Breaking Bad

By Russ Banham

CFO

Not every day does the CEO of a large public company contentedly smoke marijuana on a podcast (which was also recorded on video), shortly after tweeting he has secured funding to take the business private, blindsiding the board of directors. But this is Elon Musk after all, the Johnny Depp of CEOs.

Musk took Tesla’s institutional investors, shareholders, employees, and customers on quite a hair-raising ride in the second half of 2018. His abrupt tweet about having secured funding to take the company private culminated in a decision by the Securities and Exchange Commission to strip away his chairmanship, fine him and Tesla $20 million each, and mandate the appointment of an independent chairman and two independent board directors to oversee his communications.

The swashbuckling billionaire CEO isn’t the only person running a public company whose bizarre or inappropriate actions have been in the spotlight. Much worse than Musk’s cryptic tweets are accusations of sexual harassment against 273 business, media, and broadcasting executives, according to Temin and Company’s #MeToo Index. Among them are former CEOs Leslie Moonves (CBS) and Steve Wynn (Wynn Resorts).

In this age of 24/7 social media feeds, chief executives and other high-ranking corporate officers — the public faces of their companies —have never been more public. Careless comments, thoughtless actions, and criminal conduct go viral quicker than you can say “resignation,” damaging a company’s reputation and all the businesses and people that rely on the organization for their livelihoods.

“Today, a CEO of a large company gets out of bed and walks across the street and it’s public information,” says Stephen Kasnet, vice chair and lead director of the board at both Granite Point Mortgage Trust and Two Harbors Investment. “It’s so easy for others to know what they’re doing and thinking.”

Some CEOs curry the attention. Nothing wrong with that if their statements and deeds enhance their organization’s long-term financial performance and their social media quips don’t violate securities laws governing material misstatements. The ability to transform a CEO’s fame into corporate and product brand-building is a positive, but there is a downside if their fame is used carelessly or inappropriately. A CEO’s (or any other corporate officer’s) unguarded comments or conduct can unmoor the corporate ship and attract government investigators.

They can also affect how people within the organization treat their subordinates. “The CEO sets the tone and the culture of the organization; if they raise their voices, use profanity, or express certain beliefs, others in the company may infer these behaviors and beliefs are OK,” says Ron Shah, CFO of Hodges-Mace, a provider of employee benefits services.

All of those alarming possibilities are putting institutional investors on guard. “Executive misconduct is a really big focus this proxy season, especially in relation to the #MeToo movement and issues surrounding human capital management,” says Courteney Keatinge, director of environmental, social, and governance research at proxy advisory firm Glass Lewis & Co. “Corporate culture and governance are at the top of the list of investor concerns for boards to supervise.”

Big Mouths

Is executive misbehavior new? To be fair, today’s captains of industry are not much different from their peers of yesteryear. When they’re used to people hanging on their every utterance, some CEOs become imperious know-it-alls. Take Henry Ford, founder and president of Ford Motor. In the 1920s, Ford fumed about a “Jewish conspiracy” in a series of op-eds in his hometown newspaper, the Dearborn Independent. The series’ title said it all: “The International Jew: The World’s Problem.”

Bear in mind that Ford, a brilliant mechanic and businessman, dropped out of high school after ninth grade to work on the family farm. His geopolitical expertise was formative, at best. [Editor’s note: Russ Banham is the author of the book, “The Ford Century.”] Ford’s fulminations ended when Jews boycotted the company’s motorcars. With sales slumping, he retracted his anti-Semitic comments.

In the decades that followed, most CEOs kept their opinions to themselves. If they exhibited certain behaviors like using profanity or drinking to excess during their two-martini lunches, they had enough power over employees’ careers and means of support to keep them quiet. And what happened in the office tended to stay in the office. Apple co-founder and CEO Steve Jobs is remembered for his sharp outbursts nearly as much as his visionary ideas. But as Jobs’ biographer, Walter Isaacson, wrote, many years later, there was the “good Steve” and the “bad Steve.”

Even in the era of the personal computer’s invention, a video recorder wasn’t in the hands of every consumer to document boorish acts, and the Internet wasn’t around to disseminate sordid video clips instantly. No longer is this the case.

Travis Kalanick, the founder and former CEO of Uber, allegedly tolerated a workplace culture that included sexual harassment and discrimination. He also famously berated an Uber driver from the back seat of the driver’s car while the dashboard camera filmed the flareup. The ill-fated trip was the last straw for shareholders, who mounted a successful revolt to remove Kalanick as chief executive.

If YouTube and other video-sharing sites aren’t pushing transparency enough, anonymous employee feedback sites like Glassdoor and Indeed provide an anonymous forum for people to lift the veil on their bosses’ transgressions. A recent exposé published on LinkedIn, for instance, disclosed the conduct of the CEO of a Seattle-based government agency, who “looked women up and down” and pitched temper tantrums, on one occasion kicking an office chair across the room.

Cult of Celebrity

Many companies have made great strides in setting employee conduct policies, and at large multinationals these highly designed, magazine-like documents can run 30 to 40 pages, even guiding workers about what to do in sticky situations. (The Starbucks code of conduct tells baristas how to handle an inappropriate email from a co-worker.) Presumably, these codes of conduct apply to everyone from the CEO on down.

But in many organizations, the rules are elastic when it comes to the head honcho. The problem is that many boards hire CEOs who, by nature, are overconfident individuals. Smart CEOs say dumb things for a variety of reasons, chief among them raging overconfidence. When the weighty crown of celebrity is placed upon such big heads, it creates a compulsion to engage followers on social media with the brilliance of their beliefs on most every subject.

“Combine a smart guy with a huge ego and give them a bully pulpit, and at the end of the day their ego can destroy the organization,” says Kasnet. “The more power someone gets, the more it justifies their ‘genius.’”

Musk apparently was given leeway to do whatever he wanted by his handpicked board because of his wildly creative and obsessive ways. “Most CEOs filmed smoking pot in an interview would be gone the next day,” says Stephen Horowitz, CFO of CareCentrix, a national provider of post-acute home-care services.

But even smoking marijuana on a podcast seems to pale in comparison with the flood of sexual harassment accusations being levied at CEOs and other corporate executives. In those cases, directors can no longer look the other way.

“There cannot be a double standard just because it’s the CEO,” says Peter Cappelli, the George W. Taylor Professor of Management at The Wharton School. “Nobody should be let off the hook for something like sexual harassment. This is what organizational culture is all about. People are watching to see who gets punished and who gets rewarded.”

Others share his perspective. “Boards must have zero tolerance when it comes to issues like sexual harassment,” says Ken Stillwell, CFO of Pega, a provider of customer-engagement software. “I don’t care if the person is the world’s best CEO; you can’t barter away sexual harassment without compromising your integrity. Some things are non-negotiable.”

Boards that fail in this regard have only themselves to blame. “An organization’s reputational risk is a pressing governance challenge, yet few boards give it the attention it deserves,” says Chuck Saia, CEO of Deloitte risk and financial advisory and previously the firm’s chief risk, reputation, and crisis officer. “It’s not hard for the board to sit down with the CEO to document the organization’s shared beliefs. What’s harder is to ensure the CEO lives by them and is held accountable for them.”

Ego Management

To be fair, many CEOs are aware of the impact their words carry. “When I communicate, I always do my best to exercise caution,” says Therese Tucker, founder and CEO of publicly traded BlackLine, a provider of finance and accounting software. She takes this responsibility to heart. “Words are so powerful. How something is phrased can come across in ways that the speaker or writer did not intend.”

Indeed, many corporate officers lead their organizations with humility and empathy. According to psychological studies, humble CEOs are more self-aware of their strengths and limitations and are more open to others’ ideas. Research also indicates that empathetic CEOs more deeply appreciate employees’ need to engage in meaningful work and value their contributions more fully.

So, is there a way to balance the visionary genius of a Jobs, Kalanick, or Elon Musk with their eccentricities? Certainly, directors should not stifle a CEO’s creative impulses, despite their seeming eccentricity. But there are ways to keep these rogue entrepreneurs in check. Sensitivity training — making people more aware of behaviors that may inadvertently cause offense to others — is a good start. At the very least, it might guide CEOs to curate what they say before they say it.

Some CEO behaviors and comments can be partly chalked up to youthful immaturity — the case with such wunderkinds as Bill Gates, Jobs, Marc Zuckerberg, and Musk, all of them business founders and CEOs in their 20s. A young business leader with a big ego is bound to push the limits of respectability. “Some CEOs gain credibility by being the ‘wild one,’ which fits the brand of the company they’re leading,” says Tucker. “That’s OK, as long as the company has a set of values everyone [including the CEO] ascribes to — values like treating all people fairly and giving them the opportunity to bring their authentic selves to work.”

Bosses who fail to follow these behavioral standards may be outed, whatever their age. But Saia says companies can also build their own anonymous feedback sites to ferret out indications of a problem before it blows up into a scandal. He also advises the use of real-time technology tools that take the pulse of a company’s reputation.

“Using machine learning, data analytics, and image-recognition software, you can ferret out and monitor what people are saying about your products, services, and workplace culture to nip things in the bud,” he says.

Unseasoned CEOs can be provided a mentor drawn from the board, such as the lead director or board chair. History suggests there is merit in this concept. Apple’s board forced 30-year-old Jobs to resign in 1985 for being overly demanding and difficult to work with. Eleven years later, the board chair, Edgar Woolard, brought him back to lead the foundering company. “Most important was that Woolard served a vital role as Jobs’ sounding board, confidante, and critic, helping to keep him in line and put Apple back on track,” says Sheila Hooda, CEO of Alpha Advisory Partners and a member of two boards (Virtus Investment Partners and Mutual of Omaha).

The Right Thing

Certainly, the risk of CEO misconduct cannot be tabled by the board when bad behavior goes public. If a board becomes privy to a CEO’s misconduct and simply hopes it will fade away, it won’t. Employees in the know will report the situation on social media or leak it to traditional media. “It comes down to the board,” Kasnet says. He once served on a board of directors whose CEO’s judgment was overridden by his “ego-driven self-aggrandizement,” he says. “When we realized this, we made a change. Was it tough to do? Sure, but it was the right thing to do.”

Says Hooda: “The board has a fiduciary responsibility for the organization’s culture, reputation and long-term financial performance — all of which rest upon the CEO’s ethics and integrity as the culture champion of the organization. No CEO is irreplaceable.” To underline this fact, she suggests an organization should always have a succession plan in place for the person’s immediate replacement if need dictates.

Another way to tame a CEO’s animal brain is money. “For years, boards were concerned that clawback policies, by not having clearly defined terms, would lead to litigation and other legal implications,” Keatinge says. “That’s changing, with more progressive companies retaining outside counsel to create clawback provisions that won’t cause legal troubles down the line.”

Depending on the violation, the CEO could retain a role in the organization in return for forfeiting part or all of his or her incentive-based compensation. In cases of serious offenses, the executive could be pink-slipped along with the monetary forfeiture.

“If the CEO is going the wrong way, then put a leash on the CEO—sooner than later,” says Kasnet. “Too often the board waits until the eleventh hour, and by then it’s too late.”

Stillwell agrees. “There is no return on investment worth CEO misconduct,” he says. “Not just shareholders suffer the bad behavior—an extended ecosystem of employees, customers, business partners, suppliers, vendors, and communities also suffers.”

Boards of directors also have to be careful of the context in which they let executives go. Sexual harassment allegations by six women against Moonves led to his resignation in September. CBS is now on the hot seat for the former CEO’s severance package — a whopping $184 million exit payout, unless it is determined he was “fired for cause.” Two independent investigations are underway to figure out whether the allegations legally provide the means to give Moonves nothing.

Were he to receive the full amount, it could cause a public backlash against CBS. “Amply rewarding a guy who has been fired for the sexual harassment and intimidation of women will not sit well with many people,” says Keatinge from Glass Lewis. “What kind of message does that send to employees in the organization? How can they feel respected, appreciated, and safe in knowing their allegations matter?”

Likewise, Sergey Brin, president of Google’s parent company Alphabet, reportedly gave a “hero’s farewell” and a $90 million severance package to Andy Rubin, creator of the company’s Android operating system, upon the latter’s resignation in 2014. What was not revealed at the time was why Rubin resigned — he’d been accused of coercing another employee into a sexual act. According to The New York Times, Rubin is one of three former Google executives accused of sexual misconduct who received substantial exit packages, all shielded by the company.

Who in an organization can prevent such blatant errors in judgment? While boards of directors play a critical role in taming CEOs’ behavior, there may be a role for the CFO as well.

“My fiduciary responsibility as the CFO of a public company is to protect shareholders,” says Stillwell. “In certain states, this responsibility extends to other stakeholders like vendors and suppliers. That’s my job, but I’m also a human being. I would never abide behavior I consider intolerable. Would I bring evidence of a CEO’s sexual harassment of an employee to the board? In a heartbeat.”

But Stillwell hopes that day will never come. “Great business leaders understand that the company is much more than themselves,” he says. “They know there are many livelihoods depending on them to do the right thing.”


Out of Office

Workers’ off-duty acts may be protected by state laws.

In this hyperpolitical, tense social climate, it’s not just CEOs whose actions are under a microscope. Many workers, professional and otherwise, have been caught on a smartphone camera outisde of work behaving, shall we say, shamefully. Others have been dismissed after posting inexcusable offensive comments on social media. In the world of at-will employment, companies often don’t hesitate to let workers go. But in some states, there are specific off-duty behaviors for which you can’t fire someone. The following are some examples.

Arizona — Employers may not threaten or intimidate employees in ways that would influence political opinions, views, or actions; enclose written or printed political propaganda in pay envelopes; or post political notices or threats should a particular candidate be elected.

Connecticut — Employers may not subject an employee to discipline or termination based on his or her exercise of First Amendment rights. However, an employer may discipline an employee if the exercise of those rights interferes with job performance or the working relationship between the employee and employer.

Colorado — Political activities and some off-duty behaviors protected. Employees can’t be prevented from participating in politics, running for public office, or being elected to public office. Nor can they be terminated for engaging in lawful activities during nonworking hours, unless the behavior is “rationally related to a particular employee’s responsibilities or is necessary to avoid a conflict of interest.”

Massachusetts — Employers may not threaten or attempt to influence an employee to vote or to withhold a vote. They also may not threaten or attempt to influence an employee to give or withhold a political contribution.

New Jersey — Employers may not terminate an employee or take any adverse action against any employee based on smoking or use of other tobacco products. May do so “if the employer has a rational basis for action that is reasonably related to employment, including the current or prospective employee’s responsibilities.”

New York — Protects political activities, recreational activities, union activities, and legal use of consumable products outside of working hours and off of the employer’s premises. Off-duty activities can be restricted if they create a material conflict of interest related to the business.


Russ Banham is a Pulitzer-nominated financial journalist and best-selling author.