Impact of CEO’s Influence Over the Board on Risk Management – Part 2

When any organisation fails, be it a nation or a corporation, it is the leadership that is the root cause and it is with business failure”.

When the collapse of Enron was followed by that of World.com and a string of other major bankruptcies and scandals around the globe, it became apparent that, worldwide, something was rotten at the core of corporate life. While it is true that aggressive accounting policies and earning management were part of the story, the real reason for the downfall lies elsewhere.

In the many cases of failure of companies, there is an overly dominant Chief Executive Officer, whose own greed, hubris, and personal ambition are capable of bringing about failure. There is always a fine line between the Chief Executive Officer as hero and the Chief Executive Officer as villain. While a Chief Executive Officer as hero can be very successful and grow a giant company with large cash reserves as the world corporate history has recorded, a Chief Executive Officer as villain is capable of destroying shareholder value in a short space of time and lead a company to perdition. One asks a question “How can this happen?”.

When any organisation fails, be it a nation or a corporation, it is the leadership that is the root cause and it is with business failure. It is important to put emphasis that the prime function of the board is to provide oversight and guidance, to monitor the Chief Executive Officer and the entire management’s actions, and to protect the interests of shareholders and all other stakeholders. In order to fulfil this calling, the board must be prepared to challenge and hold the Chief Executive Officer accountable and remove him if he fails to discharge his duties as appropriate. This they are less likely to do if they are financially beholden to the company, or are ethnically, socially and religiously connected or if they are cronies. This begets moral blindness.

When some “independent” non executive directors depend directly on the company for the bulk of their income or when they owe their financial income to the Chief Executive Officer, such a board is compromised and improperly influenced and in fact “led” by the Chief Executive Officer. Such a board is unlikely to be effective as it is accommodating and walks on the path of cross-less leadership.

An essential characteristic of a non-executive director is the independence of mind, which needs to be coupled with a willingness to walk away if dissatisfied. As a matter of fact, few companies would enjoy explaining to the outside world why a non-executive director had to resign.

A dominant Chief Executive Officer becomes a bully and sits upon follies, unable to distinguish between personal ambitions and the mission of the company”.

A weak board can often after a period of seemingly successful management, abdicate power to the Chief Executive Officer whose drive, charisma, and ruthlessness have contributed to earlier success. Lulled and deceived into a false sense of security, for instance, rising share prices and earnings, the board becomes reluctant to challenge the Chief Executive Officer’s judgement and falls into the habit of rubber-stamping his decisions. The board stops scrutinizing detailed performance and risk indicators and be content to accept management figures and explanations without serious questions.

In a very unfortunate situation, even a board of distinguished professionals and businessmen may fail to challenge and question the flowing strategies crafted by a dominant Chief Executive Officer, whose impact has negative ramifications to the business. This ends up in corporate failure.

In the meantime, as the power base of the Chief Executive Officer expands, the dominant Chief Executive Officer begins to behave and act as though he is a legal persona and as if he is his own authority, trusting on his own public relations blindfolded by his inability to distinguish between things that are “holy” and those that are “unholy”, things that are common and those that are uncommon, things that are temporary and those that would endure. A dominant Chief Executive Officer becomes a bully and sits upon follies, unable to distinguish between personal ambitions and the mission of the company.

The Chief Executive Officer’s dominance and centrality describes his power within the corporate ranks and his influence over the board of directors. This dominance occurs when the board permits the Chief Executive Officer to exert too much power and influence over corporate decision making and the board abdicated its responsibility to rein in the Chief Executive who engages in behaviour contrary to the best interest of the company. This dominance can be a vexing corporate governance issue because by the time the problem manifests, it is often after fraud, illegal activity, or mismanagement has caused harm to the company and its stakeholders.

Corporate scandals on record reveal that, in some instances, a strong Chief Executive Officer is capable of manipulating the governance process. Although a board corrupted by the influence of a dominant Chief Executive may engage in abhorrent decision making, social science research has concluded that a charismatic Chief Executive Officer can run the company affairs by sheer force of personality, wearing the attire of infallibility, and the board sadly believing as such. The Chief Executive Officer becomes highly opinionated.

As a consequence, senior management becomes packed with like-minded executives who owe their position to the Chief Executive Officer, and who are very unlikely to challenge him. This compounds the lack of scrutiny and candid debate. The lack of diversity in the management team renders the company crippled and unbelievably naive because checks and balances infrastructure is disabled. Meetings at management level become a liturgy and free will is abridged.

by Amani Mbuja Tuntufye, ERMCP, CERG
Part 3