I know I should get out of the house (the sun is shining) but I was so excited to read in the Wall Street Journal about a reputation committee being formed at Goldman Sachs. The lead director James Schiro is heading this effort as the lead director on the board and is apparenlty VERY focused on reputation, according to his first letter to shareholders. Reason I am excited? Because I am a chief reputation strategist, I am always looking for trends and firmly believe that reputation committees are going to being popping up in more Fortune 500 companies than in years past. For a speech I gave before women-directors-to-be a few weeks ago, I mentioned two companies who had reputation committees but that was all I could easily find in a quick search. Board attention to reputation is long overdue. Reputation is a form of wealth, a type of equity that you get to dip into when your company is in trouble or facing issues. You need a good stockpile to weather the everyday assaults most companies are facing day in and day out. It is heartening to see reputation recognized for the worth it is. Here are a few quotes I pulled from the WSJ article that give me hope.
“He [Schiro] said the board clarified the duties of its governance committee to manage Goldman’s relationships with the outside, guard its reputation and review philanthropic and educational initiatives.”
“We continue to be very focused on the reputation of the firm,” Mr. Schiro said in his letter. A “public responsibilities” subcommittee of the board’s governance committee was formed to focus on reputation, chaired by William George, he said.”
Boards continue to see reputation risk as their top concern. In the third annual study by EisnerAmperLLP among board members, two thirds (66%) see reputational risk at the top of their agendas for concern, ahead of regulatory issues (59%). In fact, reputational risk has grown while regulatory risk has remained stable year over year. Both IT risk and privacy risk showed increases from the last survey and reflect the many breeches in systems security that we’ve seen which inevitably led to attacks upon a company’s reputation. Similarly, according to the report, crisis management, is also an indicator of reputational concern.
What do board members really mean when they say they worry about reputational risk? In an open ended question, board members are most likely to be talking about product quality, liability and customer satisfaction (30% of all responses) followed by concerns about integrity, fraud, ethics and specifically the Foreign Corrupt Practices Act, (24%). IT concerns fell in at about 12% and environmental concerns at 8%. It always surprises me how little attention is paid to environmental issues at the top.
How are risks assessed? About two in 10 get reports from executive management, discuss risk issues at board meetings and get help from professionals or outside experts. About one in 10 get information from the risk committee. That seems like an area ripe for assistance. The report interestingly mentions that recent years have not been kind to risk teams and that with all the recent issues and crises stealing headlines, boards are realizing that CFOs need greater support. In fact, the survey found that nearly two-thirds of boards are planning to enhance staff and increase audit coverage and about one in three are leaning towards hiring outside service providers.
I feel like I have read this article before. The title in USA Today yesterday was “CEOs stumble over ethics violations, mismanagement.” Is it 2002 over again when Enron, WorldCom and Adelphia made headlines over ethical transgressions and wrongdoing? I agree that there seems to be a rush of these events recently but I am not sure it is vastly different than it has always been. The Internet has certainly added to the scrutiny of corporate executives but the spotlights were just as glaring and intense as they were years ago. In fact, I tend to think that wrongdoing on the part of CEOs stayed in the news for a longer period of time than they do now. I am waiting for headlines about JPMorganChase CEO Jamie Dimon to be replaced soon. Not sure what will substitute for him in the days ahead but I can bet $5 that something will surface in the next week to knock Dimon off the front pages (so to speak). And whistleblowers have been around for a long time. It is not the first time I have heard about a note being sent to a board member about an executive transgression.
The real difference is that there is zero tolerance for these missteps and for a simple reason — “reputation.” It was interesting to me that the word “reputation” did not appear once in the USA Today article. Boards are making split-second decisions about CEO tenures because they know the downside of having their reputations tarnished, trashed, torn and tattered. Not only are their own personal reputations at risk but that of the companies on whose boards they sit (and that impacts their compensation which is often in stock). As Lucian Bebchuk, director of corporate governance at Harvard Law School said in the article, “Boards do seem to move faster to deal with scandals and public failings that attract shareholder and media attention.” Being in the headlines and chatted about online about reputation failure is the new scarlet letter. I hope that next time an article appears, the reputation damage that brings down share prices, dampens employee morale, attracts headlines and invites investor activists gets mentioned. The cost of reputation failings are higher than ever and the stain can be very deep. In fact, it takes years to wash out.
Today I was reading this article on there being no women on Facebook’s board. Only seven men. And many of Facebook’s users are apparently women. Although I had heard this before, it was quite stunning to me considering their impending IPO.
And I was also reading an article on young CEOs in the WSJ at the start of the week and noticed that the featured CEOs were all men.
Perhaps I am missing something but where are all the women or at least a few women of them or at least one? Is it me or is anyone else concerned about this? If you want to learn why women are important to business success and reputation, take a look at the special report from The Economist…..amen.
Yesterday I was asked to talk about what I do at Weber Shandwick to our Crisis and Issues group in New York. It was an end of the week get together to take the edge off of all the long hours. I talked about reputational issues and answered several questions. It was a nice opportunity for me to reflect too.
I was asked where all the celebrity CEOs had gone which made me recall my first book on CEO reputation. The book was released at the height of the dot com boom when 22 year old CEOs were the norm and celebrity CEOs were plentiful. In my book, I tried to make the point that it was not CEO celebrity that mattered but CEO credibility. As I was answering this question, I realized that I hit on some of the right notes as to why CEO celebrity was not the same today but missed a few. In fact, I mentioned that being CEO today was not an easy job whatsoever. CEOs are much more embattled. Here are some of the reasons I talked about yesterday but others as well taken from an Economist article I was saving to post about.
- CEO tenure is shorter than it used to be (on average 6.6 years, according to Booz’s research). They usually come into office with great fanfare. They get approximately two years of grace when they start out (more like 18 months), 2 years to provide evidence that their strategy is working and two years to get pushed out. After six years like this, it’s best to be a CEO nobody.
- CEOs don’t have all the power anymore. Most CEOs now have separate chairmans that are looking over their shoulders and asking a lot of questions. Booz found that in 2002 48% of incoming CEOs were also chairmen. In 2009, that number dropped to 12%. Hard to be a celebrity when there is power sharing going on.
- CEO compensation is always a headline and increasingly links the CEO title to perceptions of greed. CEO compensation is actually declining.
- Shareholders and stakeholders are not sitting idle. They are much more aggressive. Some hedge funds are actively browbeating CEO and corporate decisions and in executives’ faces. The ridicule can get strenuous.
- Boards are more active too. They don’t want their reputations shamed either by poor CEO decisions or poor behavior. And according to Korn Ferry, new board members are more likely to be deep in international experience and have worked abroad. They are not necessarily golfing buddies like board members of yore. Angry birds maybe, but not necessarily tee time!
With all these barriers in place to curb the power of CEOs, celebrity CEOs can hardly flourish. Instead, we are looking at a new world of convening CEOs who communicate internally to employees, communicate online or through video to netizens, travel to speak to customers and influencers at forums they convene themselves (IBM‘s Smarter Planet method), partner with third parties and government to problem solve on today’s economic woes and so forth.
RHR International was mentioned today in an article in the WSJ about the recent revolving door for CEOs. Not that this is new. CEOs have been coming and going for some time now. But what was new was that among the 83 CEOs of publicly held companies surveyed, the board seemed to be a greater source of tension than it used to be. Nearly three quarters wish they were included more in board discussions of succession planning. And as one would expect, the top two threats to their tenure, according to CEOs, were the current economy (39%) and rapid industry change (22%). However, a third top threat to CEO tenure was strategy disagreements with the board (17%). As a watcher of CEO trends, I find it noteworthy that CEOs mentioned disagreements with boards and desire greater collaboration over transitioning. The disagreements over strategy (spin offs, shedding assets, etc) does seem to be a rising cause for CEO exits these days. Something has changed. I wonder if the new tension that is developing is because boards are more active now because of the criticism that they were no more than a rubber stamp on CEO activities or if the strategic choices facing boards today are infinitely more complex and disruptive. When no one knows the true answer, there is room for disagreement. CEOs and boards seem to be caught in this new tango.
Another finding which I liked seeing because it provides some hard numbers about something I have observed was that half of CEOs feel isolated and lonely. For this reason, CEOs should reach out to other CEOs in different industries, find mentors or retired CEOs to talk to. It can be debilitating so finding an ear to listen and advise is highly recommended.
The S&P downgraded the U.S. credit rating last night. The full report is here. What struck me in its overview are these two points (below) which directly speak to how our fiscal reputation is being managed. In other words, the ability of our governing leaders to work effectively as a management team is no longer putting the US at the head of the class. We all know that when corporate boards do not function well, they are called to task, reputations gets tarnished and board members find themselves disinvited to serve. We now see the same reputational metric of good governance being applied to our government and the picture is not pretty. S&P is essentially saying that our ability to govern fiscally and responsibly is ineffective, less stable and more unpredictable than it was earlier. And our ability to collaborate across parties is in question. It’s not just the credit rating that’s being discredited but our fiscal reputation as well. America’s reputation for fiscal safety is being downgraded as well.
More broadly, the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned when we assigned a negative outlook to the rating on April 18, 2011.
Since then, we have changed our view of the difficulties in bridging the gulf between the political parties over fiscal policy, which makes us pessimistic about the capacity of Congress and the Administration to be able to leverage their agreement this week into a broader fiscal consolidation plan that stabilizes the government’s debt dynamics any time soon.
Interesting article on what boards talk about when they talk about sustainability. The interview was in MIT’s Sloan Management Review with Christoph Lueneburger, head of Egon Zehnder’s sustainability practice. He tells a wonderful story about something that was said by the founder of Patagonia that is worth repeating.
“I think Patagonia is a leader. I had a conversation with Rick Ridgeway the other day, who leads sustainability at the company, and he said something fascinating. They were doing their Christmas catalogue, and Rick was down there, looking at the always-beautiful pictures and so forth. And Yvon Chouinard, the founder, says in the meeting, “That’s a nice catalogue, but tell me how it is that we’re not just incenting people to buy more stuff they don’t need?”
As Lueneburger says, Patagonia is not saying that its all about growth but instead saying, “It is not growth that will ensure our sustainability, but values.” Yes, Patagonia is exceptional and privately-held but this is where the intersection between value and values happens in the right way.
The second survey of Board Directors was just issued. The survey is conducted by Eisner Amper, audit, tax and business advisory professionals. They used their database and NACD’s Directorship magazine’s subscriber list of corporate directors. The survey reports on the opinions of 142 directors representing publicly and privately-held companies.
One of the questions they asked was which risks are most important to their boards, that is, besides financial risk (which probably begs a 100% answer!). The chart is below. At the top of the list is reputational risk — 69% said this is most important today. Reputational risk surpasses regulatory compliance risk (61%), CEO succession (55%) and IT risk (51%). I would posit that if this survey was done in the past few weeks, IT risk might have jumped up higher as a factor of major concern. The hacking and hobbling of computer networks at Boeing, Sony and the White House gmail accounts have had to certainly affect risk management concerns at board level. With regard to security risks, Eisner Amper wisely says: “The tools of today’s business heavily revolve around information technology, the Internet, the speed and degree of data transmission, and the pervasiveness of social media.” And everything that affects business affects reputation.
|Aside from financial risk, which are most important to your boards?||Board Directors|
|Regulatory compliance risk||61%|
|CEO succession planning||55%|
|Privacy and data security||33%|
|Risk due to fraud||21%|
Another question they asked which I like was where board directors go to for new information. In the 2011 survey, the leading sources were company management, publications, Internet, accounting/advisory firms and conferences (at 33%). I liked seeing the importance of conferences among the other sources because I firmly believe that getting out of the office and listening to other points of views provide opportunities for thinking beyond the same old ways about the same old problems. I wish I did more of this myself. We all need to close the door on our silos. For board members, this is a good sources considering how the problems they face have to be on high boil these days.
|Primary Sources for New Information||Board Directors|
|Accounting and advisory firms||36%|
At the end of their executive summary, Eiser Amper concludes:
“Protect. Protect. Protect. Reputational risk needs constant monitoring and analysis of the broader issues…Brand, company and personal reputation can change overnight. The speed of today’s business was unimagineable in years past, but its impact is real and protection is the name of the game.”
CEO reputation is always of interest to me and of course this week has been a cataclysmic and newsy one with the medical leave of Steve Jobs at Apple and Google Eric Schmidt’s relinquishing of the CEO title to Larry Page.
WIth CEOs on my mind, I stumbled across a research study by Wharton finance professor Luke Taylor who built a model to understand what happens when boards fire a CEO and what holds them back, if anything. Taylor found that there are two costs to firing a CEO — the severance payment (direct costs including headhunters and other exec departures) and second, what he calls “entrenchment” costs. Entrenchment costs are the personal ties that get severed when board members decide to let a CEO go.”Taylor’s model found that the entrenchment cost per firing was, on average, $1 billion — far more than the $300 million in direct costs.”
One of the downsides to firing CEOs in his model is that more aspiring executives might not choose the CEO track. In past research I have done, I learned that the CEO role was already diminishing in stature due to public scrutiny and stress. The economic problems of recent years have probably dampened that corner suite goal even further. See below.
His model does, however, predict that if the entrenchment cost went to zero — meaning that sacking a CEO came with only financial costs and no intangible consequences — the annual rate of CEO firings for the S&P 500 would go from 2% to 13%. That would result in a one-time bump in value for the S&P 500 of 3%. Taylor notes that this higher level of firings could potentially cause talented individuals to choose career paths other than those that might lead to a CEO position.
The whole idea of entrenchment costs is fascinating, especially because it is over three times more costly than just severance costs according to Taylor’s research model. The Wharton Leadership article said:
According to Taylor, this remaining $1 billion probably stems from two factors. First, there is a personal cost to board members who terminate the company leader — in the form of the time and stress of making a management change — as well as the loss that directors face in the departure of a business ally or golfing friend. Another contributor may be the fact that the board simply does not care all that much about maximizing shareholder value — at least not as much as keeping a CEO with whom they feel comfortable.
Of course this became more interesting when I read that entrenchment costs depend on company size. For the larger S&P 500 companies, Taylor found that the entrenchment costs were nearly zero. Whew. That was a relief to learn since this research was alarming me – board members hesitating to fire poor-performing CEOs because of their feelings (?) and losing golf partners (??). I agree with Taylor that the larger the company, the more board members have to lose in their own reputational equity. No one wants to be on those board of shame lists.
Reputation works in funny ways but maybe it works well when it comes to decision-making on large company boards. Sounds like a good thing.