Hold Them or Fold Them — What to Do with a CEO in the Midst of Controversy
I sometimes wonder why anyone would want to be a CEO of a public company in today’s climate. Gone are the days when CEOs were venerated members of the community. Today’s CEO is much more likely to be facing off with aggressive shareholder activists, a critical public or an unfriendly media on the hunt for an adversarial story. Unfortunately for the companies that employ them, some of the attacks on CEOs are justified because of their behaviors or decisions. When its CEO is embroiled in a scandal or simply accused of mismanagement, what should a company do? When should a company hold onto its CEO, and when should it fold, and hope to be dealt a better hand the next time?
The best way to deal with these scenarios is prevention. When first employing and negotiating the terms of a CEO’s contract, consider what could go wrong and how your company would deal with the CEO if things don’t turn out as expected. Think about how public communications will be handled if faced with a CEO crisis. I have seen too many poorly drafted executive contracts which limit a company’s options for handling public- or investor-relations nightmares. Likewise, if the CEO will also be a board member, pay attention to the board’s bylaws with an eye to these worst-case scenarios. For example, do your bylaws allow a terminated CEO to remain on the board? It’s better to know ahead of time, since it will likely become more difficult to change these key terms in the heat of a PR disaster.
When planning for these scenarios, also give careful thought to attorney-client privilege issues. When will some of the communications truly have a likelihood of being covered by the attorney-client privilege? Be very honest and conservative in this evaluation — don’t assume that close calls will be protected. Instead, assume the opposite and plan to communicate as if these communications will someday be made public. Of course, you also need to consider the obligation to make public disclosures as a public company and the timing of such disclosures.
The best way to know when to hold or fold on the issue of an embattled CEO is to prepare for that question long in advance, long before any controversy concerning the CEO begins. Include the CEO in the process, and fight the knee-jerk reaction to immediately fold if you’ve done enough of this advance work that you are comfortable your position is defensible before the public, the board, the shareholders, and any government regulators. Following these steps may help make one of the most difficult issues for a company a little easier.
This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.