WHEN CRISES HIT, CEOs’ PERSONAL REPUTATIONS ARE OFTEN AT RISK

We need look no further than the daily media to realize the extent to which CEOs personally are being targeted in connection with corporate crises and stakeholder disappointment and anger.  That’s not going to change any time soon.  Consider these findings from a recent study by Steel City Re:

• Financial losses related to reputational attacks have increased by over 400% in the past five years – and that upward trend is continuing.
• An increase in generalized anger among the public is demonstrated by a measurable increase in angry posts on social media.
• There has been an increased tendency for interested parties, ranging from politicians to activist investors, to direct that anger toward individuals – meaning CEOs and senior management as well as boards of directors.
• The weaponization of social media has made it possible for this anger to be harnessed and directed rapidly and with greater volume and ferocity than ever before.

Whenever there’s a corporate misstep, stakeholders, from activist investors to customers to politicians, are giving public voice to their anger through social media, doing damage not only to corporate brands, but to individuals in corporate leadership positions.  It’s becoming more and more clear: either board members are going to lose their seats or CEOs and other members of the executive team are going to lose their jobs.

And while corporate brands – especially strong ones – often recover quickly after a crisis, personal reputations do not.  The executives who are vilified during a crisis become the personification of stakeholder dissatisfaction.  When they are targeted, the personal losses can be devastating.

Incidents are bound to happen and every company recognizes it. But reputational crises today have taken on new dimensions as social media and online “news” sources sometimes make it difficult to determine whether information is accurate or false.  And the speed with which it can circulate – true or false – makes it extremely dangerous.

These societal trends are taking place against a backdrop that indicates CEOs are in a more tenuous position than ever before.

• Fewer CEOs are chairing boards. According to data analytics firm Equilar, among S&P 500 companies, 35.1% now have a non-executive chairman, up from 27.7% in 2012.
• Boards are being tougher on CEOs generally, adopting measures like “say on pay,” shorter tenures and threats of compensation claw backs as punishment for setbacks. That sets the stage for CEOs to find themselves walking a very lonely plank when their companies face public crises.
• CEOs are turning over in greater numbers. In 2016, according to SpencerStuart, 58 of the S&P 500’s CEOs transitioned, although not all were pushed out following crises. That is the highest number since 2006, a 13% increase over 2015, and a 57% increase over 2012.

Clearly, CEOs need new tools to protect themselves and their companies, since standard insurance products, like D&O liability insurance, offer no defense against damage incurred by the court of public opinion.  Just as D&O coverage became commonplace 30 years ago after a wave of lawsuits rocked boardrooms, new insurance products are gaining attention today to deal with the current threat.

Reputation Assurance products provide the type of third party warranty and endorsement that deters reputational attacks.  It demonstrates that a third party has scrutinized the company’s governance and found it to be worthy of standing behind.  That lends credibility to the company and stands as a shield against attack.  And like D&O or other forms of coverage, it provides indemnification to compensate for losses that affect their companies and themselves personally.

CEOs are accustomed to leading their companies through challenging times and adapting to changes in the marketplace.  They are also generally accustomed to thinking that if they perform well, their positions and their compensation will be secure.  The cultural and societal trends we’re seeing today threaten to upend that convention way of viewing the CEO’s role and, while they present great opportunities, they also present issues that require new thinking.

 “Activist Investors Have a New Bloodlust: CEOs.” – The Wall Street Journal

“From Ford to DuPont to Honeywell, leaders are being punished unfairly for long-term thinking.” – Jeffrey Sonnenfeld in The Wall Street Journal.

“CEOs face an ‘unforgiving’ business environment.” – Marco Amitrano, head of consulting at PwC UK, in The Financial Times.

“When you [the CEO] do strike back, you’re fired.” Elliott Management’s Jeff Ubben in The Financial Times.