What Happens to the Inner Circle of the Ousted CEO? (page 1 of 4)

The question becomes more urgent if the ousted CEO engaged in criminal behavior related to his or her role at the company.

Tyco International - and the resignation of chief executive L. Dennis Kozlowski on June 3, shortly before he would have been removed by the board - is only one of the most recent very public examples. Some others that have made headlines include the ousters of Joseph P. Nacchio at Qwest Communications International on June 16, 2002, Bernard Ebbers at WorldCom in April 2002, Jacques Nasser at Ford in October 2001, Richard McGinn at Lucent in October 2000, Rick Thoman at Xerox in May 2000 and Eckhard Pfeiffer at Compaq Computer in April 1999.

The state of affairs at Tyco is especially tricky, according to press reports, because Kozlowski's closest associate, CFO Mark Swartz, is said to have been an integral part of the CEO's now-maligned acquisitions strategy for the company. The question has also been raised as to what Swartz may have known about alleged criminal behavior on Kozlowski's part regarding sales tax evasion and use of company funds for personal expenses.

At the same time, Swartz, according to a recent article in the New York Times, is highly regarded on Wall Street and is considered one of the few Tyco executives who understands the intricacies of Tyco's business strategy. So far, as the Times notes, the Tyco board has left Swartz in place but appointed a former Tyco board member, rather than Swartz, as interim chief executive.

Michael Useem, director of Wharton's Center for Leadership and Change Management, predicts that Swartz "may be forced out. While he was one of the masterminds behind the company's many mergers, and knows the intimate details of how the company operates, he was also Kozlowsky's right-hand guy. He may be ushered to the exit if the board and prosecutors press Tyco to clean house." Useem's first book on business management, written in 1984, was entitled The Inner Circle.

One consideration in this issue is whether, after a CEO is ousted, "the board of directors is capable of looking, independent of the circumstances, at the executives who are still there, or whether they end up being tarred with the same brush," says Robert Mittelstaedt, vice dean and director of Wharton's Aresty Institute of Executive Education. "Any board that is smart won't end up throwing away talent unnecessarily."

The problem in Tyco's case, however, "is that as you begin to peel back the onion you realize this could be a lot more complex than originally thought," Mittelstaedt added. "You assume that some people, like the legal counsel, had to have known what was going on." Indeed, last week Tyco's board fired its general counsel, Mark Belnick, amid accusations that he was impeding an internal investigation into possible fraudulent actions by company insiders, including himself. Belnick denies the charges.

The role a CEO's inner circle plays in the company "is crucial in deciding whether they stay or not, and the way to decide is to look at whether the people have some importance to the culture of the organization going forward," says Peter Cappelli, director of Wharton's Center for Human Resources. "If you don't want to get rid of them, you can, for example, move them to different roles elsewhere in the organization."

But it's hard to imagine, Cappelli adds, "that the executives around the CEO are not part of the CEO's agenda.