June 5, 2017

Unethical CEOs: Don’t Let the Door Hit You On the Way Out

This Bloomberg article says that the number of CEOs in the US & Canada fired for ethical lapses has more than doubled in the past five years:

Fourteen North American CEOs were ousted for ethical lapses from 2012 to 2016, compared with six in the preceding five-year period, according to a study of 2,500 global companies by PwC. The researchers included executives who left because of their own improper conduct or that of employees, so if, for example, a CEO was forced out because of widespread fraud in the organization, that counted as well.

The 102% increase in North American firings of wayward CEOs compares to an overall global increase of 36%.  Western Europe saw these CEO terminations increase by 41%, while BRICS countries saw a 132% increase.  According to one of the study’s authors, the crackdown reflects a number of factors, including shareholder activism & increased director exposure to liability for corporate malfeasance.

Did the CEO Quit – or Was it a Resig-firing?

Reading the tea leaves to determine whether a CEO was forced out is sometimes difficult. Corporate transition announcements tend to be ambiguous, and investors are often left to sort out for themselves whether the CEO was fired or resigned.

Now financial journalist Daniel Schauber has come up with a model – the “Push-out Score” – that he contends will help shed light on whether a CEO left voluntarily, or was shoved out the door. Here’s an excerpt from a Stanford article describing the model:

Unlike models that strictly categorize executive departures as forced or voluntary, the Push-out Score produces a score on a scale of 0 to 10 that amounts to a confidence level that the CEO was compelled to leave. (A score of 0 indicates that it is “not at all” likely that the executive was terminated or pressured to resign; a score of 10 indicates that termination is “evident.”)

The Push-out Score incorporates publicly available data along nine dimensions, including the form & language of the announcement, the time between announcement & departure, the official reason given for the change, the circumstances surrounding it and the nature of the succession. The model also takes into account extenuating circumstances and judgment, and assigns a score based on its assessment of the various dimensions reviewed.

As one of my law school profs was fond of saying in response to my brilliant insights – “so what?”  Well, it turns out that there’s a correlation between a high Push-out Score and increased volatility (both positive & negative) in the market for the company’s stock.  So the article suggests that this model may provide investors & companies with important information to assist in interpreting the market’s reaction to a CEO departure:

A positive reaction might indicate that shareholders approve of a decision to push out the CEO because of the potential for operational improvements or future sale of the company. On the other hand, a negative reaction to a high Push-out Score situation might indicate that shareholders view a forced termination as evidence of deeper operating, financial, or governance problems, or that shareholders disapprove of the decision to fire the CEO.

Keith Higgins: Back at Ropes & Gray!

After a nice healthy break, former Corp Fin Director Keith Higgins has resurfaced at his old firm – Ropes & Gray – to serve as Chair of that firm’s corporate department. Good to see Keith back in the saddle!

John Jenkins