How to deal with bad CEOs

Benjamin Wey, CEO of New York Global Group may have to pay a woman US$2.4 million for bad-mouthing her on social media.

And that was the very same woman whom he sexually assaulted and was ordered by court to pay $5.65 million in a civil claim case in 2014.

Despite paying this huge amount, it is obvious that no sum of money could possibly be big enough to undo the damage caused on his company's reputation via the media.

As such, what exactly can HR leaders do in times of such crises to ensure their leaders' acts of misdemeanour have minimal negative impact on their firms?

To examine how corporations handle allegations of CEO misbehaviour, researchers from Stanford University conducted an extensive review of news media between 2000 and 2015.

They identified 38 incidents where a CEO’s behavior have caught significant level of media attention - defined as having more than 10 unique news references.

Among the 38 incidents, 34% involved reports of a CEO lying to the board or shareholders over personal matters, such as a drunk driving offense, undisclosed criminal record, falsification of credentials, or other behavior.

More than one in five (21%) involved a sexual affair or relations with a subordinate, contractor, or consultant.

Following that, 16% involved CEOs making use of corporate funds in a manner that is questionable but not strictly illegal.

Similarly, 16% involved CEOs engaging in objectionable personal behaviour or using abusive language.

More than one in 10 (13%) involved CEOs making public statements that are offensive to customers or social groups.

After examining these incidents in detail, here are five take-aways:

1. Bad news is here to stay

The media coverage on bad CEO behaviour was persistent, with references made to the CEO’s actions up to an average of 4.9 years after initial occurrence.

For example, news stories today continue to reference former American Apparel CEO Dov Charney’s odd behavior of walking around the company’s offices in his underwear, even though it was first reported over 10 years ago. Boards should not expect allegations of misbehaviour to disappear quickly.

2. Actively responding to the scandals

In response to bad CEO behaviour, 84% of the company in the study issued a press release or formal statement on the matter. In 71% of cases, a spokesperson provided direct commentary to the press.

Board members were much less likely to speak to the media, making direct comments only 37% of the time. In over half of the cases (55%), the board of directors was known to initiate an independent review or investigation. The board is most likely to announce an independent review in cases of potential financial misconduct.

However, the willingness of an individual director to discuss the matter directly with the press does not appear to be associated with the type of behavior involved or the “severity” of the CEO’s actions.

ALSO READ: HSBC’s Stuart Gulliver voted the most hated CEO in banking

3. Smelling the trouble early goes a long way to resolving it

When the CEO engages in misconduct, the board is not the first within an organisation to learn of CEO misbehavior and will respond only after reports of misconduct become widespread.

However, there are ways for HR to assist boards to detect misconduct at earlier stages, including carrying out confidential workplace surveys, monitoring third-party websites (such as Glassdoor), and independent social media listening tools.

With the help of HR looking out for early signs of CEO and employee misconduct, the board can do a better job protecting company's reputation.

Prevention is better than cure but the boards never seem to learn their lessons.  An alarming 21% of CEOs have been previously engaged in questionable behavior, including allegations of sexual harassment, insider trading, and other infractions, felonies, or misdemeanors, yet they land the big job again.

Among the 38 cases, three were reported to resign from other boards because of their actions. Two CEOs who were terminated were subsequently rehired by the same company. Many continued in their position or were hired by other corporations or investment groups.

4. Fire the CEO? Not so fast.  

In 58% of incidents, the CEO was eventually terminated, which is alarmingly low considering the seriousness of his or her actions.

Questionable financial practices was the only category of behavior that almost uniformly resulted in termination.

In a third of cases (32%), the board took actions other than termination in response to CEO misconduct, such as stripping the CEO of the chair title, removing the CEO from the board, amending the corporate code of conduct, reducing or eliminating the CEO’s bonus, other director resignation, and other changes to board structure or composition.

5. No discernible relationship between CEO misbehaviour and share prices 

No surprise that disgraced CEOs, the poster boy of the corporate  is going cause corporate reputation and share prices to take a hit.  The share prices of companies in the study declined by a market-adjusted 3.1% (1.1% median) over the three-day trading period around the initial news story.

For example, Hewlett-Packard stock fell almost 9% following reports that former CEO Mark Hurd had a personal relationship with a female contractor.

However, shareholder reactions are not uniformly negative. Of the 38 companies in the study, 11 exhibited positive stock price returns when CEO misbehavior made the news.

The researchers concluded that there is no discernible relationship between the type of behavior and stock price reaction.

Image: 123RF