The Ethics of Risk

In our last post we considered the case of a CEO who was fired after his attempts to hold out for a better buyout offer for his company turned into a fiasco of lost money when the value of the company itself took a nosedive before any such offer was received. I argued that this is part of the CEO’s job – and the fact that he or she may be blamed (or fired) for events that were beyond anyone’s control is part of why the person running a company is often given such an elevated salary. But this case also raises the issue of whether the CEO has a responsibility to take such risks, and whether the stockholders have any responsibility to let him or her get on with the job. I thought we should take a closer look…

On the one hand, if the CEO of a company overestimates the value – and even more so, the future potential value – of his or her company, there exists a real chance that they will pass on an offer to purchase the firm that the CEO feels does not live up to that potential, even though this is actually the best offer they will ever receive. This can result, as we saw on Friday, in the company’s stockholders firing the CEO for interfering with their best chance of cashing in on their investment. However, this is not the only possibility…

On the other hand, if the CEO underestimates the potential value of his or her company, there is a real chance that they will sell out for significantly less than the value of the company, thus cheating the stockholders out of a significant portion of the revenue they could have received from cashing in on their investment. This will, most often, also result in the CEO being fired. In fact, it can generally be assumed that any CEO actions that result in any significant loss in stockholder equity will result in the loss of the CEO’s position – because increasing stockholder equity is the book definition of the CEO position’s duties in the first place. Unfortunately, if the CEO never takes any action whatsoever, this will almost certainly lower stockholder equity in and of itself…

There’s no real question that the CEO of any company has a responsibility to make that company as successful as he or she can – a fiduciary responsibility to the stockholders, a professional responsibility to the employees, and an ethical responsibility to anyone else whose livelihood depends on the company’s continuing health (e.g. customers, vendors, community leaders, communities dependant on the company for tax revenue and so on). But if any or all of these interests can demand a specific course of action from the CEO, and then demand his or her replacement in the event of any failure to represent their specific interests, are they fulfilling their responsibility to let the CEO get on with the business of running the company?

In general, the stockholders are employing the CEO to weigh these risks and make these choices for them, and they have a right to require the CEO perform appropriately to the situation, and for the compensation they are offering. But if they are going to hold the CEO responsible for both the risks taken and the risks not taken, do they then have the responsibility to step back and let their employee get on with the job they have given him or her? Mediating between the management team and the ownership groups of a company is the primary duty of the Board of Directors, but as the elected representatives of the stockholders there are limits to how effective they can be in the face of stockholder activism. At some point we have to ask whether the owners of the company have the same responsibility to their highest-ranked employee that every other manager has to every other employee…

It’s worth thinking about…