Boards Can Hold the CEO Accountable but Do They Have the Will?
Behind every bad-behaving and ethically lapsed chief executive usually stands an ineffective board.
For every Les Mooves, there is a CBS board not holding the CEO accountable. For every Elizabeth Holmes there is a Theranos board looking the other way. For every Travis Kalanick, there is an Uber board willing to act as enabler.
Or worse, the board is a willing participating in the coverup.
Why do so many boards get this wrong?
"It's a club, everybody gets along. Over time they form close relationships with leadership," said LRN's Susan Divers, who pointed out many boards have served in their roles for years, and often serve on multiple boards, only broadening the network of 60-something white men that dominate these positions.
"It's a country club atmosphere, very chummy," said Divers. "It turns their world upside down when they have to wrap their mind around the fact the CEO was behaving out of control."
It’s surprising how little some directors know about the organization they are serving, said Judy Phair, president of Communications. Some board members may be appointed for a variety of reasons, and different organizations have different policies and procedures governing the selection of members.
"Some board members may be friends of the CEO or other executives. They may be major donors, in the case of a nonprofit association, college or university," said Phair. "They may have vested interests that prompt them to cling to the status quo."
So what are the rules for addressing CEO misbehavior after it's be proven? How fast should a board act?
Depending on the nature of the misbehavior, a board’s actions may have legal implications and directors can be held legally responsible for failure to act, said Phair. They can also be sued for not calling out a CEO for misbehavior.
"Public confidence and trust are another critical factor," she said. "They begin to erode from the moment the misbehavior is proven, and that erosion is costly on many fronts."
Adonis E. Hoffman, chairman and chief executive of Business in the Public Interest, a strategic research and communications firm, said the fiduciary duty of directors mandates them to "look at the actions of CEOs with a certain detachment and act in the best interest of the corporation, the enterprise, the shareholders."
After proven bad behavior, he said directors are bound to determine if the CEO can continue in his or her role, or if continuation is detrimental to the company. Such weighty responsibility means directors should always act prudently in exercising their duties.
"The rule of thumb is to proceed apace, not acting reflexively, but also not delaying," said Hoffman. "There is also a duty to provide a measure of due process to the CEO, and once that has been exhausted, then the board has a duty to act readily."
Because information--true or not--spreads lightning-quick in today’s social media world, waiting to take action no longer is an option, said Phair. The trick, she said, is to determine just how extensive that first response should be.
Divers said the #MeToo movement starkly showed in a way all people could understand, that boards drop the ball often when the CEO or other top exec is involved.
For example, in the case of CBS, the board ignored complaints about Mooves' conduct. The board at Theranos failed to question Holmes after it became apparent there were problems with the claims of her company's blood-testing procedures and capabilities. Uber's board knew of the company's toxic culture but did nothing.
"It's clear some boards are ineffectual when it comes to top management," said Divers.
Yet, this is where a board is needed to stand at its strongest, she said, since nothing is worse for the business than establishing a culture where C-suite executives and top performers are not held to the same standards as everyone else.
"Everyone knows if the CEO, the top performers, get away" with things, said Divers. "That sets the tone, no matter how much training is conducted, how many times the code of conduct is rewritten. You can't have two tiers. It doesn't work from an ethical point of view."
Very often directors and companies have so much invested in the CEO that it is difficult to change leadership or direction, said Hoffman.
"A great deal of planning, resources and energy goes into the investiture of a CEO that removing that person means the process has to begin anew," he said. "Even for the best prepared company, this can be draining, not to mention damaging to shareholder value and reputation."