Why CEO reputation is critical in a crisis

Nothing destroys reputation faster than an issue or crisis mismanaged, and new research reinforces that CEO performance and leadership is critical in determining reputation.

A Weber Shandwick reputation study  of global executives found that on average they attribute nearly half (45%) of their company’s reputation, and 44% of their company’s market value, to the reputation of their chief executive officer.  Moreover the study – involving 1,700 C-suite executives in 19 countries – found that half expect CEO reputation will matter more to company reputation in the next few years.

This data may seem encouraging, and an endorsement of strong leadership. But it also highlights just how potentially vulnerable companies are when things go wrong. In the world of crisis management this is very much a two-edged sword. Effective leadership in a crisis can protect and even enhance reputation. Think of AirAsia CEO Tony Fernandes after one of his aircraft crashed into the sea off Indonesia a year ago. He stepped up, took control and famously said: “I am the leader of the company. I take responsibility. The passengers were on my aircraft and I have to take responsibility for that.”   PR Week concluded: “AirAsia CEO Tony Fernandes has given a lesson in crisis management.”

But the downside of the leadership equation is that weak management in a crisis can severely damage reputation. Think of Chip Wilson, Founder and Chairman of sports apparel company Lululemon, whose mishandling of a recall of faulty yoga pants led to a severe hit to reputation and share price, an ill-advised executive apology and the Chairman’s eventual resignation. Typical of the resulting storm of criticism was the Washington Post which posted the headline: “How not to apologize, with Chip Wilson of Lululemon”

Sadly, Mr Wilson is not alone on bad apologies when things go wrong. The Weber Shandwick study revealed that almost half the C-suite executives surveyed (49%) believe that apologies are overused, and more than a quarter (26%) think CEOs in general are rarely or almost never sincere in their apologies. Sheesh. If one in four company executives don’t believe CEOs why should the public?

Which brings us to the other downside of the link between the CEO and reputation. Namely when executive misbehavior  is the cause of the crisis. Research in the US shows that when arrests, lies or extramarital affairs of CEOs and other top executives are disclosed, their companies suffer serious loss of both reputation and market value. A study of 219 cases of executive indiscretion showed an average shareholder loss of $US226 million in the three days after the revelation.  Furthermore, the researchers found that stock prices of companies of accused executives fell in total between 11% and 14% in the subsequent 12 months. And that firms where executives behaved badly performed poorly overall that year, were more likely to manipulate earnings, be sued by shareholders and be accused of fraud by the government. Worryingly the study also found that 65% of the accused executives kept their jobs, even those with repeat offences.

So when it comes to a crisis, a strong CEO reputation can be a valuable asset. But poor executive performance or behaviour can be a very costly liability.

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About managingoutcomes

Issue and crisis management expert
This entry was posted in Crisis management, Reputation risk and tagged , , , . Bookmark the permalink.

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