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At Large: Strong CEOs with weak boards are the biggest compliance risk

The current troubles at McDonald’s Corp. — involving allegations that former CEO Steve Easterbrook had improper relationships with several employees, and that he and the HR department engaged in a mutual cover-up of improprieties — have again revealed how corporate boards are often overwhelmed by charismatic and strong-willed CEOs.

At McDonald’s, a tip to the chair of the board eventually triggered an investigation into Easterbrook, which resulted in his leaving the company. But it appears that for years, he and the head of HR (whom he appointed) may have enabled the alleged misconduct to occur under the nose of McDonald’s board of directors.

McDonald’s board includes ten current or former CEOs from some of the world’s best-known industrial and financial organizations. Why did it take them so long to discover the alleged problems in the C-suite?

And, for our discussion today, why does the scenario of a strong CEO and weak board repeat itself in scandals over and over again?

Corporate boards can be less than the sum of their parts. This is one of the business world’s great ironies. Strong CEOs who pack their boards with eminent personages sometimes create the weakest boards.

Enron CEO Jeff Skilling assembled a board that included 15 external members, and not a dud among them. There was a former dean of the Harvard law school, two well-known medical doctors, a university president, a former member of the British Parliament, several prominent lawyers, and multiple Harvard MBAs. Together the board members served on at least 130 other boards of for-profit and non-profit organizations.

At Theranos, the blood-testing startup once valued at $9 billion before it collapsed amid allegations of fraud, CEO Elizabeth Holmes attracted a roster of illustrious directors. They included two former U.S. Secretaries of State (Henry Kissinger and George Shultz), a former Secretary of Defense (William Perry), two former U.S. Senators (Sam Nunn and William Frist), the former CEO of Wells Fargo (Richard Kovacevich), and several other luminaries.

The Boeing board that watched now-fired CEO Dennis Muilenburg mishandle the Boeing 737 MAX disaster had plenty of star power. It included three former U.S. ambassadors, two retired Navy admirals, and current or former corporate chiefs from the medical and biotech sectors, electric utilities, air carriers, insurance companies, and private equity firms.

So, here’s the question: How can rooms full of such impressive and accomplished people morph into weak and ineffectual boards of directors?

Board members are full-time professionals who become part-time amateurs. It’s a strange alchemy. Through financial inducement, flattery, or some other weird process, great individuals assemble in boardrooms and . . . do nothing. Is it because top-level professionals with specialized expertise accept board seats for which none of their qualifications and experience are relevant? What would two former Secretaries of State contribute to Theranos, a blood-testing company? What would three former ambassadors contribute to Boeing, an engineering company? What relevant skills and experience did two medical doctors contribute to Enron, an energy services company? Each of those individuals excelled in their fields. But did they possess the knowledge and skills needed to represent shareholders?

Investors say they want strong boards. But do they? Steve Jobs, Bill Gates, Jeff Bezos, Elon Musk, Mark Zuckerberg. They created enormous wealth for their investors. Those investors may say they always look for strong boards. Indeed, good governance is likely a real factor in their investing decisions. But the first goal of investors — of shareholders — is to make money. Investors place bets not on boards of directors but on brilliant CEOs who typically dominate their boards. I am unequivocally not suggesting that Messrs. Jobs, Gates, Bezos, Musk, and Zuckerberg led or will lead their companies into compliance problems. But, companies with CEOs who dominate their boards are vulnerable to compliance blow-ups. That’s the lesson from Enron, Theranos, McDonald’s, and Boeing.

Does a strong board make a strong company? Could an assertive board do a better job guiding the company than a powerful CEO and his or her hand-picked C-suite? It seems unlikely. Yes, a strong board could bring stability to an organization. But could it bring vision, adaptation, and innovation? I doubt it. Committees are good at steadying the ship, navigating in straight lines, and keeping things the same. Strong CEOs (strong people from every field, for that matter) do the opposite. They bring change. That’s where wealth creation comes from.

Can strong CEOs and strong boards co-exist? Are there examples of companies where the CEO is self-confident and capable, but also humble enough to nurture a strong board of directors? Five years ago, the Harvard Business Review published a short posthumous article by Liam McGee, the former chair and CEO of the Hartford insurance company. Titled “CEOs, Stop Trying to Manage the Board,” the article admonished all corporate chiefs to develop strong boards. McGee called it “a better approach.” He said a CEO can work “in partnership with directors without sacrificing his or her authority — and thereby accomplish far more than is possible with an arm’s-length relationship.”

I suspect CEO McGee checked his ego at the door. Instead of competing with his board or playing hide and seek, he apparently spent his working life trying to create a better company. To do that, he knew he needed to enlist the board into a true partnership.

I admire Mr. McGee’s strength and his vision. In his “better approach,” there’s a hopeful note for both investors and compliance officers.

Those are my thoughts. As always, yours are welcome.

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5 Comments

  1. Thanks, Richard, for pointing out this anomaly. I would start with Lord Acton’s observation, that power tends to corrupt and absolute power corrupts absolutely. Few people in modern society are more powerful than corporate CEOs.

    I think one of the key elements is not simply to look at the board, but to look at how compliance programs are designed. Recently I posted a note on LinkedIn about the 3 greatest failures in compliance programs:

    “In Murphy, Policies in conflict: Undermining corporate self-policing, 69 Rutgers U.L. Rev. 421, 468 (2017), http://www.rutgerslawreview.com/wp-content/uploads/2017/07/Joseph-Murphy-Policies-in-Conflict-69-Rutgers-U.-L.-Rev.-421-2017.pdf I highlighted 3 weaknesses I believe are the most dangerous.

    1. Senior executives. Not addressing company executives as the highest risk in the company. Too often the focus is on the workers instead of the leaders. But the leaders cause the most problems.
    2. CECO. Chief ethics and compliance officers being underpowered, disconnected from decision making, and not independent. If the CECO lacks power and independence, how can the program be effective in addressing high-level misconduct?
    3. Incentives. Not recognizing the power of incentives. Incentives drive conduct. Ignore them and you are missing a central cause of misconduct and a driver of the culture.”

    The senior execs, and especially the CEO, are the greatest risk. And to address this, one key step is having a strong CECO who is beholden to and reports directly to, the board. There is no guarantee that any one step will prevent misconduct, but these two are key. Another step I would recommend for all boards is to recruit as board members a CECO from another company (a real CECO, not a general counsel with the nominal title). Compliance & ethics professionals know about the need to challenge and dig in, and not to accept things at face value.

    On the incentives piece, have the board’s compensation committee include in the factors it considers the CEO’s commitment to the company’s values and the compliance and ethics program. That committee would get important input from the CECO.

    I never believe in handwringing as a response to challenges. We have been complaining about boards for years (when I started practice they were dismissively called “the parsley on the plate.”) Let’s design our compliance and ethics programs so they at least have a chance of addressing executive misconduct. And let’s recruit compliance and ethics professionals as board members. (So far, I am waiting for someone to call Roy Snell, recently retired as head of SCCE, to be on their board. No calls yet. I don’t think boards really care about this – at least, not yet.)

    Cheers, Joe

  2. Great Blog, I entirely agree with the Richard. Anwar

  3. Very insightful. Thanks for sharing your thoughts. Totally agreed with Richard and Joe’s ideas. If we can really appointed a real CECO in the board then that can help and support to implement an effective ethics and compliance program in the organization.

  4. Interesting perspective. It seems more of US phenomenon to have a CEO who is also the chair of the board and picks the other board members. An independent chair and board is key to ensure good corporate governance and by extensions, compliance. How can you have an independent audit & risk committee of the board, if the CEO is also the chair? In cases where the CEO is a significant shareholder (e.g. Tesla) one must question whether the chair, although a different person, is truly independent. I can’t imagine the Chair of Tesla firing Elon Musk.

  5. Stock markets and investors embrace (and reward) the cult of the messianic CEO (to a greater or lesser extent) in the search for PROFIT – Gates, Bezos, Musk, Buffet, Ma, Welch, Walton, Zuckerberg, Ellison, Ford, Jobs…the list goes on and on.

    When something goes wrong and the usual checks & balances aren’t in place, everyone nods sagely and, using the benefit of hindsight, explains why THEY didn’t embrace the cult (well, not this time…).

    Until shareholders, fund managers, regulators, and legislators address the the issue of the INDEPENDENCE of the Board (esp. the non-execs) from the CEO and executives, we’re in the realm of wishful thinking.

    Entrepreneurial CEO’s, particularly if they are a founder & large shareholder too, tend to rule their companies and boards with an iron fist – only legislation protecting the independence and autonomy of Board members (esp. non-execs) can mitigate this risk.


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