October 20, 2017

Helping PR pros make smarter decisions

CEO reputation and PR: How online challenges have intensified brand risk

CEO reputation and PR: How online challenges have intensified brand risk

A recent article in the Harvard Business Review examined the increasing likelihood that CEOs who have ethical lapses will be dismissed. Titled “CEOs Are Getting Fired for Ethical Lapses More Than They Used To,” the piece references a PwC Strategy& CEO Success study that was covered in a May 2017 issue of Strategy + Business. The PwC study is done annually, and looks at the top 2,500 largest publicly held companies.

The study found that there has been a notable increase in the number of CEO dismissals because of ethical indiscretions. From 2007 to 2011, dismissals attributed to ethical lapses comprised 3.9 percent of the studied pool’s CEO turnover. From 2012 to 2016, that number increased to 5.3 percent. Although this is still a small percentage of the total, the increase is significant—as the HBR piece notes, this represents a 36 percent rise in ethical lapses as a factor for CEO dismissal.

An increase of that size is significant—but what accounts for it? Are CEOs becoming less ethical, or are boards becoming less tolerant of indiscretions—or, is there something else that is driving the likelihood that a CEO will be dismissed?

The authors of the HBR piece offered five possibilities that might be causing this rise. Of the five factors, three touch on communications or public relations functions in some form. The five potential reasons for increased CEO dismissal rates are:

  1. A less forgiving and more cynical public;
  2. Increased regulation and more proactive governance in addressing corporate malfeasance;
  3. Heightened risk due to more global activity in emerging markets;
  4. The increase of digital communications; and
  5. Media and the 24/7 news cycle.

Items one, four, and five each has something to do with corporate communications work, and therefore has an impact on the practice of public relations.

CEOs and public attitudes

The first item—a more cynical public that is less willing to forgive aberrant corporate CEO behavior—presents a challenge for any corporate communications team. In looking at Edelman’s Trust Barometer, we can see just how the HBR piece is reflecting what the Edelman study found: distrust in business is growing.

A 2016 study might contribute to some understanding of why the public has become so unforgiving. A Stanford Graduate School of Business study of American attitudes toward CEO pay found that a majority of those surveyed felt that CEOs are “vastly overpaid,” and that most Americans believe there need to be “drastic reductions” in the amount that CEOs make. This is despite the fact that those surveyed underestimated—by far—the amount that the average Fortune 500 CEO makes. It stands to reason that if so many people believe that CEOs are overpaid, there’s probably less latitude given for unethical behavior. This was a key point made in a New Yorker article titled “Why CEOs are getting fired more,” which stated:

Top executives everywhere are paid more than they used to be, and the U.S. has led the way; American C.E.O.s earn, on average, two to four times as much as European ones and five times as much as Japanese ones. Yet it’s precisely these factors that make C.E.O.s vulnerable, because the expectations for their performance are higher.

The median annual salary of CEOs at Fortune 500 companies that disclose CEO salaries is $10.3 million; companies need to anticipate that the public will be less than forgiving of a CEO’s ethical missteps at that price.

Digital Risk

The rise in digital risk is characterized by the HBR piece as attributable to risk exposure from hackers and whistleblowers. These certainly do present a risk. Hackers who steal and release negative material against a company could expose CEO communications that weren’t meant for public consumption, and the threat this poses comes from two angles: the release of information that shows illegal behavior is one, but there’s also a risk presented from information that is release that simply looks bad—even if it isn’t illegal.

A USA Today article published last year listed eight CEOs who had been fired or resigned due to violating internal company policies, which weren’t necessarily legal violations. The mention of whistleblowers is also on point, and companies need to think about how all communications look to outsiders, because digital means easily shareable.

News cycle

The 24/7 news cycle is also suggested as a contributing factor to the rise in CEO dismissals. Such coverage serves to amplify and repeat any coverage of CEO misbehavior, making it difficult to sweep under the rug. The news cycle, and the presence of video, is likely the contributing factor in the dismissal of Desmond Hague, the former president and CEO of Centerplate, a catering company that serves sports facilities. In 2014, security footage from an elevator shows Hague repeatedly kicking a puppy, then jerking it by the leash so hard the dog is lifted off the floor, and then he returns to kicking the puppy. The video footage made international news, and Hague was fired.

In another case, although he wasn’t fired or asked to resign, AOL CEO Tim Armstrong set off a media firestorm not long ago when he sent out a notification to employees about cuts to company benefits, specifically mentioning the medical costs associated with “two distressed babies” as a contributing factor to the benefit cut. This didn’t just look bad—some healthcare experts opined that it might have violated HIPAA protections. Former Wells Fargo CEO John Stumpf was fired after something of a hat-trick of issues listed in the HBR piece: the massive public outcry (item 1) after internal whistleblowers verified and disclosed the existence of millions of fake accounts created by bank employees (item 4) meant that the firm was repeatedly in news cycles (item 5).

Fallout

The ramifications for corporations go beyond simple public embarrassment or “bad press” when CEOs behaving badly are in the spotlight. In one high-profile, recent example, Uber is reportedly having a significant problem recruiting talent. In the puppy-kicking case mentioned above, the mayor of one city that had a contract with the catering company said it would be reviewing the $17 million contract it had with the firm when the allegations came to light; the city ultimately did not renew the contract when it expired. AOL CEO Armstrong wisely reversed the benefit cuts he had proposed, which no doubt was the smart move—but it almost certainly cost the company money. In each of these cases, there is a lingering feeling of public distrust of the company in question.

It’s not a “PR problem”

There’s a tendency to label these issues “PR problems,” but they are far more than that. Bad CEO behavior reflects poorly on a company and is: a Human Resources problem, an ethics problem, a corporate reputation problem, a financial comms problem, and potentially a recruiting problem. It can also lead to employee morale problems, and a productivity problem. It might even be a corporate culture problem. Lumping all of this under a “PR problem” banner suggests that communications alone can solve these problems. PR and communications can only apologize and explain how the path ahead will be different. The company must then implement the changes necessary to resolve issues and move forward.

A corporate reputation isn’t that much different than an individual’s reputation. A good one is hard to earn and easy to lose—and when it comes to the CEO, there is scant light between the individual’s reputation and the company’s. The uptick in CEO dismissals based on behavior represents both an understanding of that, and the quickest means of getting a company back on track.

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About The Author

Jennifer Zingsheim Phillips is the founder of 4L Strategies, and has worked in communications and public affairs for just over 20 years. Her background includes work in politics, government, lobbying, public affairs PR work, content creation, and digital and social communications and media analysis.

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