This is a guest post by Cindy Moehring, Founder and Executive Chair of the Business Integrity Leadership Initiative, Sam M. Walton College of Business, University of Arkansas, and the Former SVP, US Chief Ethics and Compliance Officer for Walmart.
Last year, for the first time in almost twenty years of tracking, more CEOs were dismissed for ethical lapses than for any other reason, according to the PwC’s Strategy& 2019 annual report on CEO Success. Certainly, the “#MeToo” movement contributed to this statistic, but so did other issues such as fraud, bribery, insider trading, environmental disasters and inflated resumes, according to the report. In this age of transparency, with stepped-up societal pressure on issues such as sexual harassment and an increased focus on governance by regulators, boards of directors should take steps to reverse this concerning trend.
Aside from the obvious strategic and operational disruption caused when a company replaces a CEO unexpectedly, a CEO departure for an ethical lapse is often a sign of larger problems. In addition to setting a poor tone at the top, it is often indicative of a widespread, weak ethical culture throughout the company and could be the tip of an iceberg. This leads to lack of employee engagement and undesirable turnover, something no company can afford if they want to stay on top of their game.
Fortunately, there are best practices that boards can employ to ensure a company’s ethical culture remains strong.
1. Boards of directors should set a company’s ethical culture above the CEO level.
Boards should ensure their companies have robust ethics and compliance education, and then take the same periodic training that is required of all employees. Boards should also set aside time on their agendas to periodically discuss emerging ethical issues, such as the diverse ethical risks that can be posed by using AI systems.
They should also take time to learn from the ethical missteps of other companies and discuss with management what controls are in place to ensure the same issues don’t arise for them. Most importantly, though, a board should ensure that its engagement on ethics is visible to the employees of the company.
PRO TIP: Board members should periodically engage with their company’s employees at internal company venues and discuss the board’s involvement on ethics and the board’s personal relationship with the company’s chief ethics and compliance officer (CECO). These steps signal to employees that everyone is accountable, including the CEO.
2. The board committee responsible for overseeing ethics and compliance (usually the audit committee), should ensure the company has an established set of criteria for the types of alleged misconduct that must be reported and explained to the board.
This level of board oversight goes beyond just the overall ethics and compliance program metrics being reported to the board by the company’s CECO. Among other things, the criteria for reporting to the board should include all officer allegations. Boards should ask about trends on these reportable allegations. For example, in addition to overall numbers and substantiation rates, boards should inquire about the trends by geography and department.
PRO TIP: Be wary if there are no officer allegations. Often it is indicative of a closed culture that doesn’t promote speaking up about leadership concerns. Then go deeper and discuss with the CECO the main findings, root causes, accountability for individuals involved in substantiated cases, and remediation steps taken by the company to ensure issues don’t repeat themselves.
3. Establish a personal relationship with your company’s CECO.
Set the expectation that direct and immediate notification by the CECO to the audit committee chairperson is required for certain significant allegations, such as credible allegations against the CEO and other C-suite executives.
PRO TIP: Importantly, the audit committee should also meet with the CECO in private session during committee meetings. This private setting allows for an unvarnished, candid conversation about any issues of concern, including potential concerns with the CEO or other C-suite executives.
4. Inquire about company policies, and whether they are applied consistently.
Be sure the ethics and compliance program has teeth and that substantiated allegations are being handled consistently, regardless of the level of the employee. For example, when significant cases are substantiated against senior leaders, boards should ask the following types of questions:
- How do similar cases for lower-level employees compare – were those employees terminated?
- If a matter is investigated and substantiated but not deemed terminable, then how was the senior leader held accountable – was there a reduction in compensation and/or did it affect their performance rating?
This type of oversight and probing can help elevate the effectiveness of a company’s ethics and compliance program.
5. Ensure that board committees are sharing pertinent information early and often.
Issues of concern with the company’s most senior leaders should be shared between the audit committee and nominating and governance committee. That way, time is not unnecessarily spent discussing a leader’s promotional opportunities when their next step may be out of the company.
PRO TIP: Sharing pertinent information early and often will allow for timely succession discussions if and when a leader must be replaced for unethical behavior.
Boards of directors have the ability to influence a company’s ethical culture by setting the tone at the highest level. If boards follow the steps outlined above they can positively raise the profile of their company’s ethical culture and reduce the likelihood that CEO and C-suite turnover will occur.
Cindy Moehring is Founder and Executive Chair of the Business Integrity Leadership Initiative, Sam M. Walton College of Business, University of Arkansas, and she is the Former SVP, US Chief Ethics and Compliance Officer for Walmart.