What Happens to the Inner Circle of the Ousted CEO? (page 4 of 4)

He is now president of Hewlett-Packard following the recent merger of HP and Compaq.

Cashing In His Chips
In Michael Lewis' book, Liar's Poker, published in 1990, the author tells of an attempt by John Gutfreund, then chairman and CEO of Salomon, Inc., to make a poker bet with one of his colleagues for $1 million. (The colleague upped the bet to $10 million and Gutfreund decided not to play.)

Useem cites this anecdote in his 1998 book, The Leadership Moment, while describing the Treasury bond scandal that engulfed Salomon - up until then one of Wall Street's most respected investment banks - in 1991. By waiting more than three months to report illegal behavior by a Salomon bond trader, Gutfreund and his management team ultimately had to resign. The scandal almost toppled the firm.

"The disaster was so huge that the price of restoring credibility was to bring in completely new top management," says Useem. "The result was a vast loss of institutional memory on a fateful day in August 1991 when the entire inner circle was forced out. While often necessary, firing the top team nonetheless means that you lose all those who really know what is going on."

In the case of Salomon, the firm hired Warren Buffett, at that time Salomon's largest stockholder, to become interim chairman and CEO. Buffett immediately asked the company's 12 remaining senior managers who from inside the firm they thought should be designated to run the firm with him. The overwhelming choice was Deryck Maughan who was then head of Salomon's investment banking business. He was immediately labeled "Mr. Integrity" by the press. Also joining the management team was Buffett's personal lawyer, who became Salomon's general counsel.

"When things go very badly, you should bring in new talent and not just replace the top person," says Useem. "This stems from the premise that what really counts is the top management team and not any single individual."

Stewart Friedman, director of Wharton's Work/Life Integration program, says that "it's all about perception." "If key stakeholders, like board members, analysts, employees, suppliers, important customers and so forth, see that the people who are hanging around after the CEO is ousted are going to continue in that CEO's direction, then those employees are in trouble. They should immediately create a kind of distance, a perception that they are going to play the new game. It can be hard to do that, which is unfortunate, because in some cases where [members of the CEO's team are pushed out] the company ends up losing important assets."

MacDuffie suggests that a CEO's ouster is often the "result of a number of circumstances. Sometimes a person takes a job just when the company is blowing up" because of actions before that person arrived. "It may be important to hold someone accountable to the point of ousting that person, but to assume that it is wise to remove all the expertise on the team is to overstate the causality. The message is that the problems were the fault only of those leaders, when that may not be the case at all."

According to Useem, the situation can also depend, in part, on how big the CEO's error was. "If it was just a matter of personal error or malfeasance, it does not necessarily reflect badly on others in the inner circle. But in the case of Enron, for example, the errors and malfeasance were corporate, not just individual. That's a wholly different circumstance, and in that instance the entire inner circle had to go."