CEOs are just as vulnerable to tragedy as everyone else — sometimes even more so, as fortunes and families are often intertwined with the company.
Management teams are wise to plan ahead for the “4 D’s”: death, divorce, disability and drug abuse.
Battling back from drug addiction
The U.S. is currently embroiled in an epidemic. According to a recent nonprofit study, from 2007 to 2014, opioid dependence rose by 3,203 percent. Opioid abuse rose by 317 percent. The amount of heroin overdoses in the U.S. grew by 510 percent from 2009 to 2014, a much steeper rise than prescription drug overdoses and street drug opioids.
It would be naïve to think executives are immune, but drug dependency is perhaps the least discussed concern and one of the most likely to set a company back. Executives — especially entrepreneurs — lead high-pressure lifestyles and often have the resources to support addictive habits.
Indeed, owners are generally wired to seek stimulation in some sense. As David Linden, a Johns Hopkins neuroscience professor, wrote in the New York Times, “What we seek in leaders is often the same kind of personality type that is found in addicts, whether they are dependent on gambling, alcohol, sex or drugs.”
Addiction is well-recognized as a disease that is treatable and temporal. An executive that fights through such an affliction will miss substantial time, and the organization will be better off if ground rules are established.
Guidelines should be drafted to outline the process of bringing an owner back on board, and agreements can be structured to set aside shares for a reasonable period, offering a window for executives to right their ship. Trusts can be established to hold the shares, and certain corporate structures (e.g., LLCs) can reassign them as non-voting shares until the owner returns or retires his position.
Divorce can split the business
Divorce is another scenario that can shake a company to its core, yet almost no corporate structures have default clauses that address the situation. Common practice leaves that area as a personal issue to be dealt with through prenuptial agreements, which can cause an intense tug of war.
The most dangerous aspect of divorce accompanies the valuation of shares that are thrown into the asset pool at play. If provisions are not in place, spouses of CEOs can suddenly become voting shareholders, sending ripples through the board and across the company.
Forethought and planning can take a good deal of risk out of the equation. As an example, a corporate charter or limited liability company operating agreement can denote that shares transferred to others automatically become non-voting shares. That way, when a divorce settlement comes due and shares go to a spouse outside the company, there will be money at stake but not control of the enterprise.
Death in the executive suite
The good news in our society is that incidences of heart disease have dropped, blood pressure can be better managed, and healthy lifestyles are promoted more actively among adults. People are simply living longer, with the life expectancy for an American at birth currently at 77.9 years.
The bad news is that people still die. In fact, as professionals ascend to leadership roles, their mortality rate jumps significantly: at 45, the probability of death is .0034, by age 56 that jumps to .0085, and at 60 to .011.
Perhaps because of its finality, death is often addressed in partnership agreements. Corporate policies are a common source of comfort, and enable companies to recoup the value of an owner’s shares in the case of their death.
Disability as real as death
While not as commonly addressed as unexpected death, disability deserves just as much attention.
All executives stand a reasonable chance of becoming disabled during their time at the helm. A typical male in an office job has a 21 percent chance of being disabled for three months or longer, and there is a 38 percent chance the disability lingers for five years or more.
Females in the same category share similar exposure, with a 24 percent chance of a 3-month disability and a 38 percent chance of being disabled for five years or longer.
Those odds are too short to ignore, especially when insurance policies are typically bought to account for an executive’s shares in the case of his or her death. Similar policies can easily be attached to address disability; the additional premium is a small price to pay to safeguard the company.
Whether through insurance or shareholder agreements (or both), businesses need strategies in place to account for the disability of key executives.
Running a business does not exempt you from life’s curveballs, but companies can maintain momentum with the right legal structure and ownership clauses in place. Careful planning can be the difference between a downward spiral and “business as usual” during troubling times.
Frederic J. Marx is partner, head of the Business Law Group at Hemenway & Barnes LLP