This article by Calibre One’s Ryan Polich first published on the Corporate Board Member website:
Corporate scandals and corruption aren’t new. High profile ethical failures and fraud have plagued Corporate America for decades. In 2016, PwC did a study to examine CEO turnover in the world’s largest companies. It found that although forced turnovers are generally declining, the proportion of CEOs fired for ethical lapses — insider trading, resume fraud, accounting scandals and sexual misconduct have indeed risen.
With the dawn of the #metoo movement, the frequency and number of unplanned corporate executive exits has continued at a fervent pace. Most recently, Les Moonves the Chairman and CEO of CBS, joined the growing crowd of powerful executives that have been accused of inappropriate behavior and forced to step down.
While these unplanned departures can provide high drama and feed the news cycle, the fallout can be far reaching – injuring the company’s brand, internal morale and long-term financial future. In March 2018, The Economist looked at eight of the most notable corporate crises since 2010, including those at Uber and Wells Fargo. The evidence showed that these episodes were deeply injurious to the companies’ financial health, with the median firm losing 30% of its value since the crisis. Even greater damage can be caused by the indirect costs of a poorly planned change.
Plan for the Unexpected
In today’s environment — with the increased focus on holding chief executives to a higher level of accountability — it is essential to have a solid strategy in place to mitigate risks. Most companies have a detailed crisis management plan in place to ensure business continuity and effective communications in the case of an emergency or natural disaster. However few have a detailed plan in place for CEO succession, and even fewer have a plan for sudden departures.
A good succession plan should not only take the company’s current status into consideration but also its future strategic direction. So when developing a CEO profile, make sure to take the company’s future priorities into account.
Ideally, succession planning should be a multiyear structured process and evolve with the company. Alibaba just publicly announced Jack Ma’s succession plan where CEO Daniel Zhang will take over as chairman in a year. Ma stated the transition “demonstrates that Alibaba has stepped up to the next level of corporate governance from a company that relies on individuals, to one built on systems of organizational excellence and a culture of talent development.”
The process should be re-examined on an annual basis. This also offers the opportunity to carefully examine business processes, compliance programs and controls and codes of conduct. The rise of digital communications has created new risks for ethical lapses. A simple tweet from a CEO can move markets — as evidenced by Elon Musk’s recent public conflicts. Take time to scrutinize the systems, standards and policies governing social media and digital communications for all of your employees.
Act Quickly
In the case of a chief executive caught up in a major scandal, the company must be ready with must be ready to move fast with a replacement. While due diligence is important to ensure that the claims are substantiated, the days when company’s can wait until “the storm passes” are over. What was once water cooler gossip can catch fire within days or even hours.
Therefore, it is essential that the succession plan include an “interim option” for sudden leadership departures. Look internally and turn to the COO and CFO first, then to board members with experience in operational leadership. For example, if the CRO is particularly adept and has the revenue machine humming along under strong lieutenants, he or she may be a good option. Make the interim status explicit from the start but with enough flexibility in the timeline to enable your company to weather the storm and find the right replacement.
Look to the Outside
In a moment of crisis, don’t cut out outsiders. Harness the power of external consultants to help counsel with HR, legal and communications issues.
While some company’s may chose to find their new executive from within, in some cases it requires bringing in someone from the outside. Uber needed to bring in outsider Dara Khosrowshahi to clean house and redefine its famously “toxic” corporate culture.
An experienced executive search firm can help to immediately start the process. There may be leaders in their networks who are ready to make a move and others who are interested in the vacancy.
Search firms can also provide deep background screenings that can be invaluable in identifying candidates who have the ideal attributes in addition to potential risk factors. It was an incorrect resume, revealed by an activist shareholder, which initially prompted the company’s board to sever ties with former Yahoo CEO Scott Thompson.
The Moment of Truth
With ever-increasing scrutiny, 24/7 news cycles and social media, there are no signs of CEO scandals slowing down any time soon. Scandals can and will continue to happen suddenly and without warning. This is a major cultural moment for your company, so make sure you are ready.
To quote Miguel de Cervantes, “Forewarned, forearmed; to be prepared is half the victory.”