New CEOs

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.

A few interesting things crossed my mind and desk this week that I thought I would share. All reputation-related of course.

1. The World Economic Forum released its report on the top risks facing the world in 2012. Social unrest and income inequity were at the top. Natural disasters such as the earthquake in Japan were also high on the risk list. And as pointed out, one risk affects another creating a domino effect. “The Internet, meanwhile, can magnify and spread the effects of a disaster in other ways. Rumors, even if incorrect, spread quickly on social networking sites — sometimes more rapidly than emergency services can communicate accurate information. As word of disasters like the terror attacks of Sept. 11 or the earthquake in Japan spreads globally, consumers hunker down in front of their computer screens or televisions, rather than going about their daily lives. This increases the economic effects of a crisis, even in areas far removed from the source.”  Disasters such as the horrific earthquake, tragic 9-11, death-defying financial crisis, massive oil spills and nasty ash clouds coming from Iceland all heighten other risks in some way. And risk spells reputation damage depending on how a company or country responds and solves the problem.

2. The report from WEF also mentioned that risks are on the horizon as leadership transitions are in full force this year. It is not just the U.S. presidential election that poses risk and stirs up emotional angst. There are leadership transitions underway this year in France, Russia and China as well. Add to that the sudden transitions in the Arab world this past year and we see upheaval and uncertainty. When CEO transitions are underway, the first few months can be risky so as we see world leaders change, tighten your seatbelts. The public will be more socially active than ever. We’ve already seen that in Russia.

3. I’ve written here about rankings and so-called “worst of” lists where companies, CEOs and environmental records are put on notice that they are not making the grade. In most Januarys, TripAdvisor.com comes out with its “dirtiest hotels” in the world.  No more. The CEO Stephen Kaufer says, “We want to stay more on the positive side, so we’ll continue to feature the best destinations, the top hotels.  We’re slicing and dicing the ‘best of’ in different ways this year, more than focusing on the negative.”  Although the article where I learned about this says there were potential legal considerations and competitive reasons for abandoning the January list, it also mentioned that the original “worst of” list was done for PR reasons and that TripAdvisor is less interested in that now.  Perhaps there is a reputation-reason afoot here. There is so much negativity online on some of these sites and it is so easy to find what you are looking for that a list of the 10 worst may be hardly worth alienating visitors to your site. Everyone worries about the detractors and the praisers. Maybe it is time to just worry about the average site visitor who does not want snarky comments and lists, but just the plain old straight forward facts to plan a plain old relaxing get-away.

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.

Chris Perry (@cperry248) who is our digital communications president, wrote this really good post on Forbes about social CEOs. I am taking the liberty of repeating his 5 must-dos for CEOs wanting to get social or even considering it.

I would probably add one more and that is to find yourself a buddy who can read your Tweets as a sounding board when you first get started. I think that that second opinions can save oneself from having a red face and worth the try until you feel comfortable enough to try it alone.  And maybe it’s worth having a buddy just as good practice when it comes to Tweeting or even Facebook.  They might not be good golfing buddies but hey, this is a new age. Take his advice. It is seriously good.

Here they are…..straight from Chris.

Realize you shine bright in social mediums.

Social media participation is a public appearance where everything is on the record. Assume that comments will be picked up by the press as well as examined closely by your customers, staff and others watching your company. Speak and act accordingly.

Recognize your role as Chief Narrator.

Social platforms like Twitter aren’t a sounding board for a CEOs innermost thoughts; they’re an extension of other modes of communication you use as the lead executive of your organization. There’s great opportunity to share thoughts on your company or industry issues that get amplified through networks that reach employees, investors, customers and the press. As with existing communications efforts have a plan in place as you engage.

Anticipate social remarks being a part of a permanent public record.

Avoid posting or tweeting on topics that you would never discuss aloud in a public forum. Badmouthing competitors, going too deep into personal affairs or speaking about divisive issues is not the way to go. Don’t be gun-shy when engaging online, but anticipate that what you say will generate the same reaction as if it were published in the press.

Don’t court controversy if you can’t take the heat.

Opinions on relevant industry issues and current events that affect your business are fine. But steer clear of statements that might be controversial – unless you want to be at the center of the storm. Off the cuff remarks can have a massive ripple effect to be managed your staff, PR team and others tied to the issue after the fact. Pause for a moment in private before you go public.

Despite the inherent risks embrace your humanity.

Words of caution don’t mean you can’t let your personality shine through. In fact, this is one of the best ways CEOs can engage on a deeper, more human level with stakeholders. Personal insights into what it’s like to lead an organization show authenticity. Just remember that there are limits to what’s appropriate to share.

Any leader looking to engage through social media can harness the power, or suffer from the peril, of the medium. While it provides a forum for new interaction, new communications policies have similarities to traditional media guidelines.

Keeping that in mind will help you participate in ways that adds value, not headaches, to your organization.

Because I am off from work for the holiday, I have a little time to catch up on things I meant to read in the months before. I was particularly interested in some research on CEO transitions and its impact on the value of the enterprise conducted by FTI.  A few facts jumped out at me from their study among the financial community. They found that one-third (32%) of investor decisions are impacted by the reputation of the CEO. Moreover, the reputation of the CEO was more important to investors than the reputation of the company’s products and services.

The research covers the value at risk depending on what type of CEO transition occurred. The greatest risk to the enterprise is when a CEO is forced to resign.

Because of my work on CEO tenures and how to build CEO reputation, the findings confirm my own research over the years that CEOs need to show success by that 12 month marker. FIT found that investors give new CEOs about six months to assess the challenges and opportunities facing the company, setting a vision and strategy.  They give new CEOs more leeway to improve market performance and valuation — about 12 months. After the first year, all engines need to be firing.

Another particularly interesting finding was what investors look at in their first 100 days to further establish the CEOs credibility in their eyes….here is what they said was of “significant importance.” Despite the ranking for “charisma,” it is still interesting that it is still estimated to be of high importance and only 16% said it was of limited importance.  FTI concludes that investors take a multi-dimensional view of new CEOs. They expect to see it all.

 FTI Consulting

  I must be on a “leadership” kick as this week ends. Yesterday I posted about leadership’s role in crisis preparedness. Today I am going to post on the effects of crisis on a leader. At a dinner the other night, my colleague mentioned the impact of the killing of Osama bin Laden on President Obama. We agreed that he had to be a changed man. In yesterday’s reading, Daniel Henninger wrote the following in the same vein:

A candidate is not a president. In the fall of 2008, after Mr. Obama won, our offices were visited by then-Homeland Security Secretary Michael Chertoff, a former anti-mob prosecutor. Asked about the Obama criticisms of the war on terror, Mr. Chertoff replied that it was impossible to overstate the sobering effect of learning the true magnitude of the threat and bearing responsibility for thwarting it. On another occasion, former Attorney General Michael Mukasey, who as a federal judge presided over terrorist trials in New York, was asked the difference between his understanding of terrorism then and as attorney general. “About the difference,” he replied “between what you thought you knew in the sixth grade and a post-doctoral education.”

Without a doubt, the decision to launch the Seals attack on bin Laden’s hideout and the risks that entailed changed the man. Whenever people go through their CEO transition to finally land their company’s highest office, they realize the enormity of the position. Nothing ever looks the same. The buck really does stop at that corner door. As you’ve undoubtedly heard before from Shakespeare,

“Heavy hangs the head that wears the crown.”

Found myself up at 4am reading about Governor Cuomo. Jet lag sure is a hanger on. When I was in Asia, people told me that for every two hours in time difference, it would take one day to recover. So because I was in Australia and Asia, I figure I have about 7 days before I feel like myself. I am at the half way point but 4am is not pretty to be wide awake, jet lag or no jet lag.

So I found myself reading this article on New York Governor Andrew Cuomo’s first 100+ days in office, a transition similar to CEO transitions.  The headline read “Cuomo Stands Out Among Peers for Low Profile.”  The author was a bit incredulous about Cuomo’s low visibility: “In fact, since taking office in January, Mr. Cuomo has neither taken a single trip out of New York nor appeared on any talk shows.” Can you imagine– no talk shows! That is downright renegade.

Among the CEO class, the governor’s actions are standard operating procedure. Apparently most political figures have not gotten the memo telling them about the importance of getting their house in order before getting out in the headlines. When I talk to CEOs, my advice often is to do exactly what Cuomo is doing. That is, keep a low profile because “What’s there to say?”  New CEOs have not done anything much in 100+ days to crow about. 100 days is not a track record.  The most important duties in the first 100 days are to set your agenda, build your executive team, listen and learn and communicate internally. That’s how enduring reputations are built.  Therefore I agree with Governor Cuomo’s inclination to keep a low profile. The best insight in the article came from Hank Sheinkopf, a political consultant, who was quoted as saying, “Keep the focus on policy, not on personal matters of any kind, and ensure that there is nothing else but that discussion. He is the all-business governor.” That’s exactly it. Build your reputation on good governance, getting down to business (jobs and budget) and showing that you mean business.  Cuomo’s reputation as the all-business governor will stick if he keeps this up. Sounds like a welcome change. This kind of first 100 days gets my vote.

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.

I was sent a column today that recently appeared in BloombergBusinessWeek on the CEO revolving door. It is worth reading because the author, CEO Kevin Kelly of Heidrick & Struggles, argues that perhaps we are giving CEOs too little time to accomplish too much. We expect miracles in the first 100 days and if that is not long enough, we say we will give them another 100 days. By the end of year one, we expect these new CEOs to be turning around the share price, keynoting at Davos and chiseling their strategy into stone tablets. I was just thinking the same because this weekend I read articles about two CEOs’ performance on their first year anniversaries. The two CEOs barely got credit for what they had accomplished. It takes CEOs at least two years to hit their stride, crisis or not. Of course, if they are not working out, it is time for the boot but lets admit it, most incoming CEOs take about one year to change what was not going right in the first place. From months 12 to 24 or 36 months, the best of the rest starts to take hold.

That’s my two cents for the day.