What If Donald Sterling Ran Your Company?

By Jon Friedman AAA

A chief executive officer can seem to have it all: power, influence and gravitas. But all of that hard-earned respectability—along with a company’s share price—can erode in the wake of a scandal. 

Just ask Los Angeles Clippers owner Donald Sterling, who was unceremoniously forced out of his perch by National Basketball Association Commissioner Adam Silver after Sterling was found to have made racially offensive comments during a recorded telephone conversation. 

Negative Attention

The individual at the center of the storm isn't the only party to experience turmoil, of course. Investors, naturally, have a stake in the situation. They have to worry whether the misdeeds or insensitive words of a ceo will hurt their portfolios.

If a situation is handled quickly, and in a way that satisfies both investors and the public, share value can be preserved. But if handled poorly, a ceo’s loose lips could be the catalyst short sellers are looking for.

Here are examples of three scenarios:

Harry Stonecipher and Boeing

Harry Stonecipher was recruited out of retirement to restore the image of Chicago-based The Boeing Co. (NYSE:BA) as president and chief executive officer, as well as its chief ethics cop. Then an indiscretion of his own came to light.

In what the Wall Street Journal at the time called “a remarkable turn of events,” Boeing announced that its board unanimously asked Stonecipher to leave the post he had held for 15 months after learning of his consensual relationship with an unnamed female executive. The act violated the company's code of conduct not because it was extramarital, but since the ceo had apparently used poor judgment and put Boeing in a potentially embarrassing and damaging position.

Boeing’s shares had experienced healthy appreciation under Stonecipher and continued to rise after his departure—a credit to how quickly the issue was handled as well a nod to how forgiving society is about peccadillos. That’s not to say investors weren’t watching like hawks, though.

Gurbaksh Chahal and RadiumOne

Such scandals hit private companies as well, such as San Francisco’s RadiumOne, an advertising platform that uses real-time bidding and which is working its way toward an IPO. Its well-connected CEO, Gurbaksh Chahal, was in the news recently after a security video of him allegedly hitting and kicking his girlfriend 117 times was seized by police. While the video was declared inadmissible by a judge, Chahal was sentenced to probation, fined $500 and ordered to undergo counseling. Four days passed from his plea to his firing—which, according to at least one business partner, was too much time; IT news source TechCrunch dropped RadiumOne as a sponsor for a big event.

Chip Wilson and Lululemon Athletica

In the case of Vancouver, B.C.-based Lululemon Athletica, Inc. (Nasdaq:LULU), disparaging comments by founder and chairman Chip Wilson made about women customers of his yoga fashion company contributed to a lack of confidence among investors. He eventually stepped down, but not before the stage was set for a massive erosion of share price. From a high of around $82 last June, LULU is now trading at around $43. And from Dec. 10, 2013, when Wilson resigned, the company’s shares have dropped almost 38%.

The Bottom Line

The board of any company must act fast to address a lapse in judgment or outright misdeeds by high-ranking officials. Only that will fend off criticism and restore confidence. As an example, take Boeing or how in the wake of the NBA’s quick justice with Sterling, a reeling Clippers squad advanced to the next round of the playoffs.

 

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