CEOs in crisis: when to stay, when to go

Having named a new leader on 19 January, Dentsu is now hoping to enter a new chapter after several months of intense media scrutiny brought on by management failures. But while some observers foresaw the resignation in December of president and CEO Tadashi Ishii, others both in and outside Japan saw it as an extreme response.

For some, Dentsu’s decision raises the question as to when CEOs should resign and when they should stay. Stepping down can seem like the easy way out of a sticky situation, and CEOs in Japan have faced criticism for this in the past. Yet the familiar image of executives bowing their heads in a show of apology and then returning to business as usual also frustrates the public and shareholders. So when is resignation necessary to protect a company’s reputation, and when would it be better for the leader to stay and fix things?

“Lightning rod”

Some think the answer is clear-cut. Of course, it depends on the severity of the issue, but in simple terms, when something bad happens, someone has to take the fall for it, and the most logical person to do that is the one at the top who should have overseen it all. “It’s theatre,” says Charles Lankester, executive vice-president of global reputation and risk management at PR agency Ruder Finn. He describes the CEO as a “lightning rod” that absorbs the negative energy from the scandal in order to protect the company and give it a clean break.

“You need someone to blame and ritual firing [or resignation] is very important. There’s a lot of choreography around it. Usually there is intolerable pressure from shareholders and government that builds to such a degree that the CEO’s position is untenable. The CEO is usually pretty toxic at this point so it’s counterproductive to try to keep them in place.”

This way of thinking has become commonplace in Japan largely because the public has become less forgiving of large corporations, particularly since the TEPCO scandal of 2011. Indeed, unlikely as it may seem, in countries like the US, people tend to have more patience and see the resignation of a CEO as an admission of personal wrongdoing rather than a necessary symbolic gesture. “Observers in Japan think that CEOs abroad take way too long to resign,” says Ryota Iguchi, head of international operations at Kyodo PR.

It can be difficult for beleaguered leaders to be seen to do the right thing. Kumi Sato, president and CEO of Cosmo Public Relations, notes that in a number of cases where a CEO stayed on to resolve a scandal, they were seen to have “overstayed their welcome”. The most recent example of a CEO taking this route is Isao Moriyasu of DeNA, which was hit by a plagiarism scandal at the end of 2016. Moriyasu took a pay cut and promised to improve company operations, but it’s likely to take a long time for the brand’s dented credibility to bounce back.

For Lankester, the only time the CEO of a scandal-hit company is justified in staying is when the CEO’s personality is inextricably tied to that company and an abrupt departure would put the future of the company at risk, or when the scandal is truly the result of a ‘black swan’ event that no one could have foreseen.

Tough questions

Others think it’s more nuanced. John Morgan, Asia president & CEO of Hill & Knowlton, suggests the board should ask a number of questions to determine the CEO’s position: is the incident a one-off problem, or an example of rotten company culture? “A good CEO delegates and therefore can be forgiven in not knowing every detail,” he says. “However, when a company-wide culture tolerates such extremes as non-delivery for customers, mistreatment of employees and lying, it’s time for the boss to go.”

Further factors to weigh up, Morgan says, are the extent to which trust has been compromised, and whether the CEO has become a negative distraction that’s larger than the issue itself. Sometimes, the CEO’s reputation (and that of the company) can be protected through timely and skilled crisis communications. Iguchi says more often than not, unskilled responses to a crisis contribute to the early resignation of company leaders. Regrettably, media training in Japan is still “only taken into consideration by a small number of corporations that are sensitive to public opinion,” he says.

If things really have fallen apart, Sato believes the best way to resolve matters is not only for the CEO to leave, but for the company to then appoint an independent third party to investigate and clean up the mess. This helps meet the public desire for accountability and transparency, she says.

Whether a third party is involved or not, once a compromised leader has left, the company must act fast and decisively to restore its reputation. In Dentsu’s case, an internal investigation (which did involve third parties) and the announcement of preventive measures to address the root of the problems, put the company in a good position to move forward. But it should go without saying that as important as communicating is, the key for any organisation to rebuild trust and credibility is not just to show its intent, but also to follow it through rigorously.

Now read our Q&A on CEOs and crisis containment in Japan versus the US