News & Analysis

Corporate Boards Need to Worry About Risky Business

CXO

In the past we have waxed eloquent about how faulty business decisions have eroded stakeholder value and taken proven business down. The story of Thomas Cook and stories of unethical practices that wrecked reputations are too recent to be forgotten in a hurry as these stories had several lessons for C-suite officials to imbibe for the future.

Globally there have been several such upheavals be it the resignation of Overstock.com CEO Patrick Byrne on grounds of allegedly carrying out political espionage or that of WeWork CEO Adam Neumann’s tryst with weed on board a private jet, the fact is that Boardrooms have a larger problem of overseeing the CXOs risky behavior outside of the business.

Closer home we had a whistleblower raising up a storm inside Infosys, once considered the paragon of good governance, the issues leading to the PMC Bank crisis, not to speak of the suicide of V G Siddhartha of Café Coffee Day that raised the hackles of industry against the government’s own brand of muck-raking via tax-related searches and seizures.

Personal misconduct got added to the long list of misdemeanors that cost CXOs their jobs in recent times though one has only to hark back at history to list out cases of sexual harassment and other behavioral impropriety doing as much. A study conducted by EY published in Livemint claimed that 57 per cent of employees in Indian companies reported that senior managers were ready to ignore dubious actions by employees to achieve targets.

Challenger, Gray & Christmas, a Chicago-based outplacement agency that has tracked CEO departures since 2013 says there was a spike in late 2017 in the United States as part of the #MeToo movement on social media. “People are paying attention to personal conduct of CEOs in a way they didn’t do a generation ago because of social media,” says an article published in Strategy+Business, quoting the Vice President of the company Andrew Challenger.

Apart from the obvious risk to their reputations, companies are now turning wary of CEOs with messed-up personal lives as they fear that not having a steady life outside of the job could lead to bad decisions and higher risk while dealing with operational matters of the company, especially in areas of strategy, finance and people management.

The author of the article Michele Wucker, a Chicago-based consultant and author, feels that while stakeholders expect CEOs to be risk takers, it may also be the reason why many of the fly under the radar when it comes to personal wrong-doing, at least not until they’re caught with their trousers down, both literally and metaphorically.

However, post the #MeToo aftermath, Boards seem to be perceiving things rather differently, seeking consistent behavior from the CXO-level in terms of good judgment not just in matters related to the company but also those concerning their personal lives.

Michele Wucker quotes a research conducted by executive search firm Russel Reynolds from 2016 to suggest that the best CEOs not only score high in embracing risk, but also on judgment and the quantum of self-promotion. The research was conducted based on psychometric tests of some 6,000 CEOs across the United States.

She goes on to argue that someone taking risks, but tempered by other personality traits mentioned above would be the ideal choice for the leadership role. Wucker warns that the Board needs to keep close track of personal behavior and attitudes of CEOs and other members of the leadership team, a key one being narcissism.

A sense of self-importance and entitlement along with a need for admiration and a lack of empathy — and overconfidence, two factors that studies show tend to increase risk taking and decrease judgment, she says quoting management scholars Arijit Chatterjee and Donald C. Hambrick who found that such people tend to pay more attention to objective performance measures while thriving on social praise resulting often from big wins or major losses.

The article quotes another piece of research from the University of Chicago Booth School of Business suggested that traffic violations, domestic violence and such behaviour are related to the CXOs’ tendencies to take liberties with financial and securities reporting. Incidence of fraud were higher in companies where senior executives indulged in questionable behaviour off the job.

All of this brings up the fact that the Boards need to keep a closer track of the leadership team who are entrusted with carrying the vision and mission of the enterprise forward, albeit in a manner that ties in with the core values and principles of the founders and the stakeholders.

Unless the Board of Directors wake up to this new challenge, the era of dishonourable exits for CEOs and other members of the leadership team is likely to continue.

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