E*Trade CEO Mitch Caplan took an admirable and risky step yesterday: He went on CNBC and categorically ruled out bankruptcy. He acknowledged E*Trade’s problems, and, unlike most CEOs, admitted that he was bearish about the next 12-18 months. (He also played the wimpy “irresponsible” card again, lambasting the analyst who used the dreaded “b” word, but never mind).
Why was Caplan’s CNBC appearance admirable? Because E*Trade needed to take a forceful, public stand. Why was it risky? Because if, god forbid, the crisis worsens and E*Trade does go bankrupt, Caplan will probably go to jail…
E*Trade’s situation reveals the enormous challenge that executives at distressed companies face in these post Enron days. Even as pundits rage that “nothing has changed,” that corporate behaviour is as sleazy as ever, senior executives have been muzzled to the point where management-market communications are suffering and investors are actually getting hurt.
The problem in a nutshell: The future is still unwritten, but whatever happens will always be obvious in hindsight. If E*Trade goes bankrupt, it will be impossible to convince anyone that the all-powerful-and-all-knowing CEO Caplan didn’t see it coming (and, therefore, that his bankruptcy denial on CNBC was “false and misleading”). Right now, however, bankruptcy is probably indeed an unlikely outcome for E*Trade, so Caplan probably firmly believes every word he says. (To his credit, he’s also no shrinking violet).
Moreover, as with any “run on the bank” scenario, managements’ public comments and confidence have a direct impact on the future outcome: If Caplan had cowered with fear behind a legal wall, e*Trade would have been more likely to go bankrupt–thus hurting the shareholders the legal “zero tolerance” policy is designed to protect. By speaking out, meanwhile, Caplan did the right thing for the company and its shareholders, but only by exposing himself to great personal risk.
There’s no easy answer here: Obviously CEOs should be careful about what they say, and obviously those who make truly false and misleading statements should be held accountable for them. That said, the standard for what is truly “false and misleading” should be high. Executives like Caplan shouldn’t have to risk spending decades in jail by expressing confidence and optimism about their companies in the face of a still uncertain future.
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