Is the CEO's Inappropriate Relationship "One Risk Too Many"? An HBR Mini Case Study

Editor's note: This fictional mini case study dramatizes a dilemma faced by leaders in real companies. Please contribute by offering insights and solutions from your own experience. Amanda: Oh my lord, Howard. It's getting late. We've been talking in circles all day. It's beautiful here by the pool on your little corner of the Cape, but I need to get in the car and start heading back to the city in about 10 minutes. As conscientious board members, we have to come to some kind of a plan for what we're going to do about our wayward CEO — and his crush.

Howard: I told you, she's not his crush. No? The married, 63-year-old Jules Deykin is involved in an extremely close relationship with a 27-year-old female employee, and for months they've been texting each other like a couple of schoolgirls. Flirtatious. Goofy. Inappropriate. He took a picture of himself at the Gap, for heaven's sake, trying on jeans in the mirror. "Do these make me look fat?" he wrote.

The jeans were on, though. I mean, he wasn't in his underwear. He was wearing jeans and a T shirt. Sheesh! And they did make him look fat, by the way. It was sickening all the details that came out in the board's investigation.

They've both said categorically that there was nothing improper going on — no romance, no sex — and I believe them. She's been blabbing to all her coworkers about her very dear friend in the C-suite, and it makes everyone around her feel really uncomfortable. So even if it wasn't romantic — even if it was just weird — it's still wrong.

Why? Because he's male and she's female? Because he's old and she's young? What about you and me? I'm male, you're female; I'm Jules's age, and you're young enough to be my daughter. We're close friends, but there's never been anything else between us, and no one looks twice. If you ask me, this whole thing got started as an anonymous campaign of jealousy aimed at getting rid of that girl. She's a very attractive, dynamic person in a department full of — pardon me — middle-aged ladies. Whatever it was, we have a responsibility to do something useful. The shareholders specifically put you and me on the board two years ago to act as a counterweight to all the FOJ directors — the friends of Jules.

Useful, yes. But also thoughtful, Amanda. The company's already down on one knee. Performance has been poor for a dozen quarters. Now the company's getting all this negative publicity about Jules. We want to be very, very careful, Amanda. BuyersBest is extremely vulnerable right now. Remember: According to the bylaws and the law of the land, Jules did absolutely nothing wrong. I predict it's all going to blow over. This whole thing makes me feel ill. Jules used to be famous for his golden touch. I studied a case about him when I was still in business school. He took a lot of risks — there was that crazy purchase of the sporting-goods chain, which turned out to be a brilliant move. It was his willingness to take risks that turned the company into one of the biggest retailers in the United States.

I agree with you there. But he's lost his golden touch, Howard. He's done. He's cooked. He's past his prime. That's what this is really about. His risks used to be exciting and fruitful — now they're harebrained. Remember that push to put a restaurant in every store? What a bad idea. Even you got sucked into that vortex. I was the only board member who voted against it. He's got too much freedom to do whatever he wants. He's completely unconstrained.

Not every risk is a winner. You wouldn't want a timid leader. I was a lot more skeptical of Jules when I joined the board. I've come to admire him tremendously. You've become part of the pack, Howard. Admit it, this relationship with that girl is just one more pointless, unnecessary, thoughtless, impulsive, destructive move on Jules's part. It's one risk too many. Personally, I'd be a lot happier with him gone.

What? To be honest, I think a significant number of investors feel that way too.

Strong words, Amanda. Jules has a lot of power. Exactly. And who lets him be so powerful? The board does. The board is in awe of him and doesn't challenge him enough to be more transparent. Why is it that he always knows so much more about the business than the directors? Because he controls the flow of information very shrewdly. He cultivates private sources — managers he's known for years.

Every CEO does that. And another reason he knows more than the board is that all directors — even if they're really sophisticated — are part-time. They can't possibly understand the business the way the CEO does. BuyersBest needs a stronger board, Howard. The board's weakness is what got us into this mess. Somehow Jules feels he can take whatever risks he wants, with no consequences. The board needs to assert its power. This might be our opening to talk sense into the rest of the directors — and to get rid of Jules.

A friendship with an employee is a pretty flimsy excuse to dump the CEO. And think about it: Without Jules we'd have no credible leadership. Sure we would: Howard Ansler.

Me? You command a lot of respect in this company. You're a former retail CEO in your own right. You'd be the perfect interim. And we've got some good people waiting in the wings at the VP level.

But I don't want to be the CEO. Without Jules's vision, we're just another retailer. Besides, if you're looking to turn this board into an activist board, you're gravely mistaken. Your fellow directors don't have the wherewithal or the expertise to start truly steering this company. You're talking crazy talk, Amanda. Am I?

Question: Should Amanda start a movement on the board to oust the CEO over his office relationship?

A further note: Like HBR's traditional case studies, HBR.org's fictional mini case studies are based on academic research into business problems. This story was inspired by "CEO Power and Risk Taking: Evidence from the Subprime Lending Industry" by Krista B. Lewellyn and Maureen I. Muller-Kahle in the May 2012 Corporate Governance: An International Review.