By Steve Treagus
EverFi Legal Editor
A study by PwC business consulting firm Strategy & found that the world’s largest publicly held companies have been terminating CEOs more frequently for ethical lapses. Globally, the years 2012-2016 saw a 36% increase over 2007-2011 in CEO misconduct-related terminations.
The larger the company, the more likely a CEO would be fired for ethical lapses (from a rate of 7.8% of all dismissals in the largest quartile of market share, to a rate of 3.2% in the smallest, in 2012-2016).
Examples of Ethical Lapses
Ethical lapses don’t necessarily signal that leaders or companies lack integrity as whole, but they do indicate serious and harmful errors in ethical judgment. Examples of ethical lapses include business-related misconduct such as fraud, bribery, insider trading, and environmental disasters involving negligence or recklessness.
They also include personal ethical misconduct, such as inflated résumés and sexual indiscretions. (We’ll zero-in on the economic consequences of personal misconduct in Part II of this series.)
Increased Accountability for CEOs
As the study’s authors are quick to point out, this does not necessarily mean that CEOs are less ethical now than they were in the past:
Our data cannot show — and perhaps no data could — whether there’s more wrongdoing at large corporations today than in the past. However, we doubt that’s the case . . . our data shows that companies are continuing to improve both their processes for choosing and replacing CEOs and their leadership governance practices — especially in developed countries.
What it does mean is that boards of directors hold CEOs more accountable now, largely due to these 21st century factors:
- Increased public suspicion of corporate behavior;
- The amplifying effects of the 24/7 news cycle and of wrongdoing’s digital footprint on social media;
- Increased legislative, regulatory, and enforcement actions; and
- Greater global exposure to supply chain and emerging market-related risks.
All of this points to what the study’s authors call “a sea change in accountability” over the last 15 years. In the late 20th century, by contrast, corporate misconduct almost never resulted in CEO turnover: “criminal prosecutions of corporate officers were extremely rare . . . financial penalties tended to be modest . . . and media attention was often limited to the business press,” the study’s authors observe.
Systemic Recommendations for Ethical Leadership
The study concludes with systemic recommendations for ethical leadership. After all, CEOs don’t turn “bad” in a vacuum. They are both influencers in, and influenced by, the social and corporate cultural circles they are part of.
So, the recommendations focus on what leaders can do on a company-wide level to avoid unethical behavior by any employee and by the corporation itself:
1. “Organizational and external influences.”
Social pressures such as unrealistic performance targets create bigger problems than financial incentives. Leaders should make sure that they have appropriate structural checks on misconduct. This includes an open-door policy that encourages employee dialogue about both good and bad news (such as difficulty meeting targets). That way, problems can come to light before they turn into ethical lapses.
2. “Business processes.”
Minimize opportunities for bad behavior by assessing your company’s risk exposure, by shoring up compliance programs for effectiveness, and by ensuring that employees have ways to report misconduct and know how to do so. [Our research shows that employers should give workers multiple avenues for internal reporting, not just a whistleblower hotline.]
3. “Individual ethical decision making.”
People convince themselves to act unethically by telling themselves that it’s okay to break the rules (rationalization). Leaders who seem to implicitly or explicitly condone rule-breaking influence company culture and make it easier for employees to rationalize cutting corners themselves.
Ethical leaders should clearly and effectively communicate their company’s ethics and compliance policies through employee training. They should drive ethical engagement from the top by example (including by holding themselves accountable and admitting mistakes) and seek out expert guidance when facing ethical dilemmas.
In addition to these recommendations, I would add that ethical managers value evidence over opinion (expert or otherwise) in assessing whether their company’s ethics and compliance program is working. Although it’s human nature to hold our own opinions in high esteem, doing so often leads to ethical lapses. Ethical leaders rely on the facts first.
Note: This is Part I of a three-part series on the consequences of leadership misconduct. Part II will examine the economic impact of personal indiscretions by corporate leaders. Part III will wrap up by looking at situations in which leaders and workers are more likely to cheat, through the lens of recent enforcement actions and empirical data.
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