Executives and directors associated with corporate failures can get branded for life. But the stigmatization process is not always rational or efficient. Why are some executives tarred with failure while others seem to be Teflon-coated? By Batia M. Wiesenfeld, Kurt Wurthmann and Donald C. Hambrick
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hen companies fail – because of misjudgment, misdeeds, or even bad luck – leaders’ names and rep-
utations stand to be indelibly smeared. They get fired and have a hard time finding work elsewhere. Those who do get rehired tend to do so in lesser capacities or at smaller firms. It is difficult to imagine Dennis Kozlowski of Tyco or Jeffrey Skilling of Enron ever working again. Even executives who have been labeled as simply bad managers, such as Jill Barad of Mattel, become marginalized. For CEOs who get branded with the Scarlet F – for failure – it’s all part of the “settling-up” process. Settling-up is an essential, but often overlooked, premise of agency theory developed by University of Chicago finance professor Eugene Fama. Corporate owners (principals) can rely on the fact that managers and directors (agents) will be motivated to do their very best by the prospect of future adjustments to their compensation – adjustments, or settling-up, that will be based on prior performance. Executives who perform well build good reputations and get better jobs and higher pay in the future. Meanwhile, the markets disseminate word about the failings of those who perform poorly, and their prospects are accordingly diminished. But the settling-up process for corporate elites can be exceedingly imprecise. Peter Lynch, the investment guru and vice-chairman of Fidelity Management and Research Company, was a director of two of the most ILLUSTRATIONS BY KEN ORVIDAS
visible corporate collapses of the 1990s – Morrison Knudsen and W.R. Grace. Yet his name was rarely invoked in conjunction with these failures, and he went on to enjoy great acclaim after their occurrence. And sometimes corporate leaders are penalized far out of proportion to their culpability. Lloyd Ward served as CEO of Maytag for only 15 months. He was replaced in November 2000, after being blamed for the 59 percent drop in Maytag’s share value; he lost prestigious corporate directorships and has not found a comparable position. But Ward served at Maytag during very difficult times for the appliance industry. And Maytag’s performance was worse under some other CEOs who somehow avoided stigmatization.
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