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corporate governance expert Ruth Aguilera
When the CEO of a publicly traded corporation is diagnosed with a serious illness, is there an obligation to inform shareholders?
In an interview with News Bureau Business & Law Editor Phil Ciciora, business professor Ruth V. Aguilera, an expert on comparative corporate governance and a fellow in the Center for Professional Responsibility in Business and Society, discusses how firms handle CEO succession and its effect on a company’s value.
Does a CEO have a responsibility to shareholders to inform them of an illness, especially if they may be unable to perform their chief executive duties?
Personal illness is a private matter, but when it comes to CEOs of publicly traded firms with an illness that can affect their performance in the firm, they are obligated to disclose it to the shareholders and stakeholders, and to communicate what plan of action they have for the company. In other words, CEOs are hired to manage the firm in the interests of the shareholders. A serious illness is something that can potentially affect shareholder wealth creation, so it is incumbent upon the CEO to ensure that all shareholders are aware of information that might affect the firm’s performance.
Think about any organization, even the government – there is always a plan B in case something happens to the leader.
If a CEO is readily associated with a company (for example, Warren Buffett at Berkshire-Hathaway, Steve Jobs at Apple), should that factor into the decision and the timing of such an announcement?
Absolutely. These types of announcements should be handled with care because stakeholders might equate the health of the firm with the health of the CEO. Therefore, it’s critical to have a succession plan in place, as well as a few good in-house candidates to replace the CEO. However, it also depends on the ownership and governance structure of the firm. If the CEO is as relevant to the firm as Steve Jobs is to Apple, then I believe it’s better to inform the shareholders in advance. Chief executives in the U.S. tend to be more powerful and charismatic than in other advanced industrialized countries.
Also, research on CEO succession often talks about corporate saviors, and how shareholders and the board tend to give carte blanche to CEOs to restructure companies in exchange for increased transparency, accountability and, of course, good performance.
So succession planning is critical for instilling confidence in the stakeholders on the direction of the firm, particularly when a CEO is seen as near the end of their tenure.
Ever since Steve Jobs’ health issues arose, Apple has taken flak for not having a clear succession plan. Why is it important for a corporation to have a transparent line of authority in place?
When we talk about authority and leadership, that inevitably leads us to the writings of Max Weber, the most influential sociologist of the early 20th century when it comes to organizations. Weber identified three types of authority: traditional, rational-legal and charismatic. Like Jack Welch, Walt Disney and Henry Ford, Steve Jobs is a charismatic leader. These types of leaders are harder to replace because the value of the company is closely tied to their charisma. A charismatic CEO has a firm idea about where the company should go, can communicate it and motivate employees to get behind her vision, and is able to remove obstacles that may impede realizing her vision.
Without a doubt, one of the biggest factors in the success of Apple is Steve Jobs, who has lots of power and is a great negotiator and visionary. On the downside, the corporate governance structure in place at Apple would be considered weak by standard corporate governance metrics – that is, it has a small board of directors with limited independence, no large shareholders and minimal market-related executive compensation. This makes succession planning all the more difficult to design. Having authority concentrated in one individual has worked well for Apple, but if his corporate strategies had failed, it might have been very difficult to remove Steve Jobs.
Interestingly, one of Weber's arguments was that bureaucracy often succeeds charismatic authority, and what makes the story of Apple even more interesting is that Steve Jobs left the company once before. In 1985, Apple’s board had to choose between keeping Jobs or then-CEO John Sculley. Well, they let Jobs go, and the company faltered, teetering close to bankruptcy. It wasn’t until Jobs came back as CEO in 1997 that the company started its resurgence.
The other big piece of news that came out by way of Jobs’ resignation is that he’s staying on as chairman of Apple’s board of directors. Generally speaking, is it a bad idea to have a former CEO stay on as chairman of the board of directors?
This is close to the classic problem of dual leadership, where the CEO and the chairman are the same person. Interestingly, in the U.S., most chairmen are former CEOs. There are two sides to this. Some might say that having the CEO as chairman might diminish the legitimacy of the current CEO and prevent the board from bringing new ideas and properly engaging in their duties of advice and monitoring. The other side is that having a former CEO around as chairman might assure a smoother transition, as this person is there as a liaison between the management, the board and shareholders.
A Minute with… is provided by the News Bureau | Public Affairs as a venue for Illinois faculty experts to comment on current topics in the news. Faculty experts on a wide range of socially important topics are available to news media through the News Bureau, (217) 333-1085.
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