Daredevil CEOs May Put Companies at Risk

By | February 7, 2012

The death of Micron Technology Inc. Chief Executive Steve Appleton in the crash of an experimental plane is raising fresh questions about what a company should disclose to investors when a senior executive has a high-risk hobby.

There are plenty of corporate chieftains who indulge in risky pastimes. Oracle Inc. CEO Larry Ellison, a sailor and pilot whose adventures are part of his Silicon Valley mystique, competed in the storm-plagued 1998 Sydney to Hobart Yacht Race. Six men died and nearly two-thirds of the boats in the race did not finish.

Other CEOs engage in physical pursuits that might be considered dangerous for anyone, let alone the head of a major corporation.

US Airways Group Inc. Chief Executive Doug Parker has run with the bulls in Pamplona. Google Inc. CEO Larry Page kiteboards. Virgin Group mogul Sir Richard Branson has attempted to set a number of world records including trying to circle the planet in a hot-air balloon.

Appleton was a well-known daredevil who performed stunts at air shows when he wasn’t scuba diving, surfing or racing off-road vehicles — all while running a $7.85 billion enterprise that employs more than 26,000 people.

Appleton had crashed in 2004, badly injuring himself and triggering questions from governance experts about whether he was taking excessive risks.

When he crashed last Friday, the 51-year-old executive was flying an experimental, self-assembled, single-engine plane. The National Transportation Safety Board is investigating the crash.

His death has analysts wondering about Micron’s plans for the future, given the company was reported to have been a potential buyer for Japanese chipmaker Elpida Memory Inc. Micron, the last U.S. memory chip maker, has also been struggling with falling prices and formidable Asian competitors.

The company’s shares fell as much as 6 percent after-hours on Friday after news of Appleton’s death.


Experts say this should be a lesson for other companies.

“It’s very important that a public company CEO be candid with the stakeholder audience whether that’s an investor or the people who he works with,” said Hank Boerner, chairman of the Governance & Accountability Institute. He said Micron had not mentioned in its annual reports or proxies that Appleton had such risky pastimes.

Micron declined to comment on its disclosure policy around Appleton’s activities, or any insurance it may have had on him.

“If it would move the needle for an investor to buy, sell or hold, that is material,” Boerner said, adding that U.S. securities regulators have repeatedly reminded the boards of public companies that they have a “positive obligation” to oversee risk.

Boerner likened it to people seeking the presidency of the United States. By aspiring to the office, they acknowledge that they must give up a certain amount of privacy and activities that could interfere with their ability to serve.

But could the risks actually lead to rewards for a company? A University of Notre Dame professor who has researched risk-taking by CEOs in their personal lives says there is strong evidence that they need such pursuits for their own good and the good of the company.

“When they tend to have adequate or proper outlets for that creativity, it adds value,” said Matthew Cain, an assistant professor in the Mendoza College of Business at Notre Dame.

“If you take this away from them it could push them into pursuing improper outlets for those urges,” Cain said, suggesting that illicit sex, drugs or alcohol abuse could be possible substitutes.

Cain said risk-takers tend to exhibit what psychologists call behavioral consistency. They act the same at work as they do on weekends.

Cain and a colleague published a research paper last November showing that CEOs who were private pilots tended to take on about 15 percent more leverage than non-aviators and were 40 percent more likely to make a corporate acquisition.

Reed Kathrein, a northern California attorney who sues public companies on behalf of shareholders, said he was not familiar with any lawsuits over a chief executive’s lifestyle. For the CEO’s activity to be material to shareholders, it would have to be both a secret and truly daredevil, he said, adding that he would consider behavior such as Appleton’s material because it could affect one’s ability to get insurance.


Many public companies carry what are called “key man” policies on male or female top executives, though few acknowledge it.

Two Indiana University professors conducted a study released late last year in which they sought to examine the relationship between key men and corporate returns.

For the study, they examined every filing of every publicly traded non-financial company in the United States. They found that nearly 82 percent of them made no disclosure about whether they carried key man policies. Nearly 10 percent specifically said they did not carry them.

Only 8.8 percent of the companies said in filings that their key men were insured. On average, each of those policies was worth about $3.85 million, but some were worth as much as $60 million each.

A senior executive at a national insurance brokerage said that when it comes to insurance, boards have an obligation to have a contingency plan in place, particularly if a CEO keeps a high-risk lifestyle. He said the degree to which a company could face legal questions depended upon what happened to its stock after an accident.

Talking specifically about Micron, the broker said, “If trading opens substantially lower it could be the case that a plaintiffs’ attorney or two or three will start to conduct an investigation.”

Micron shares fell 2.8 percent on Monday, wiping nearly $217 million off the company’s market capitalization.

Attorney Jeffrey Kingsley, a partner in the insurance practice of Goldberg Segalla, said death-defying executives would almost certainly be covered under company insurance policies protecting directors and officers.

Kingsley said recreational activities generally are not considered when insurance companies are deciding what to include in a policy. “What the CEO or the officer does in their recreation time is far more of a grey area,” he said.

To be sure, there are grey areas and then there are grey areas. For every company that tolerates a daredevil like the late Appleton, there are companies that look far less kindly on the recreational habits of their CEOs.

For example, Hewlett-Packard Co parted with Mark Hurd in 2010 after he had allegedly fudged expense reports to cover a relationship with a female contractor. Boeing Co. ousted Harry Stonecipher in 2005 for alleged sexual improprieties.

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