If you are a thriving chief executive, it falls to shareholders, employees, and customers to pick up this tab. The Wall Street Journal may view this matter primarily through the lens of what happens when CEOs who are natural risk takers endanger not only themselves but their entire organization by continuing to indulge in flying, racing, or other high-adrenaline, higher-insurance premium activities that carry over from more prodigal habits before the given executive rose to the top. (For details, see http://online.wsj.com/article/SB10001424052702303717304577277931099185536.html )
The real questions, from the view of protecting the organization’s equities, are these:
• Is there a point where executive freedom to do as one damn well pleases crosses the line to qualify as a legitimate concern for the organization? Can this penchant for unnecessary, physical risk taking become the proper business of the board of directors and of the whole institution instead of staying a private matter that is only the executive’s business and no one else’s?
• If so, what are the organization’s and CEO’s options for reconciling personal freedom with thrill seeking that puts more than just the chief executive at risk?
• What, if anything, should CEOs and governing boards not do about this matter?
First of all, there is a line that the top executive crosses when his or her sudden loss would be catastrophic to the organization. A startup whose strategy, financing, and advancement rely on an irreplaceable leader puts all the employees and investors at the mercy of the leader who is cavalier about pursuing needless thrills. This leader may find it exhilarating to cheat death, but the workers who face layoffs or shuttering of the business if the leader is incapacitated have their livelihoods right there, in the cockpit of experimental airplane, race car, or deep sea diving apparatus – only they don’t get to experience the adrenaline rush. For them, as for investors, the risk only comes with penalties, not rewards. So, if the chief executive has any sense of obligation to employees or others who are important enough to keep the organization working and thriving, then he or she owes them some consideration before blithely signing up for the next thrill ride.
What of the negative effect that such restraint or thrill reduction imposes on the adventure-seeking executive for whom taking risks is a personal imperative that is indelibly tied to business creativity or performance? In this case, there are alternatives. Both of the main alternatives involve syndicating the risk, which is what insurance companies do when no single entity is able to reimburse the total loss that would occur in any worst-case scenario. Thus, when Lloyd’s of London started insuring ocean-going ships on their passage across the Atlantic from the Old World to the New World and back again, it would rely on a number of different syndicates to pick up some of the expense that, in the aggregate, would represent the total cost of making good on a claim. Naturally, these syndicates also shared in the profits, splitting up premiums accordingly when the same ocean trips took place without incident. How do executive and governing body arrive at a syndication of the risk arising out of thrill-seeking that the executive refuses to give up? One way is through insurance for key officers of the organization. Executives quickly find that the more elective risks they take and the more indispensable they are to the enterprise, the higher their premiums will be. The board of directors can disincentivize such executives from overdoing risk taking by refusing to pay the difference in premiums between what it costs for a thrill seeker and what the insurance company charges for a more prudent executive officer. Money alone seldom compensates fully for loss of an irreplaceable leader, however. What, then, is the other form of risk syndication that needs to happen?
Take strategic measures to make the thrill chaser less indispensable. Such measures include succession planning and active diffusion of responsibilities so that the organization can and does function regularly without the star leader. Properly instituted, such measures offer the leader in question a means to ease the burden of carrying the organization around the neck as a millstone. Encourage the chief executive to take frequent vacations and to grow the next generation of leaders by leaving others in charge. Eventually, the organization will develop the capacity to function without the one single executive, to the relief of investors, employees, customers, and the executive as well.
What not to do? Turning the debate on thrill-seeking executives into an epic battle between board and CEO and waging war in the media constitute a recipe for disaster. This is a business challenge, like any other issue that keeps the operation running. Accordingly, it deserves sober, analytical discussion and weighing of options. The executive’s value to the organization is an asset which the organization has a right to protect. Similarly, the executive’s personal freedom and idiosyncratic attachment to risk-taking behaviors may well be so ingrained as to be an inseparable component of that executive’s secret of success. Failing to acknowledge each other’s views and letting emotions lead to a clash of the titans represents institutional malpractice on the part of all concerned. Instead, the best approach is to enter into a business discussion about how to safeguard everyone’s business assets. This turns needless risk into calculated risk.
– Nick Catrantzos
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Nick Catrantzos + Tom Goff
- All Secure
- NICK CATRANTZOS is the lead author of the All Secure website and is the emeritus security director for a large public organization. He has also managed security aspects of corporate takeovers, response to international hostage situations, and finding and keeping secrets. He has been board certified in security management, licensed as a private investigator, and certified as an incident commander. He worked as a case officer for a discreet branch of public service. He protected stealth technology at Lockheed and, later, as a consulting security director for both Kroll and Control Risks, he assisted executives with workplace violence cases and with protecting VIPs and critical assets globally in volatile areas. Nick's partner, TOM GOFF, was a captain in the Military Police Corps, U.S. Army Reserve and has a law degree from the University of California at Davis. He is a former reporter for Fortune Magazine, was senior editor at New York Magazine and Esquire, and has provided crisis and communications counsel to senior executives at Fortune 500 companies, including Lockheed, ARCO, Microsoft, Nissan, and Sony Pictures.