Should you ever blow the whistle on your CEO?

Jeff Donahue is a good friend and battle-scarred veteran of venture-backed and private equity-backed companies. He has raised over $275M of funding for early and later stage startups and has been CFO of 10 emerging growth businesses. He’s worked across the table from leading investors like GRP (now Upfront Ventures), Invesco, ComVentures (now Fuse Capital), Allegis CapitalAlta-BerkeleyInvisionSteamboat Ventures and many more. I’m thrilled that he’s offered to write a Venture Financing Series. You can read episode one through five hereIn episode six, Jeff dives into a critical but almost never discussed subject: what should a CFO do when he or she concludes the CEO is not up to the challenge? Should the CFO reassert a commitment to the CEO and strive to get the company back on track, or should the CFO appeal to the VCs on the board for a replacement CEO?

From my previous guest posts you know I am focused on a CEO’s ability to execute. Execution spans the functional expertise of the CEO’s direct reports in operations, research and development, engineering, manufacturing, supply chain and logistics, financing, sales, customer service, marketing, business development, strategic partnerships, strategy and a raft of other things. No CEO is an expert in all of them but, to be successful, a CEO has to know how to lead his or her C-team members who individually are the experts.

So, what happens when a CFO (or any other C-team player for that matter) senses the CEO’s inability to execute on the business plan? Should he or she remain loyal to the CEO in the hope the CEO will get a grip and turn things around, or should he or she blow the whistle and rat out the CEO to the VCs on the Board of Directors? Remember, a start-up CFO operates in a world without Sarbanes-Oxley and there are no rules and regulations governing disclosure, governance, compliance and the like that might have tipped the investors’ hats regarding the CEO’s non-performance along the way.

In theory, this problem should never arise because the VCs on the Board should be practicing oversight so proficiently that they are abreast of the company’s performance on an almost real-time basis. In reality, there is a wide range of degrees of proficiency of Board oversight. The fact that the vast majority of start-ups fail affirms the landscape is littered with CEOs who can’t execute and Boards who do not effectively oversee them.

CEO-Board relationships are intricate, fraught with not only the operational and strategic complexities of the business but also with the subtleties of personality and ego. I have found relationship dynamics to be firm-specific and any attempt to reach broad conclusions runs the risk of instead producing portentous generalities. Hence, perhaps a couple of anecdotes is the best way to introduce the subject of what C-team players should do when the CEO is asleep at the wheel.

In one particularly appalling case of CEO incompetency despite my and the rest of the C-team’s incessant support of him, I finally worked up the courage to approach the two VC firms backing the company. Both were highly regarded entities. I did so only after extraordinary consternation that kept me awake night after night. My case against the CEO was meticulously documented, and the company’s performance spoke for itself. One of the VCs responded very favorably and was effusive in its gratitude for my having egregiously violated protocol in contacting them. The other heaped scorn and opprobrium on me for not having brought the issue to them sooner, and they blamed me for having let the company spiral out of control. I am good standing with the former VC to this day – even to the point where they have given me recommendations going into other portfolio companies – whereas the latter deliberately poisoned the well for me when contacted by other VCs for recommendations.

In another case, I approached the lead VC in less than six months of working for the company. I had joined it after 4 rounds of financing, the last one of which was a serious down round. The CEO they had put in the company 3 months before I joined had no clue, and I had no choice than to convey that to the lead VC when all my efforts to support him in getting the company back on track had been rebuffed. Not only was the CEO pink-slipped but also the COO. And, the CSO was put on what amounted to probation. The earth wound up a tad more scorched than I anticipated, but that was the prerogative of the Board.

Keeping in mind my prior observation that all of this is firm-specific and relationship-specific, I do offer the following guidance if you have found yourself in the same CEO non-performance situation as I have several times in my start-up career:

  • Exhaust every opportunity imaginable to work with the CEO and make him or her successful prior to blowing the whistle to the VCs. Fundamentally, a CFO’s job is that of deuteragonist – someone whose purpose in the company is to make the CEO look like a stellar performer. You must be certain that the company’s looming failure solely is the responsibility of the CEO’s lack of leadership and not your failure as CFO. Up to the day you approach the VCs, your first loyalty unquestionably must be to the CEO. When you do approach the VCs, you must have a clear conscious that you put every ounce of your effort, intensity, loyalty, professionalism, purposefulness and creativity into remediating the company’s problems and helping the CEO make the company work.
  • You are obligated to approach the Board when the CEO is incapable of performing. If the company fails as a consequence of the CEO’s inability to execute on the plan, you are going down the swirly with it and very likely so is your career in start-up space. If you think CEOs are expendable, CFOs are really expendable.
  • Don’t complain about the CEO to the VCs; instead, document his or her failed execution and inability to dig the company out of the ditch going forward against the plan and the reasons why. It is suicidal to approach the VCs because you don’t like the CEO or disagree with him or her. Stick to the facts, and do not judge the CEO. You have to build a case that pre-determines the outcome.
  • Form a coalition of your fellow C-team players to approach the Board if circumstances support that. Pick your alliances judiciously. One of the other C-team plays may have a different agenda which could encompass ratting on you to the CEO. If so, you will be on the receiving end of the fastest termination imaginable for disloyalty and insubordination.

Interestingly, in my experience when other C-team individuals discerned the CEO’s shortcomings they virtually always came to me first to share their concerns. Because the CFO is the financial connective tissue in the organization and has the best overview of what’s really going on, I was in a position to affirm their concerns or suggest that they re-commitment themselves to making it work and giving the CEO some more runway.

Of course, when the CEO not performing and the CEO is seconded from one of the VCs behind the company (i.e., the CEO is a partner in one of the VC firms that’s invested), you’re screwed. There is virtually no upside in that situation, and your best course of action is to update your resume and seek gainful employment elsewhere. Trust me, that will save you a great deal of heartache and consternation.