Telecom CEOs Face Personal Risk When Reputational Attacks Occur

By Special Guest
Dr. Nir Kossovsky, CEO, Steel City Re
June 19, 2017

When corporate reputations are damaged in today’s unforgiving culture, individuals in corporate leadership take the heat as stakeholders seek satisfaction through blaming, shaming and directing their anger and disappointment toward the most visible personification of the company they can find – usually meaning the CEO.

Companies in the telecommunications industry are always targets for reputational attacks. Their networks are the backbone of our entire society. Virtually every business and consumer relies on them in one way or another and our personal activities have become dependent on them. That dependency makes the industry a particularly good target, and every major player is devoting significant resources to protecting itself and its customers from malicious attacks.

But incidents are bound to happen and every company in the field recognizes it. Verizon, for example, counts among the potential risks it lists in SEC filings as “breaches of network or information technology security” – a statement with which every one of its competitors would doubtless agree. Verizon will undoubtedly face a unique level of scrutiny in coming months as it completes its acquisition of Yahoo! Inc., which has had serious reputational issues as a result of recent cybersecurity attacks that compromised a reported 1 billion accounts.

But reputational crises today have taken on new dimensions. A recent study by Steel City Re, which analyzes reputational risk and provides insurance products to protect companies and their leadership, found that financial losses related to reputational attacks have increased by over 400 percent in the past five years – and that upward trend is continuing.

The same study found an increase in generalized anger among the public and an increased tendency for interested parties, ranging from politicians to activist investors, to direct that anger toward individuals – meaning CEOs and senior management as well as boards of directors. As more and more directors lose their seats and their compensation in the wake of corporate reputational crises, boards seem to be finding a convenient way of relieving the pressure – by casting their eyes toward a more prominent target, namely the CEO.

In this era of weaponized social media, generalized anger and boards increasingly intimidated by activists, CEOs are in the crosshairs like never before. We need look no further than the daily media coverage to find examples. The Wall Street Journal’s prominent headline, for example: “Activist Investors Have a New Bloodlust: CEOs.”

To defend against such attacks, CEOs could talk about their value-protecting governance, risk and compliance (GRC) investment leadership and hopefully mitigate an activist-initiated reputation crisis. But as Elliott Management’s Jeff Ubben noted in the Financial Times, “… when you [the CEO] do strike back, you’re fired.” And as Marco Amitrano, head of consulting at PwC UK, told the Financial Times, “CEOs face an ‘unforgiving’ business environment.”

Consider the plight of CEO Gavin Patterson at BT Group. It has been a tumultuous year for the telecoms group, which kicked off 2017 with a profit warning triggered by an accounting scandal in Italy and a collapse in orders in its public sector business. That was followed by a record £42m fine from regulator Ofcom related to past issues. Patterson’s pay was cut by £4m for the year and he waived his 2017 bonus.  BT also clawed back bonuses previously paid out to Patterson to reflect lower profit expectations.

More evidence of the shakier ground on which CEOs find themselves:

  • Fewer CEOs are chairing boards. According to data analytics firm Equilar, among S&P 500 companies, 35.1 percent now have a non-executive chairman, up from 27.7 percent in 2012.
  • Boards are being tougher on CEOs generally, adopting measures like “say on pay,” shorter tenures and threats of compensation claw backs as punishment for setbacks. That sets the stage for CEOs to find themselves walking a very lonely plank when their companies face public crises. 

The result: CEOs are turning over in greater numbers. In 2016, according to SpencerStuart, 58 of the S&P 500’s CEOs transitioned, although not all were pushed out following crises. That is the highest number since 2006, a 13 percent increase over 2015, and a 57 percent increase over 2012.

And as we’ve seen on countless occasions, while large companies and their well-supported brands almost always recover, individuals do not. When individuals, be they CEOs or Directors, take a major reputational hit, it sticks. And it can affect careers and compensation for many years into the future.

These risks are exacerbated, ironically, by societal trends that could not exist without the telecommunications industry. Social media, simultaneously the chosen outlet for public anger and the tool for building brand equity and customer loyalty, cuts both ways.  A false tweet can become Internet phenomena, fake news is difficult to distinguish from real news and elected officials seek to bolster their own standing by using social media to harness public anger against corporate America. The telecom industry is as susceptible to these threats as any and it needs to treat reputation – corporate brands and individual corporate leaders – as a strategic priority.

Finally, CEOs need new tools to protect themselves and their companies. D&O liability insurance was once a badge of good governance, but it holds no standing in the court of public opinion and is useless in deterring these kinds of reputational attacks or providing any kind of insulation or indemnification when they occur.

They need third party warranties and endorsements that serve like a security sign on the front lawn, warning intruders and deterring attacks in the first place.  Those warranties need to come with credible and transparent analysis demonstrating the company’s good governance and providing a positive alternative narrative to repel any attacks that do occur.  And because telecom executives live in a world where technology is constantly advancing and attackers are relentless, they need indemnification to compensate for losses that affect their companies and themselves personally.

About the Author

Dr. Nir Kossovsky is CEO of Steel City Re, which analyzes the reputational strength and resilience of companies and provides insurance products that protect those companies, their officers and directors against financial losses when reputational crises occur.


 
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