Good corporate governance is about people. For all of the codes and regulations that have been introduced in the last 20 years, typically in response to various corporate scandals, it is the values, the behaviour and the accountability of those at the top which sets the tone and determines the relationship that business holds with society
Contributors: Prof. Pino Audia, Tuck School of Business at Dartmouth; Prof. Ernst Maug, University of Mannheim, Business School; Mr. Mats Isaksson, Head of Corporate Affairs Department, OECD; Mr. Gilles Pélisson, Former Chairman, ACCOR Group, Independent Director, Accenture, TF1, BIC, NH Hotels; Mr. Peter Solmssen, General Counsel, Siemens.
From an original piece in the Council on Business & Society White paper “Corporate Governance and Leadership” by Prof. Patricia Charléty, ESSEC Business School
No one is held more accountable than the CEO. Among the corporate scandals that have shaped attitudes to business in the last decade, it is the man in the corner office who is identified with the behavior and actions of the firm. Kenneth Lay at Enron and Bernie Ebbers of Worldcom are forever synonymous with the accounting scandals that wiped billions off shareholder value; BP chief Tony Hayward was publicly vilified for his management of his company’s oil spill in the Gulf of Mexico. And media magnate Rupert Murdoch found himself testifying in front of the UK parliament about allegations of phone hacking and other illegal conduct by News Corp.
Should the blame be aimed at the top?
Few would argue that Kenneth Lay deliberately pursued a path of fraud on a breathtaking scale, and that the management style and communication skills of BP’s Tony Hayward fell woefully short. In other instances however, the CEO is the scapegoat for board misconduct, such as former Olympus CEO Michael Woodford who was dismissed after he made allegations about board misconduct involving massive advisory fees in connection with the purchase of a UK company. It was only after investigation by authorities in Japan, the UK and the US that the company announced that its entire board would resign.
Either way, the behavior and leadership of the CEO is a vital piece in the corporate governance puzzle. Curiously though, most conferences on the subject focus on shareholders and boards, overlooking the critical and often unappreciated role that CEOs play in leading governance. Because CEOs are often singled out as villains who steal from the company or shirk their responsibilities, these conceptions have led to the belief that there is a principal/agent problem. But as Mats Isaksson, Head of Corporate Affairs at the OECD insists, “a good board can never compensate for a bad CEO but a good CEO can compensate for a bad board. We have to encourage CEOs to get more involved in corporate governance decisions.
Accountability is important for individuals and organizations, but taken too far can have negative consequences
Clearly, accountability is important for both individuals and the organization, but Professor Pino Audia of Tuck School of Business argues that when taken too far, accountability and the ability of others to judge and pass sanctions can have negative consequences. “Leaders are put in the difficult position of having to decide which sources to be accountable to, whether that be shareholders, employees, consumers or the media.” And as the amount of information available to the public continues to grow, he believes that the accountability pressures on CEOs will only increase, and with it the risk of unintended consequences. “If people are only accountable for outcomes, and not processes, they may focus excessively on the outcomes.” Poor decisions as well as unethical decisions can often be traced back to an extreme emphasis on outcomes and little regard for the process by which they are achieved.
Balancing business operations with corporate governance
As former Chairman of the world’s largest hotel group, ACCOR, Gilles Pélisson has overseen his fair share of quarterly reports, and explains that he has simply come to accept his accountability to institutional investors. “As the world moves faster and faster, people want and except prompt information,” but for the man who also once ran telecoms giant Bouygues Telecom and Euro Disney, he feels that there is a paradox that goes with the role.
While recognizing the power and resources CEOs might have at their disposal, Pélisson contends that running a listed company means you are always short on time. As a consequence CEOs are always faced with how to use that precious time, balancing the governance with other priorities. “Do you stay at the office and analyze data, or do you walk the floor to see first-hand the customer experience?”
In any case, Pélisson asserts that a CEO doesn’t wake up in the morning focused on corporate governance. “Your first thought is serving the customers, and engaging in research to know how they think and feel. The next focus is employees, who are key to a company manufacturing or delivering its product or service. CEOs must think about how best to motivate employees and the values, principles and policies they need to establish.” It is only then that CEOs think about governance, including a focus on the size and make-up of the company’s board.
Leadership and responsibility
With such a potentially decisive role, it is surprising to learn that some large organizations lack a real CEO. But that is the contention of Peter Solmssen, General Counsel at German industrial conglomerate, Siemens. Solmssen had worked for many years in the senior management of GE, “a company with one clear CEO who was the ultimate decision maker and who took this responsibility seriously.” Upon moving to Siemens, he saw a culture where decisions were made by committee, without clear accountability. At the time of his arrival, a bribery scandal was tarnishing the company’s image and threatening its business. Recovering from the scandal required a culture change driven not by committee, but by strong leadership. The company’s new CEO made integrity the company’s number one priority, and led by example. Along the way he sought the involvement and support of all the company’s stakeholders, including the labor unions and shareholders, including the Siemens family itself. As Solmssen sees it, “there are some things a CEO can’t delegate and has to own. While laws and rules are necessary, good governance is about values and behavior, which starts at the top.”
Amid the challenges of running an organization, what is the advice to CEOs for setting the governance agenda?
- Lead by example
- Be transparent
- Leverage the loyalty of employees
- Leverage the goodwill of customers
- Set limits
- Lead by example: CEOs are being watched and scrutinized at all times, by all parties. CEOs can never relax and must always be role models, especially in a crisis.
- Be transparent: CEOs will be asked hard questions, such as how can they justify their compensation. They must be transparent in their answers and must be able to simultaneously balance two objectives. The first is to deliver a consistent, uniform message about what the company does. The second is to tailor the message to each distinct audience.
- Leverage the loyalty of employees: Employees want to feel that they belong. If CEOs can achieve that, they will generate loyalty among employees who will then go above and beyond what they are being asked.
- Leverage the good will of customers: Companies are often afraid of social media, but you need to create communities that will help you. Social media is a reality and it can be leveraged to create influential support.
- Set limits: CEOs can’t let each employee behave as they see fit. Diverse global companies, with employees around the world, must have clear and specific rules to guide behavior on issues like gift policies or expenses. It is the CEOs job to say, “Here are the rules.”
Will such behaviours rebuild society’s trust in corporations and their executives?
When asked how credible they would deem information about a company that came from a CEO, just 38% of the global respondents to the 2012 Edelman Trust Barometer said they would trust the information, down from 50% the previous year. It was the biggest drop since the survey began 12 years ago. Clearly the public remains skeptical, but for Professor Ernst Maug of the University of Mannheim Business School, this is in part a communication gap that influences public perception. “It’s time to put the human aspect back into the governance equation and find a common language with society,” he insists.
FOOD FOR THOUGHT…
Loneliness and accountability: group decision making often leads to better decisions, but can also be used by individuals to try to protect themselves from the consequences of bad decisions:
- Which decisions should be efficiently delegated/taken by the Board?
- What are the respective roles of the CEOs and the Board in times of crisis?
- Download the Council on Business & Society White paper “Corporate Governance and Leadership”
- Visit the Corporate Governance and Leadership Forum summary
- View the Edelman Trust Barometer 2016
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