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More CEOs are getting forced out for ethics violations

May 22, 2017
Borderless Leadership

For former Yahoo chief executive officer Scott Thompson, it was an incorrect résumé, revealed by an activist shareholder, that initially prompted the company’s board to sever ties with him in 2012.

In 2015, former United CEO Jeff Smisek parted ways with the airline in connection with a federal probe into whether it improperly tried to sway officials at the Port Authority of New York and New Jersey. Last year, LendingClub ousted founder and CEO Renaud Laplanche amid faulty lending practices and conflicts of interest at the peer-to-peer lender.

If it seems like more CEOs are getting cast aside amid ethical blunders or corporate scandals, they are. According to a new report on CEO succession from Strategy&, PwC’s strategy consulting business, the percentage of CEOs getting pushed out for questionable behavior — lapses including environmental disasters, insider trading, résumé fraud, accounting scandals and sexual misconduct — is up over the past five years.

While the number is small — there were only 82 CEOs ousted for scandals among the 2,500 largest public companies over the past five years — dismissals for bad behavior between 2012 and 2016 rose from 3.9 percent in the prior five-year period to 5.3 percent in the last five, a 36 percent increase. In North America and Western Europe, they rose from 4.6 percent of all successions to 7.8 percent; in developing markets like Brazil, Russia, India and China the figure increased from 3.6 percent to 8.8 percent of all successions. (Because companies are often elusive with their reasons for a CEO’s departure, and rarely outright say a CEO is “fired,” Strategy& says it uses news reports, independent sources and on-the-ground knowledge to decode the cause of each executive change.)

The numbers may be small, but they come at a time when forced turnovers are actually on the decline, the report found, making the scandal-related departures an even greater share of CEO ousters. Globally, about 31 percent of successions between 2007 and 2011 were because of the CEO being pushed out — whether for scandals or ethics lapses or more garden-variety performance problems or power struggles with the board. Over the past five years, meanwhile, that number has shrunk to only about 20 percent.

“We’re going through this cleansing out period where you can’t hide it anymore,” said Gary Neilson, a principal at Strategy&. For boards, he says, “there’s not much willingness to deal with distraction. It’s bad for companies. They want to get on with it.”

Neilson says the rise in ousters over ethical issues is not because of more bad behavior or more corporate scandals. Indeed, there may even be less, as boards become more focused on succession planning and face greater scrutiny from both investors and the public. But at least five factors are making it less possible for CEOs to skate through unscrupulous company behavior unscathed, Neilson says.

One is that the public has grown more skeptical and less forgiving when it comes to bad behavior, and consumers’ public outcry combined with the threat of activist investors has prompted boards to react more often. The financial crisis “stimulated a lot of distrust, frankly,” he said. “With activists, you as a lead board member don’t want to be subject to them. If you don’t act, someone will act for you.”

That’s compounded by two other factors: a digital communications world primed to expose bad behavior that might have gone unnoticed in the past, as well as a 24/7 news cycle that acts as a megaphone, particularly for negative stories that catch fire on social media. With emails and text messages, Neilson said, it’s more common for boards that “you have a smoking gun,” he says. “It’s more provable. You can’t hide from it. And there’s this huge capacity for news that might not have met the [newsworthy test] in the past.”

Meanwhile, Neilson says that increased regulation and governance requirements, as well as more business being done in emerging markets where there is more unethical behavior, have added to the higher numbers.

That was one reason that larger companies — which are more likely to be global in nature, or come under fire from consumers on social media — were more likely to see a forced turnover in the wake of ethical violations than smaller firms, the study found.

Another finding: CEOs who hold both the chairman and chief executive’s title — resulting in the potential for less oversight — were more likely to be involved in a forced turnover than those who were only CEO. The study found that 24 percent of CEOs who had been ousted and had both titles were dismissed for ethical lapses, while just 17 percent of those with only the CEO title were shown the door because of their behavior.

That would seem to confirm the belief among good-governance experts that splitting the roles is a good idea. “Where there is a separation, they’re getting in front of it,” Neilson said. “It’s not boiling over, or it may not be happening because of this check and balance in the first place. And if it does happen, they’re catching it early.”

By Jena McGregor

Source: Washington Post

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