Have you ever read a news article where directors are quoted giving a glowing endorsement of the current CEO, only to find that same CEO stepping down a few months later under a dark cloud amid stories of misconduct? What brings those board members to ignore negative information and paint a gloriously healthy but misleading picture of the organization?
A recent study of how corporations handle allegations of CEO misbehavior made some important observations. There are repercussions from CEO misbehavior, such as losing clients, facing federal investigations, and (for public companies) exposure to shareholder litigation actions. Media coverage of a CEO’s problematic behavior continues years after the initial occurrence (4.9 years on average according to this study) – hence the PR problem does not disappear quickly, potentially tarnishing corporate reputation and brand. Directors spoke to the media in 37% of the cases in this study, presumably to protect the corporate reputation.
It may be up to the board to prompt an investigation into CEO behavior. In the same study, at least 55% of the cases involved the board triggering an independent investigation or review. When seeking the appropriate response to CEO misbehavior, boards should quickly engage to better understand the circumstances that are raising red flags. Failing to act properly (and promptly) sends a clear signal to employees, customers, and investors that the board lacks the necessary courage to protect long-term interests of the company.
Let’s examine the role of a director when things go wrong. One area of board focus is to advise and appraise. This means mitigating risk, evaluating and elevating performance, and protecting the financial health of the organization. To achieve this, a high-performing board engages in a dance of positively influencing the organization while adhering to “NIFO” expectations: noses in, fingers out.
Where do the problems unfold?
- Board members fail to mitigate risk.
The board members allow the CEO to drive what information they receive, and through careful selection and presentation, the CEO orchestrates the board’s view; problem areas are glossed over or avoided altogether, causing the board to miss important cues that something is amiss.
The board does not challenge the CEO to provide justifications for decisions that seem odd.
The board does not establish a strong moral compass, nor does it assure implementation of systems in the organization that support ethical behavior.
- Board members do not evaluate or elevate performance.
The board focuses on a very narrow set of metrics regarding CEO performance, perhaps even profit alone. A more inclusive perspective would raise red flags when things were amiss. To wit, a precipitous drop in employee retention could be a sign of deeper issues that might not emerge until months later (were a board relying solely upon income statement results).
- Board members fail to effectively monitor and foster organizational wellbeing beyond financial health.
The board may be so swept up by meeting the financial expectations of shareholders that they minimize the needs of other stakeholders in a way that is damaging to the long-term interest of the organization. For example, board members may minimize talent management red flags such as low employee engagement, high turnover, or legal claims against the company, when such issues, unaddressed, damage the corporate interests.
- Personal loyalty gets in the way of peak board behavior.
Loyalty to the CEO (or other executives) may result in board members excusing behavior or actions that should not be pardonable. A CEO-loyal director may minimize issues or denigrate those raising concerns, making it difficult for other board members to appropriately assess the situation and craft an appropriate response. Consequently, a board of this nature may defend behavior that should not be defended.
Loyalty to the company brand among those who have had a long or meaningful association with the firm may find it hard to swallow that the company is engaging in unethical behavior. Directors may be willing to sweep issues under the rug for the sake of protecting this image. They may even be willing to speak out publicly in defense of the firm without digging into the facts, worried that their own reputation would be sullied if serious problems with the firm become public.
Holding management accountable is critical. This can be accomplished by paying attention to the board as a team, focusing on its culture and ensuring that board membership is broad. Keeping focused on the long-term vision and success of the company is also critical in helping the board mitigate relevant risk while evaluating and elevating CEO performance.
For greater accountability from the board, organizations fundamentally need the following:
- Board members who are loyal to the long-term vision of a successful firm.
Board members with a long-term view will not be satisfied with quick fixes or actions that damage the reputation of the firm.
Board members who are able to identify activities in strategic alignment will keep the company on track toward achieving its vision.
- Board members who are willing to hold leaders accountable.
Board members who can look past personal and organizational brand loyalty are valuable in that they can challenge the status quo in a healthy way.
Board members who are willing to hear feedback that they may not like will be better equipped to accurately assess problems looming on the horizon.
Board members who ask hard questions about performance of the firm and its people serve the organization by unearthing hidden issues sooner and creating opportunities to mitigate the attendant risk.
Boards have a crucial role to play in directing the company to success. However, weak boards, or misguided directors, can do tremendous damage. Set your board up for success by managing the membership, setting appropriate expectations about leadership accountability, and requiring the board to look deeply at factors that influence the long-term success of the company.
 Larcker, D., & Tayan, B. (2016). We Studied 38 Incidents of CEO Bad Behavior and Measured Their Consequences. Harvard Business Review. Retrieved from https://hbr.org/2016/06/we-studied-38-incidents-of-ceo-bad-behavior-and-measured-their-consequences