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Why more CEOs are forced out of office due to ethical lapses, Strategy& Report

Posted on May 22, 2017

The job of a chief executive officer at a large publicly held company may seem to be quite comfortable — high pay, excellent benefits, elevated social status, and access to private jets. But the comfortable perch is increasingly becoming a hot seat, especially when CEOs and their employees cross red lines.

As this year’s CEO Success study shows, boards of directors, institutional investors, governments, and the media are holding chief executives to a far higher level of accountability for corporate fraud and ethical lapses than they did in the past.

Over the last several years, CEOs have often garnered headlines for all the wrong reasons: for misleading regulators and investors; for cutting corners; and for failing to detect, correct, or prevent unethical or illegal conduct in their organization. Some high-profile cases, involving some of the world’s largest corporations, have featured oil companies bribing government officials and banks defrauding customers.

To be sure, the number of CEOs who are forced from office for ethical lapses remains quite small: There were only 18 such cases at the world’s 2,500 largest public companies in 2016. But firings for ethical lapses have been rising as a percentage of all CEO successions. (We define dismissals for ethical lapses as the removal of the CEO as the result of a scandal or improper conduct by the CEO or other employees; examples include fraud, bribery, insider trading, environmental disasters, inflated resumes, and sexual indiscretions.

Globally, dismissals for ethical lapses rose from 3.9 percent of all successions in 2007–11 to 5.3 percent in 2012–16, a 36 percent increase. The increase was more dramatic in North America and Western Europe. In our sample of successions at the largest companies there (those in the top quartile by market capitalization globally), dismissals for ethical lapses rose from 4.6 percent of all successions in 2007–11 to 7.8 percent in 2012–16, a 68 percent increase.

A Sea Change in Accountability

How much has the level of CEO accountability risen in recent decades? In the late 20th century, even the most serious, large-scale, and widely publicized cases of corporate misbehavior rarely led to dismissal of the CEO.

Criminal prosecutions of corporate officers were extremely rare.

Financial penalties tended to be modest, ranging from the tens of millions to the low hundreds of millions of dollars, and media attention was often limited to the business press.

Today, the chief executive of a company caught up in a major scandal is often dismissed quickly. And it is not uncommon to see multiple criminal indictments of corporate officers.

The financial penalties that companies face have rocketed — in some recent cases, into the tens of billions of dollars. And media attention, from online outlets, cable television channels, and the relentless glare of social media, is omnipresent.

Five tectonic shifts have forged this new era of CEO accountability to include: public opinion, governance regulation, business operating environment, the rise of digital communications and the 24/7 news cycle.

Build a Culture of Integrity

Large organizations undoubtedly face a large and expanding spectrum of threats and issues. And the reality is that CEOs, senior leaders, and board members will increasingly be held accountable (often personally) for ethical lapses that occur anywhere in their organization.

So how can leaders limit their exposure to potential threats?

From our own experience in advising companies that have experienced ethical lapses, we have observed that the single most important force for preventing fraud and other misconduct and withstanding regulatory scrutiny is your corporate culture.

An effective culture must clearly state the company’s values of ethics and integrity, but it also needs to ensure that every team — and every employee — understands the critical few behaviors that will enable them to embrace and live those values in the work they do every day.

To reinforce those behaviors, the company’s organizational ecosystem must address the underlying conditions that are always present when employees engage in illegal or unethical acts, by

(1) ensuring that the company isn’t creating pressures that influence employees to act unethically;

(2) making sure business processes and financial controls minimize opportunities for bad behavior; and

(3) preventing employees from finding ways to rationalize breaking the rules.

This is an extract from the report “Are CEOs less ethical than in the past?” by Per-Ola Karlsson, DeAnne Aguirre and Kristin Rivera from Strategy&. To read more about the report go to http://bit.ly/2q8rvJN.