In a historic wave of exits over the last year, McDonald’s, Disney, IBM, Salesforce, UberEats and other companies have lost their CEOs. The 1,600 CEO departures that happened in 2019 and the 219 CEO departures in January 2020 are all-time records for any single year or month, respectively. Observers have struggled to find a lesson in the mass turnover, but considering the departures individually, they have plenty of insights to offer, particularly in the area of crisis communications.
A CEO transition is not necessarily a corporate crisis—although changes at the top can certainly be spurred by crises, or when not managed properly, create their own. However, the CEO’s departure cries out for an explanation to shareholders, even if one is not legally mandated. But the Securities and Exchange Commission gives public companies wide latitude in choosing what to tell their investors when a CEO departs, only requiring that companies file an 8-K form when they terminate or accept the resignation of CEO. The agency demands only that companies “disclose the fact that the event has occurred and the date of the event.”
Recent examples show just how transparent or opaque a public company can be in complying with those guidelines and offer three broader lessons for crisis communications.
Different Paths for Different Brands
What does it mean for a CEO to exercise “conduct inconsistent with a non-financial company policy”? This euphemistic, obscure language comes from an 8-K filed by American Outdoor Brands, the maker of Smith & Wesson firearms, describing why it terminated CEO James Debney. Unexplained CEO firings will raise questions, especially in the #MeToo era. But after it showed Debney the door, American Outdoor Brands offered legalisms rather than answer those questions in a straightforward way. At most, its explanation is a vague indication that the outgoing CEO may have violated the company’s conduct policies—and going even that far requires reading between the lines.
American Outdoor Brands’ tight-lipped approach is not the only option. McDonald’s Corp. left far less to the imagination in November when it filed an 8-K reporting that Steven Easterbrook was out as chief executive. McDonald’s revealed in an attached press release that Easterbrook “demonstrated poor judgment involving a recent consensual relationship with an employee,” triggering his departure.
Since Easterbrook left McDonald’s, the company has been similarly forthright regarding a need to clean up its corporate culture. The Wall Street Journal detailed the effort in a profile of incoming CEO, Chris Kempczinski, portraying him as a reformer bent on bringing back “a more professional culture at McDonald’s after what some current and former employees described as an environment influenced by his predecessor’s late-night socializing with some executives and staffers at bars and flirtations with female employees.”
The communications strategy at McDonald’s led to some unflattering revelations in the short term, but also laid the groundwork for a positive narrative about culture change going forward. Meanwhile, American Outdoor Brands left observers wanting to know more about its “mysterious” ouster—questions that might not go away soon. Lam Research took a similar approach, stating in an 8-K that CEO Martin Anstice had resigned due to “workplace misconduct and conduct inconsistent with the company’s core values.” Thirteen months later, the termination was still being talked about in Fortune Magazine (which connected it to the #MeToo movement), among other publications.
While it can be painful in the short-term, relating negative news transparently gives companies an opportunity to get past it in a faster and healthier manner.
The Danger of Half Measures
When Herbalife’s former CEO, Richard Goudis, resigned in 2019, the company was eager to tell investors that it had nothing to do with the company’s financial reporting. It was less eager to tell them the rest of the story. In a 8-K filed in January, the company said, “Mr. Goudis’ departure is not due to any issues regarding the Company’s financial reporting, but pertains to comments which recently came to light, made by Mr. Goudis prior to his role as CEO, that are contrary to the Company’s expense-related policies and business practices.”
This indicated that Mr. Goudis had said something that conflicted with company policy, but fell far short of telling the whole story, which took the press just one month to uncover. In February, the Wall Street Journal reported that when serving as Herbalife’s CFO, Goudis had told a colleague in Asia to disregard the company’s expense limits for entertainment. That was particularly damaging, given that the Department of Justice and SEC had been investigating Herbalife’s anticorruption practices in China, in particular its entertainment and gift spending. Herbalife’s shares sank 5.5% on the revelation, confirming that the market had not understood the import of Goudis’s behavior based on the 8-K.
Being coy may only pique interest from the press, and allow them to control the message.
A Not-So Clean Break
One of the biggest business stories of 2019 was the implosion of WeWork. The company was heading for an IPO when questions about its accounting and tales of CEO Adam Neumann’s various excesses (charging the company $5 million to trademark the word “We,” for example) ended both the IPO and Neumann’s run as CEO. The company’s split with Neumann, however, left the market with mixed messages at best. WeWork announced his departure in a fawning press release that did not signal any disapproval of his tenure or break with past practices.
When WeWork’s major backer, SoftBank, offered to buy $3 billion in WeWork shares, it looked like a lifeline for the company and a golden parachute for Neumann. But in early April, SoftBank retreated from the offer, citing investigations into the company’s business dealings with its former CEO. Within a week, a special committee of WeWork’s board of directors responded by suing SoftBank.
Failing to make a clean break with the source of a company problem can hinder turnaround efforts.
Each CEO departure discussed above, like each corporate crisis, is unique. And each requires its own approach to investor relations. Lenient SEC regulations allow companies to pursue whatever course they choose. The above examples make the case, however, that companies can serve themselves well by practicing transparency, avoiding partial disclosures, and making a clean break with sources of past problems.