Protecting the Enterprise When the CEO Stumbles
There are a wide variety of factors that lead stakeholders – investors, employees, customers, lenders, suppliers, regulators – to become enamored with a company. While much of it may rely on a cold, hard analysis of the industry, economic trends and financial performance, for some companies, especially small cap, early stage or rapidly growing companies, the CEOs’ personality can become a major factor. Stakeholders believe in the CEOs’ vision, personal charisma, leadership team and the culture they’ve built.
CEOs are also a major source of reputational risk and companies today are quick to jettison leaders for questionable ethical practices even from eponymous firms, or companies where CEOs become an outsized component of corporate reputation — like Uber.
As a result, when we analyze and underwrite reputational risk at companies, we consider a number of CEO-related questions:
- What do stakeholders expect of the CEO?
- Are there different expectations among different groups of stakeholders? For example, a younger customer may give greater weight to social responsibility, while an older investor may give more weight to financial performance over time.
- What are the consequences if stakeholders are disappointed?
- What impact is there if CEO behavior is the source of risk?
- What mechanisms, if any, is the board using to keep the CEO on track with strategy while the board is protecting the assets of the firm?
One of the crucial factors in situations like these is whether stakeholders believe that, ultimately, the company is bigger than the CEO and that its value is not dependent on his or her presence. This calculation is partly psychological – can they separate the person from the company in their own minds? How much value does that individual add, above that of a replacement CEO?
Part of the calculation, however, is very tangible. How strong are the company’s underlying assets? How strong is the company’s leadership infrastructure — other C-level executives, division heads and so on — the people who run operations on a day to day basis?
In the case of Steve Wynn, for example, the answer involves both factors. Yes, the Wynn name brought cache and added value to properties. And since the company operates in a regulated industry, its licenses and approvals for projects currently underway now hang in the balance.
One of the crucial factors in situations like these is whether stakeholders believe that, ultimately, the company is bigger than the CEO and that its value is not dependent on his or her presence. This calculation is partly psychological — can they separate the person from the company in their own minds? How much value does that individual add, above that of a replacement CEO?
But those properties have a certain amount of intrinsic value — even if some organizations cancel conventions or visitors cancel reservations.
Critically important in all this is the board of directors. Are they equipped to take quick, decisive action? Will members of the board be viewed as partly culpable for any CEO-related scandal? Will there be resignations or will the board remain stable and united?
When a crisis hits, does the board have a simple to understand and completely credible story to their stakeholders, validating their good governance practices and attesting to their prudent stewardship of the company? Whatever steps they have taken over the years to manage reputational risk, do they have third party warranties, in the form of insurance policies, that help them communicate that narrative persuasively in the court of public opinion and mitigate the usual post-crisis onslaught of litigators, regulators, and social media trolls?
Obviously, CEO reputation is always crucially important to any company. But when it is a core component of the corporate brand and enterprise value, boards need to consider additional protections against the individual downfalls that so often occur.