Should Investors Worry About CEO Risk?
Sometimes, brilliant people do painfully dumb things.
“They’re too smart for their own good,” as the old saying goes.
We live in an age dominated by social media and 24-hour news.
That means tweets, posts and shares can instantly go viral. In turn, a gaffe or flawed response from even the smartest person can quickly become a public relations nightmare.
And often, investors end up bearing the brunt of it.
Silicon Valley’s “rock star” CEOs have emerged as the poster children for “foot in mouth” leadership gaffes. Offhand - and often stupid - utterances by these leaders can impact stock prices and stockholders.
In 2009, then Google (Nasdaq: GOOG) CEO Eric Schmidt said with all sincerity on CNBC that, “If you have something you don’t want anyone to know, maybe you shouldn’t be doing it in the first place.”
This was his attempt to swat away growing privacy concerns about Google. The search engine holds a treasure-trove of data on users - from fetishes to funguses. And Google will gladly share this data with anyone for a price.
In 2015, weeks before the IPO for Match Group (Nasdaq: MTCH) - the parent company of dating app Tinder, among others - CEO Sean Rad made several cringeworthy remarks... the contents of which we shouldn’t publish here.
In response, Match immediately released a filing with the SEC saying Rad didn’t speak for the company.
But two recent headline-making events had investors yelling, “This is exactly why these guys shouldn’t be CEOs!”
At the top of the list is the data scandal surrounding Facebook (Nasdaq: FB).
Initially, concerns were met with a nonchalant response from the 33-year-old CEO Mark Zuckerberg.
To him, it appeared Cambridge Analytica’s misuse of 87 million users’ data wasn’t that big of a deal.
After days of remaining mum on the ordeal, the company was eventually forced to release the Mark Zuckerberg and Sheryl Sandberg robots for an apology tour.
As public outrage bloomed, Facebook quickly rolled out a litany of new tools and settings that let users see how their personal data is accessed and by which advertisers.
The backlash led to a very public Congressional hearing that relieved investors because it showed that since Congress didn’t really understand the situation, any new regulations would likely be minimal.
Now Facebook is slowly slipping back out of the spotlight as public enemy No. 1... but not before a slew of social media and tech CEOs took to ragging on the company.
One of those included Tesla (Nasdaq: TSLA) CEO Elon Musk, who deleted the Facebook pages for Tesla and SpaceX following the Cambridge Analytica scandal.
But less than a week later, Musk sparked his own social media controversy.
He posted a series of ill-advised April Fools’ tweets about Tesla filing for bankruptcy protection...
Of course, there might have been some humor in it if Tesla wasn’t under scrutiny after a biker was killed by one of the company's autopilot-enabled cars.
Instead, it just added to the belief that Silicon Valley CEOs are tone deaf... and pose real investment risks.
Shares of Tesla - and Facebook - are lagging the Nasdaq and the S&P 500 year to date...
And despite the hype, over the past two years, Tesla shares have trailed both indexes.
Thankfully, for the most part, CEO risk is a short-term dip. And for the brave, it’s an opportunity to swoop in and snag shares at a discount.
Because if the CEO does anything too damaging, they will be quickly shuffled out the door.
Just ask Steve Wynn... or any of the 21 other executives that we said goodbye to in 2017.
The #MeToo movement had its impacts - as did plain old corruption, fraud and incompetency.
Who can forget the Equifax (NYSE: EFX) hack and subsequent response that forced then CEO Richard Smith to take an “early retirement”?
Do you remember when, as General Electric (NYSE: GE) struggled to rein in costs, former CEO Jeff Immelt had a second private jet (paid for by GE) follow his own private jet on business trips... just in case his first jet broke down?
In an era of fast news and even faster tweets, CEOs can pose an even greater risk to shareholders. Because even the smartest people can be guilty of saying and doing very dumb things.
Today, shares of Equifax and GE are still in the toilet, while Facebook and Tesla are rebounding.
Shares of Match are up more than 220% since its IPO in 2015. And shares of Google (now Alphabet) have risen more than 500% since 2009.
It may take an executive a lifetime to build a good reputation but only moments to destroy it.
Good companies on the other hand, will ultimately thrive.