The Terminal Value of a CEO is Zero and Why Reputation is the Only Thing That Matters.

While CEOs feel like geniuses when the going is good, we shouldn’t forget that our career has zero terminal value.? A few bad years, clients lose faith, M&A flops, small screw-ups, big blow-ups, market cap losses, we are left with nothing. ?A reputation is the only thing between us and an inglorious exit (or transition into nondescript role).?

Professional CEOs working for an organization have only a derived reputation, not a direct one unlike an entrepreneur who have their own direct reputation.

In the initial days, emerging leaders and CEOs derive their reputation through the organizations they lead. Overtime, they build their personal reputation from their results, the relationship they choose to associate with and the ones they choose to avoid. As professional CEOs, we are only as good as the companies and the values we back. With time, reputation becomes the identity of a CEO.

Reputation, unlike perception, is deep-rooted, substantial and long lasting.???Yet, when a reputation is lost, it is lost forever. A product can be “re-branded”, but there is not a second chance for “re-reputation” for a CEO.

In my mind, there are two determinants of CEO reputation - How we behave and How we invest.

How (well) we behave?

Well-deserved trust and respect arises out of behaving consistently and this is crucial to building an enduring organization.

1. Compliance is critical and is non-negotiable.?There is only one tangible demonstration of good behavior - avoiding the temptation of fraud or misrepresentation, walking away from bad deals, bad relationship, bad accounting and by following the letter and spirit of law. ? It is untenable that we turn a blind eye to accounting fraud outside while being spotless on the inside. It is not possible for any human to sustain this kind cognitive incongruence or dichotomy.
2. It is easy to blame luck and external situations for unfavorable situations, and ?even easier to take credit for your capabilities during success. ?How well does a CEO internalize and differentiate his/her competence and luck will determine his/her behavior.
3. Intellectual honesty matters. In my case, I must speak of the future cautiously despite several fads and trends in my industry. In my present role, the onus is on me to set realistic expectations, on which I recommend and make investments.?
4. Intellectual humility matters even more. “I-know-all” mindset and a desire to appear smart is an outright dangerous behaviour that leads to overconfidence, reckless investments. If I am humble enough to accept my limitations and mistakes, there is a greater comfort that I will do well in future.
5. How one behaves in a crisis?? ?A crisis brings the best or worst of an individual.?? Real leaders and real reputation are forged in crisis. As an example, Boeing quality / safety standard crisis, British Petroleum’s Deepwater Horizon oil spill in Gulf of Mexico ended the career of the CEO. ?

A crisis does not make a man (or woman), it reveals what the man (or woman) is made up of.

The 2nd determinant of reputation is how (well) we invest?

Investments follow sound business strategy - our winning aspirations, where to play, how we win and how to build organization capabilities.

1. Investments must build competitive advantage that will make your organization stronger - in new products, technology and people. Competitive advantage is about a business playing to its advantage, getting stronger within a good industry, continuing to earn healthy returns and redeploying/returning the money responsibly.
2. Investments must be guided by the right strategy - perhaps sticking to only one strategy, since it's not possible for anyone to make two strategies work. ?
3. CEOs must be prudent about capital allocations and risk management.?? Avoid any investment or acquisition at frothy valuations. In running a business or investment decisions, the bar for Margin of safety must be very high. This is to ensure reasonable outcomes despite unknown headwinds and unforeseen shocks. At the end of the day, I must have a margin of safety that is necessary to run my business, notwithstanding the branding of being a sand-bagger.
4. By showing results of your investments before showing new presentations. (It's tempting to run victory laps even before the game has started)

Closing comments:

1. I define terminal value as the sum of all future earning (quantitative) and respect in the industry/market place, (qualitative aspect - size of the organization being led, a seat on the table in industry forum). ? Any leader can do create a self-assessment of their own terminal value and endeavour to grow and protect this terminal value.
2. Absent one factor- how we invest or how we behave- reputation definitely takes a hit, and terminal value tends to zero if course-correction is not done rapidly.
3. The 2 factors - how we invest and how we behave is not stand-alone. Reputation is made or destroyed by a combination of these factors. Example, if you made a bad investment, it is expected that a CEO will show good behaviour by admitting mistake and quickly exiting. Conversely, if the CEO makes a bad behaviour of escalating commitment i.e. placing good money on a bad investment, the reputation is impacted negatively on a permanent basis.

How I internalize?

1. I write this post from my observations of some star-studded CEOs ( global or Indian) in leading organizations – their tenure and their exit.?
2. I remind myself everyday that my reputation is a surrogate for how I am likely to behave in the future and how I will handle other people's money.