Why are so many high-profile industry leaders making mistakes?

3 December 2018

This has been a bad year for the reputations of a number of prominent leaders of industry and commerce. What can business people learn from their errors?

Poor judgement

The last few months have seen a succession of Chief Executive Officers whose actions have fallen foul of regulators, shareholders or even law-enforcement agencies. Facebook’s Mark Zuckerberg had to admit to a failure to keep confidential the personal data of 87 million customers when this was misused by an associate, Cambridge Analytica, and also eventually conceded that his platform had been used by Russian agents in an attempt to influence the US Presidential Election. The New York Times accused him of treating his critics like enemies and showing a disregard for his ethical obligations. There is now a move by major institutional investors to remove him from the Chairmanship and replace him with someone experienced and independent.

Elon Musk, founder of Tesla, has already suffered that fate, having been found guilty of fraud and fined by the Securities and Exchange Commission for releasing misleading tweets regarding a fanciful plan to refinance the Company. He also brought his company into disrepute by intemperate tweets about short-sellers and British cave-rescuers.

The remuneration trap

Carlos Ghosn, Renault-Nissan-Mitsubishi Chairman, is awaiting trial in Japan, accused of under-reporting his remuneration by $45 million over a period of five years, and has consequently been removed from office.

Nearer home, the boss of Persimmon plc, Jeff Fairburn, angered the public by drawing annual remuneration of £75m (he declined to accept a further £35m to which he was contractually entitled.) His ‘misdemeanour’ was compounded by the fact that his company’s profits had been substantially earned out of the Government’s Help-to-Buy Scheme.

Also subjected to severe criticism by the press was Denise Coates, CEO of BET365. Her remuneration package of £265m was described by a popular newspaper as ‘obscene’, all the more so because the company’s activities are considered to cause hardship for many through addiction to gambling. In mitigation, it should be said that she donated £75m to her charitable trust that supports medical and educational charities.

Key person risk

The effect on the companies concerned has in most cases been negative. Facebook’s market capitalisation has fallen by 37% since July; Tesla has lost 14% of its value; and the shares of Renault, Nissan and Mitsubishi fell on average by 7% following their Chairman’s arrest. It seems that the market is rather sensitive to the risks of companies whose success appears to depend on the skills, ideas or whims of one individual.

There are thousands of smaller businesses in the UK who, whilst not being constantly in the public eye, nevertheless owe their continuing existence to the capabilities of their sole owner and decision-maker. These organisations have a built-in fragility that discourages inward investment.

Reputational risk

Another aspect is reputational risk, and this falls into two categories: first, the question of ethics. The Washington Post commented that Zuckerberg had a duty of care, a duty of confidentiality, and a duty of loyalty, and implied that he fulfilled none of these. All companies need to have processes to recognise the ethics under which they operate, to promote these to their people and stakeholders, and to demonstrate to their customers and investors that they comply with them.

Secondly, companies should also consider how they can safeguard their reputation by obtaining professional public relations advice. Jeff Fairburn severely damaged his own reputation and that of his company by an ill-advised reaction to a question posed on camera by a BBC reporter. Someone better trained or briefed in the art of PR would have explained the perfectly legal basis of his remuneration package and diverted the conversation onto the undoubted success of his company. Denise Coates was no doubt well-advised to keep a low profile while her salary was being raked over by the press. Even small companies can enhance their reputation by employing a competent PR adviser, and if their bosses ever get the opportunity of being interviewed by the media they should always invest in some training before entering the studio. As we have seen, reputations that have taken decades to build can be destroyed in seconds.

Lessons to learn

So, the lessons learned from the mistakes of others are: ensure that your business doesn’t depend entirely on you; always act ethically, and get professional advice on public relations.

If you would like any advice on this subject or any other business matter, please don’t hesitate to contact me or your local UHY adviser. Alternatively fill out our contact form here.