, this is a pretty rare occurrence.
What is more likely to happen is that the Board of Directors, together with any major shareholders will vote to unseat the current CEO. Usually, the smaller shareholders, like you or I, have no say in this matter. For a CEO’s job to be in jeopardy, the company is probably already underachieving so any CEO removal would not be a surprise.
How Does a CEO Get Fired?
How exactly does a CEO get fired? The most common way is that the Board of Directors will hold a vote in which a majority decision must be made. The Board of Directors is usually seen as the highest level of power within a company. They oversee the operations of the company without getting involved in the day-to-day activities.
Another way that a CEO can be fired is if they breach their contract. Remember, CEOs are employees just like any other. If they breach their contract or violate some codes of conduct at the company, it can be grounds for dismissal. They earn a salary just like frontline staff do and must abide by the same company policies.
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But the most common reason that a CEO’s job would be in danger is an underperforming company. While not all of a company’s problems can be blamed on the CEO, they are the ones that will take the fall. If the company continues to perform poorly, shareholders will likely start to get impatient. When they sell their shares, the stock’s price will fall, which is usually an indication of poor performance.
What Power Does the Largest Shareholder Have?
There are a couple of different ways to look at this. The first way is if the majority shareholder is an outside investor. Someone like Warren Buffett takes large stakes in companies that he likes. These positions can be worth billions of dollars. When he was younger, Buffett sat on the Board of Directors of companies like Coca-Cola. It’s no surprise that some people think Buffett’s company Berkshire Hathaway is a hedge fund.
The other way to look at a majority shareholder is a founder-led company. For example, a company like Meta Platforms will have trouble firing CEO Mark Zuckerberg because he owns about 57% of the voting rights. But Zuck only owns about 13% of the total shares, so how is this possible?
For founders that are also CEOs, they can issue different classes of stock with different rights. When it comes to Meta, most shareholders own Class A Shares. But there are also Class B shares which count for ten votes each. Guess who owns a majority of Class B shares? In this situation, the only way shareholders could get rid of Zuckerberg is if he voted himself out of the position.
Why Are CEOs Rarely Fired?
Let’s look at the facts: CEOs are rarely fired at all, let alone by shareholders. Why is this? Well, for one thing, most CEOs are extremely capable and intelligent people. They were hired as the CEO of a major company for a reason. The Board of Directors also does not want to look bad for the decision they made to hire the CEO.
Another way to look at it is: how many people are even capable of being the CEO of a company? If there aren’t many viable replacements, it might not be the smartest idea to just cut ties with your current CEO. If the problems of the company are out of the CEO’s hands, then what are the chances that someone replacing them will be able to perform any better? Even if someone like the current CFO takes over, it would be the same situation for them.
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When the CEO of a publicly-traded company gets fired, it is pretty major news. We can expect all of the financial publications and news sources to be discussing it. Not only is the future performance of the company in jeopardy, but the stock’s price could be as well. On the other side of the coin, investors might think it is a good idea to replace the CEO so sometimes, the stock price could rise. No matter what the sentiment is, when a CEO is fired, it is a significant point in history for that company.
The Bottom Line: Can Shareholders Fire a CEO?
While shareholders are considered the owners of the company, it is the Board of Directors that ultimately makes that call. Now often the Board of Directors are shareholders themselves, but in this scenario, they are acting as a member of the board and not as a shareholder. The Board of Directors does, however, have the shareholders’ best interests in mind.
I hope this helped clear things up! Thanks again for reading today!
Geek, out.
