How to avoid having a rogue CEO running your company

With a rogue CEO, Ryan Air ought to be going broke

The airline’s high profile boss is not a crook. But without doubt he is publicly contemptuous of those whose sole priority is a cheap ticket. Having inconvenienced three quarters of a million paying punters by badly handled mass cancellations, his reactions are those of a rogue CEO.

The airline should be on the ropes.  Nothing of the sort. The company’s shares hardly moved, and macho boss O’Leary seldom fails to look upbeat. He makes little attempt to hide his distaste for paying punters.

“…Mr O’Leary’s instinctive contempt for his customers and employees appear to be intact—and ingrained in Ryanair’s corporate culture.”
FT  30th September 2017

O'Leary with jet plane between kneesYet he is not alone. Tech, automotive, financial services and airlines have all experienced rogue CEOs with similar disdain for their customers. 

Conventional logic says the market will punish those who despise their customers. Or treat them as non-rational beings. Yet reality defies this reasoning.

Sports Direct for example, should long ago have reformed in the face of public ire. Yet its ineffectual chairman remains in situ. Thanks to support from the majority shareholder, a rogue CEO. He prefers a passive colleague in the chair to anyone more robust. Seemingly immune to public disapproval, the firm lurches from one anti employee action to another.

Or take Wells Fargo. The bank’s leader was “CEO of the year” by Morningstar. A year later he had been forced to resign amid revelations the bank had swindled many thousands of its previously loyal customers. Even so this rogue CEO will still collect pension accounts and stock valued at $134.1 million.

These logic defying stories suggest ethics in business hardly matter. Yet the reverse is true. There is clear evidence that in the longer term, ethical firms do far better financially than their less ethical competitors.

The same for a rogue CEO

Much the same applies to the behaviour of CEOs.  A 2010 study that crunched all the numbers concluded:

“… managerial indiscretions are associated with a significant decline in firm value and operating performance. At the revelation of an indiscretion, there is an immediate 1.6% loss in shareholder value that translates into an average loss of $110 million in market capitalization. When committed by the CEO, the loss in shareholder value is 4.1% or $226 million.”

Wherever it occurs, unethical leadership or rogue CEO behaviour damages the bottom line. 

Measures such as low morale, weak levels of engagement or poor public perceptions do their damage behind the scenes.  When it surfaces though,  it portrays a dysfunctional corporate culture that savvy investors avoid. They understand such companies face an increased risk of litigation, expensive enforcement actions and costly damage to reputation.

According to another study, this time by PWC the world’s largest publicly held companies have begun taking notice of this evidence. For example, a rising number of CEOs firings stem from ethical lapses.

The larger the company the more likely a CEO will be fired for ethical lapses. These range from shady business dealings to personal indiscretions such as:

  • Interest rate manipulation and money laundering
  • Abusive sales practices
  • Sexual harassment
  • Improper relations with employees
  • Resume fraud  

Consequently, some firms have started paying their CEOs based on soft factors based on to ethics. These may use the results from culture surveys, internal audits, ethics hotline use and response data, completed investigations and the outcome of ethics complaints.

Real business leaders demonstrate integrity, provide meaning, generate trust, and communicate values. Relying more on soft skills than hard analytics, or more easily measured financial performance,  they energize their followers.

They push their people to meet challenging business goals. They also attach great importance to developing others’ leadership skills. In more basic terms they know how to move the human heart. This can be difficult for many in business to talk about. “Moving the human heart” can seem flaky and hard for board members to discuss, let alone measure.

Boards much prefer proof of technical skills—engineering know-how, for instance, or marketing wizardry. With that kind of indisputable data boards feel they won’t go wrong in choosing the next CEO. Ethics seems just too tricky.

Yet the impact of the rogue CEOs behaviour can last well beyond the firing of the offender. For example a 2016 HBR study followed through on over 250 news stories in the media. on average. It found media coverage persisted  with references to the CEO’s actions up to an average of 4.9 years after initial occurrence.

Some rogue CEO stories never seem to go away. News items today continue to refer to former American Apparel CEO Dov Charney’s odd behavior of walking around the company’s offices in his underwear. Yet this was was first reported over 10 years ago. As for the now repentant Gerald Ratner, he will probably never escape the rogue CEO statements he made while addressing a conference of the Institute of Directors at the Royal Albert Hall on 23 April 1991.

To sum up: boards should not expect allegations of misbehavior to disappear quickly.

Accountability

In the past, rogue CEOs seldom paid a personal price for their bad behaviour. But in the last two decades accountability has begun to matter more. Most recently the 2017 study by the Rock Center for Corporate  Governance, concluded 

  • Almost half of Americans believe CEOs should be fired (or worse) for unethical behavior 
  • Violations of trust between company and customer are considered most egregious 
  • The public is surprisingly critical of CEOs who engage in “immoral” personal actions

Today’s regulatory environment makes it easier to identify transgressions and bring violators to justice.

list of jailed CEOs

Even so, it’s unclear whether we’re seeing more ethical violations from CEOs than in the past. But the world does seem less tolerant of unethical CEOs and more willing to take action.

“There is a perception that boards are complacent with CEO misbehavior, but when we compare the public’s assessment with what the board actually did, we see that many boards
are very proactive in punishing (either through termination or pay reduction) potentially unethical behavior”
Professor Larcker, Graduate School of Stanford Business School

Shareholder activism and changes in corporate governance for example, have transformed the CEO’s world, especially in Europe and North America. For instance, from 1995 to 2001:

  • Turnover of the CEOs of major corporations increased by 53 percent.
  • The number of CEOs leaving because of the company’s poor financial performance increased by 130 percent.
  • The average tenure of CEOs declined from 9.5 years to 7.3 years.

Standing back from the often dubious data about rogue CEOs there’s now greater emphasis on good governance, including expecting the boss to model good behaviour. 

Life tougher for rogue CEOs

 

In summary life has got tougher for rogue CEOs–see panel.

For example, when Jes Staley, Barclays CEO tried to uncover the identify of a whistle-blower in 2017 all hell broke loose.

He suffered a pay cut, faced demands for him to be sacked and attracted a blizzard of bad personal publicity.

 

 

 

 

Avoiding toxic CEOs has to be a boardroom priority. To reduce the chances of having a rogue CEO here are 12 possible actions to consider:List of actions to prevent rogue CEO

 

 

Sources:

  • R. Walkling The Consequences of Managerial Indiscretions, The Consequences of Managerial Indiscretions Harvard Law School Forum, May 16, 2017
  • Per-Ola Karlsson et al, Are CEOs less ethical than in the past, PWC, May 15 2017
  • S. Treagus–, Why CEOs with Personal Integrity are better for business, Everfi, August 10th 2017
  • 5 Most Publicized Ethics Violations By CEOs, Forbes, Feb 2013
  • ‘CEOs engage in unethical behavior’, Trends, November 24 2013
  • R. Christopher Small, Suspect CEOs, Unethical Culture, and Corporate Misbehaviour, HLS Forum on Corporate Governance and Financial Regulation, Tuesday, March 24, 2015
  • Why CEOs Fall: The Causes and Consequences of Turnover at the Top
  • C. Lucier, Why CEOs Fall: The Causes and Consequences, Columbia Business School, July 15, 2002 
  • W. Bennis & J. O’Toole, Don’t Hire the Wrong CEO, HBR, May/June issue 2000
  • Punishing CEOs for bad behavior: 2017 public perception survey, Rock Center
  • Larcker and B. Tayan, We Studied 38 Incidents of CEO Bad Behavior and Measured Their Consequences, HBR June 2016

 

 

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