Theory-Y Ethics for CEOs

Theory YFrank FabelaBy Frank Fabela
From ethikos

The biggest leverage in a corporation affecting ethical outcomes comes from the CEO. As the ancient saying goes “A fish rots from the head down.” Thus, there is great importance in dealing with ethics and compliance from the top decision-makers, namely the Chief Executive Officer. But CEOs become isolated. It can get lonely at the top and yet the buck stops with the CEO. So what influencing forces are there which act on a CEO to bring about ethical decision-making?

Influences to CEO Ethics

Certainly, there are staff members in the compliance and ethics department who work to help ensure good and proper practices. Many of these efforts, though, are spent at levels below the CEO’s grade. This commentary will focus on influences to the CEO directly and therefore, compliance officers would only have such an impact to the degree that they interact directly with the CEO. And the problem exists that anyone else in the company, including a compliance officer, is below the CEO and subject to the choices made by the CEO. While a compliance officer may make recommendations and offer opinions directly to the CEO, the CEO correctly does not see the compliance officer at his or her own level and may or may not follow the guidance of an employee below them. They clearly have different jobs.

Another influencer to the CEO would be a whistleblower. Certainly if poor ethical decisions have already been made, the CEO would be interested in minimizing public exposure. Thus the CEO may seek to squelch a potential whistleblower by placating the whistleblower with actions that may demonstrate a move toward remedying the wrong. But that is after the fact and the wrong would have already been committed. Proactively, the CEO may be influenced by the threat of a whistleblower, if an unethical choice were to be made. And strengthening the potential whistleblower’s position is what Sarbanes-Oxley seeks to accomplish … to level the playing field and bring the CEO (or other manager) down to a less powerful or lofty position.

Other influences to a CEO’s actions are built into the organization’s structure. These are the policies and procedures … much of what compliance professionals work on to establish good and secure rails to run on that lead to good behavior. These guidelines include all the regulations that are mandated, adoption of new legislation, reporting, transparency, and even established corporate culture. Each of these factors may influence the CEO but to a large extent they guide the rest of the organization and the CEO still has wiggle room at the top to set the tone and ethical culture, not always positively.

All these influences act on a CEO’s decision-making in a way that implies that the CEO needs to be threatened, held accountable by law and otherwise strong-armed into proper ethical choices. This is not far from the motivational theory of Douglas McGregor that he calls “Theory X.” Theory X from a managerial context assumes that employees will tend toward needing to be controlled, tightly directed and led in an authoritarian style. This premise does not hold up well when the final authority is the CEO. A CECO who reports directly to the board or General Counsel rather than the CEO still influences the CEO in a Theory X manner. Attempts to influence a CEO using policing and punishment in a Theory X world is an uphill battle. But there is another alternative.

Theory Y Alternative

McGregor’s Theory Y holds that people naturally apply self-control and seek responsibility. In other words, they tend toward doing the right thing. If this premise applies to CEOs alike, we should expect that most CEOs would be driven by their own personal morality to do the right thing. The biggest influence to a CEOs decision is his/hers own internal drive. It is why the integrity of leaders is so important and why all other efforts can so readily fail to bring about an ethical outcome when a leader’s own morality demonstrates poor (we could say Theory X) behavior.

Just as any manager with a Theory Y mentality leads their employees in ways that promote the employee’s own initiative and responsibility, so too ought we design the means for CEOs to achieve responsible decision-making. This can only come from critical thinking and a deep thought process on the part of the CEO. But when it’s lonely at the top, whom does a CEO turn to for stimulating thought, to bounce ideas off of and to vet a pending decision? CEOs at best are accountable to their boards so why would a CEO risk bringing questionable issues before their own board that could have a negative impact on the future of their job? Neither can the CEO bring the toughest issues down to their staff for an unbiased, open debate.

But there is an underutilized resource that serves this very need. For decades, some organizations offer facilitated private CEO peer groups where CEOs meet regularly, typically once per month, with their CEO peers from other organizations. These peer advisory boards serve to bring together CEOs from different organizations that do not compete with each other and have no interest in each other’s organization. Their sole purpose is to help each CEO become the best CEO that he or she can be. The fellow member CEOs offer more options from which to make better decisions and get better results. It is the purest form of input and suggestion that a CEO can get. These peer groups operate under strict codes of confidentiality, which enables the CEO members to speak freely and openly with their peers about their challenges and toughest decisions.

Private Peer Advisory Boards

Unlike industry trade associations, members of peer advisory boards are free to share their most intimate and ethically critical issues with each other without the fear of repercussion from a competitor seizing an opportunity. In the best of these groups, a professional facilitator (usually a former CEO) chairs the group meetings to guide the members in processing their individual issues with the group’s help. Done right, a member CEO will have accountability to the rest of the group for action commitments made as a result of an issue of his or hers which the group processed. In practice, this accountability is as strong as it gets for CEOs. And with a recurring, monthly meeting, the accountability is renewed regularly. While there is no binding regulation, policy or threat of whistleblowing, professionally facilitated peer advisory boards operate in the fullest sense of McGregor’s Theory Y motivational means to influence CEOs toward good and ethical decision-making.

Compliance efforts tend to focus more on motivating good behavior from a Theory X approach and work mostly from the C-suite on down. To impact an organization effectively, we cannot leave the CEO behind and presume that he or she has all the tools at hand for leading ethically in the uniquely CEO-level decisions that they must make. Adopting a Theory Y approach to motivate CEOs’ ethical behavior necessitates us nurturing a peer environment for them to wrestle with and work out their dilemmas. Private peer advisory boards serve this function and address the needs of the CEO directly and the ethics needs of the organization as a result.

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Frank Fabela ( is a management consultant, adjunct instructor of business ethics at the University of La Verne, CA and chairs a Vistage CEO peer group.


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