The Right Way To Handle A CEO Scandal

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Boards need to keep ahead of the public humiliation and loss of reputational equity caused by major CEO misbehavior or malfeasance.

ceo scandalIt used to be that a founding CEO could be excused all manner of misbehavior by his or her board, as long as it was kept quiet and the bottom line was not negatively impacted. In my 20 years as founder and CEO of a boutique crisis management firm, I have dealt with well over 60 cases of CEO dismissal, and an equal number of case where the CEO did not get dismissed. It used to be that the board might either tolerate bad behavior, or publicly support a CEO while privately chastising him relentlessly. Regardless, he or she would stay.

More recently, however, given the outsized attention to serious CEO misbehavior, boards really have little choice—they must react, and act, quickly and decisively. In the brave new world of 24-hour news cycles and social media commentary that transits the globe at the speed of light, no CEO is invulnerable or—once found to be guilty of ethical violations—irreplaceable.

Boards need to keep ahead of the public humiliation and loss of reputational equity caused by major CEO misbehavior or malfeasance. If they deny, or stall, they run the risk of ruining their company and turning themselves into the targets of shareholders’ and the public’s bloodlust.

That a preponderance of recently ousted CEOs were caught up in sexual scandals has made the situation even more unsupportable for boards. No one, and certainly not corporate boards, can tolerate rape or other grossly criminal behavior by their chief executive. Already in the case of the Weinstein Company, and others, the board is implicated in letting the abuse continue for so long, and for sanctioning such extravagant sealed settlements. The sooner the offending CEO is out of the equation, the better it is for the company, and for the board. Denial is clearly the enemy.

“Public and shareholder scrutiny of governance decisions is greater than ever before, as is the pressure to make public statements.”

But the biggest complication is when the founding CEO remains one of the company’s largest shareholders: witness Uber’s Travis Kalanick. Then the board’s job becomes even more uncomfortable, complex, and often, untenable.

Following are some questions for boards who may be considering the ouster of their CEO, for cause:

  • Do the facts of the case warrant ouster? Are they criminal in nature?
  • Is the CEO aware or in denial of the seriousness of the situation?
  • Is the board aware or in denial?
  • What are the ethical, legal and reputational repercussions if the CEO stays? Or leaves?
  • Where is shareholder and public sentiment trending? Are you monitoring public reaction, social media and traditional media continually?
  • How vocal are the antagonists, how public are the lawsuits and their repercussions?
  • Can the company afford the reputational risk of delay?
  • What kind of fight will the CEO mount if dismissed?
  • Are you prepared? Have you amassed all of the right resources—legal, crisis, IR, communications—to help?
  • Is your succession plan up-to-date? Is your “ready-now” CEO replacement really ready, or will you need to do a search?
  • If you’ll need to do a search, what is your interim plan?

Today, the public has a bias toward action, and it therefore behooves boards to move quickly, yet wisely. This is often why recent dismissals have come in two steps. First the CEO is put on leave, or sabbatical, while an interim head is put in place. Then, often, as the evidence of culpability mounts, the CEO is fully separated from the organization. The first step can be done and announced quickly, while the second takes more time, negotiation, and notification. So, this two-step process is rapidly becoming best practice.

Other best practices I have seen (or implemented) include:

There is no time for deep strategic thinking after an “event” occurs. Public pressure to condemn and act is too great. So, boards must think thru protocols BEFORE a crisis hits. Crisis tabletop discussions simply do not work—role play works far better.

Public and shareholder scrutiny of governance decisions is greater than ever before, as is the pressure to make public statements. Be prepared to “justify” your board actions, when you never had to before.

Do attempt to keep your board disagreements private, however. Nothing is ever gained from going public with them. That said, be prepared to respond persuasively if a competing board or executive faction goes public.

Assume the players, even at the highest levels, are not rational. Under stress, no one acts completely rationally. Be prepared to take steps first, before they are demanded by shareholders or the public. Get out ahead of the issues.

Public interest is peripatetic—my rule: If you want them to notice, they won’t. If you don’t want them to notice, they will! Hire the best advice possible. Governance judgment is not fungible.

Don’t Tweet! No matter what the situation, the board must keep its dignity. And always ask yourself, what is the morally right thing to do?

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