What kind of CEO behavior attracts the wrath of investors? James Grant, senior director of investor relations at Radio- Shack, found out first-hand earlier this year when a local newspaper published stories revealing the company’s CEO’s third drunk driving arrest, along with serious discrepancies in his resume.
Coming after a series of earnings shortfalls, this news didn’t play well with investors. ‘It was the CEO against the newspaper and the world,’ Grant remembers. Grant was not prepared to act as a shield to deflect criticism of his boss, however. ‘What I was not hired for was to be the CEO’s spin guy and personal promoter,’ he explains. ‘So I was able to reconcile for myself early on that when challenged with disgusted comments from institutional and individual investors, I was not going to make up excuses for him.’
The purpose of Grant’s job, he points out, is to provide complete and accurate information to help investors evaluate the company as an investment alternative. After a week of ‘an awful lot of listening,’ the crisis was over and the chief executive, who had initially denied the charges, resigned.
With more pressure than ever on senior management, Grant isn’t the only IRO who has had to face investor anger because of the actions of the chief executive.
Turning up the heat
Activist shareholders are demanding better performance, and faster than ever. Single-issue pressure groups and bloggers are hitting out hard over executive compensation and environmental and social issues. Government probes – which have led to the recent disclosures about the backdating of stock options – are also bringing undesired attention. So are the personal shortcomings of CEOs. Secret romantic liaisons with an employee, booking an escort agency to spice up an upcoming business trip, and behaving badly enough to draw serious allegations of sexual harassment are just a few examples of the embarrassing escapades that have recently been brought to light.
The controversies have no bounds, ranging from established corporate names like Boeing and Marsh & McLennan to lesser-known companies like UK internet gaming firm BetonSports. Disastrous business strategies play a big role in getting CEOs in hot water, as the BetonSports CEO discovered when he was arrested on racketeering charges in the US.
‘Anything that has the blatant appearance of some form of illegal activity is a sure lightning rod for attention,’ says Mark Nadler, a partner at executive advisory firm Mercer Delta.
Many CEOs are falling by the wayside. According to Booz Allen Hamilton, 15.3 percent of CEOs at the largest 2,500 public companies left office in 2005. That’s 4 percent higher than 2004 and a whopping 70 percent higher than 1995, when the firm first started tracking CEO turnover. Thirty-five percent of all departing North American CEOs left involuntarily in 2005.
‘Boards are looking carefully at things that quite frankly they were somewhat remiss in looking at before,’ says Lou Bevilacqua, chairman of the M&A group at New York law firm Cadwalader, Wickersham & Taft. ‘In the 1990s, stock prices were going up and it was kind of a ‘no harm, no foul’, ‘don’t rock the boat’ approach.’
Today, major investors are able to apply more pressure, and boards – held more responsible under Sarbanes-Oxley – are feeling it. ‘The bad news is there are so many pressures coming at CEOs from so many directions that boards are much quicker to pull the trigger and panic at the first sign of trouble,’ points out Nadler, who co-authored Building better boards: A blueprint for effective governance.
When that outside challenge comes, it’s clearly not an easy time for either the CEO or the IRO. ‘Whenever there is an issue with the CEO, I’m hard pressed to think of a
situation where the stock does not react negatively,’ says Gordon McCoun, who heads up the New York office of PR firm Financial Dynamics. ‘Some investors are not going to want to live with that increased risk level and will move out of the shares until they feel they can properly analyze the scope and size of the situation.’
Debbie Mitchell, a senior managing director for Cleveland-based IR agency Dix & Eaton, estimates that 35 to 50 percent of a stock’s valuation is based on corporate intangibles – the strength of strategic vision, customer loyalty, management depth and so on. She says it’s easy to see how a crisis can put price under additional pressure ‘if the investment community doesn’t have a sense of the company’s strategy or succession plan.’
Responding to the firestorm
When the CEO comes under fire, senior IR counselors say it’s best to get the issue out into the open – and quickly.
‘Our feeling is that when a crisis happens, by properly getting control of the situation, finding out what the cause is, resolving the issue and communicating throughout the process, it’s entirely possible to avoid any long-term diminution of the value of the company,’ says McCoun.
Any communication that hits the market will be dissected and scrutinized. ‘They’re going to watch your voice inflections and everything you say,’ says Keith Mabee, a 35-year IR veteran and president of Dix & Eaton. ‘If you can say, This is something I can only tell you so much about, and you need to trust me, if you have those kinds of relationships and you are viewed that way by the Street and by your peers in the organization, including the board and senior management team, it speaks volumes for putting a reasonable floor under the stock.’
Sometimes it’s very difficult for an IRO to convince an embattled CEO to move forward with the necessary communication. ‘You are raising issues that the person you’re working for may not want to talk about,’ explains Nadler.
‘You are going to your boss – who is the CEO, not the board – and in essence you are saying that somebody really ought to be looking into this,’ he continues. ‘That’s a message that your boss may not want to hear. I think IR people in that position are told to go and figure out a story or a line, but spin will only get you so far and will eventually deepen your troubles.’
This brings up some fundamental conflicts, according to Bob Haville, managing director of the London office of Financial Dynamics. ‘How long do you stand by your CEO?’ he asks. ‘Is it until they take him away in the police car? I think the dividing line for me is if criminal charges are levied. I am a great believer in being transparent.’
Nadler believes that IROs with real integrity ‘are serving their companies, shareholders and employees much better than those who are basically helping their boss dodge bullets.’ Grant, recalling the former RadioShack CEO’s controversy, says he ‘assured people that the values of the company were not the values of the CEO.’
Getting the board involved
When the CEO’s interests begin to diverge from those of his or her employers, the board must take control of communication. ‘It becomes that much more important for the company to demonstrate there’s a viable management team and a strong ability to continue to run the company in the absence of the CEO,’ says McCoun.
In these situations, the board must move quickly and clearly establish that its members serve shareholder interests and are not the CEO’s handmaidens. ‘In the wake of Enron and all the other scandals, we are in a very different environment now, and boards realize they too have legal exposure,’ says Nadler. ‘Boards need to say, We will get to the bottom of this as quickly as we can and take whatever action is warranted, even if it means getting rid of the CEO.’
The received wisdom on crisis communications is that the CEO must take a strong corporate role during a crisis, but Nadler argues that this doesn’t necessarily work today. Even so, companies should prepare for the next CEO crisis – and first on the list is a management succession plan.
‘What the board has to do is make the succession planning process transparent, through the proxy, the web site and everywhere they go,’ Mabee advises. ‘Without naming names, they can say, Here is the process, here’s how we grow management, here’s how we look at career development, and here’s how important it is.’
Global spotlight
Increasingly, companies headquartered outside the US are seeing their leadership coming under similar pressures. While there are major differences between US and European companies – mainly in the roles and responsibilities of boards and oversight functions – Haville says European companies are becoming more litigious. Asian CEO turnover has also increased.
All of this attention is having an effect on CEO and board recruiting. CEOs are looking very closely at the top corporate positions these days, scrutinizing the existing board members to see who is judging them.
‘They want to figure out what kind of board it is and what kind of breadth and experience is on the board, because they realize they’ve got a shorter time frame in which to prove themselves – and they want to understand who’s judging that,’ says Mabee.
Indeed, these board members will be the ones judging whether the future wrath brought by shareholders or other interest groups is deserved or should be defended against.
