More CEOs Being Fired for Ethical Lapses, Study Finds

Five trends have contributed to the rise in CEO terminations

By Robert Teachout, SHRM-SCP Jun 5, 2017
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​A new study finds that the number of CEOs being fired for ethical lapses has been rising. HR has a role to play in the investigation of ethical lapses at the top and can educate the C-suite about trends leading to CEOs being held more accountable, management attorneys say.

According to the 2016 CEO Success Study, dismissals for ethical lapses globally have increased by 36 percent over the past five years, to 5.3 percent in 2012-16 from 3.9 percent in 2007-11. Despite this increase, the study authors say the numbers don't necessarily mean there has been more corporate misbehavior; instead, companies are simply holding CEOs to higher standards.

[SHRM members-only toolkit: Involuntary Termination of Employment in the United States]

The study by Success&, a part of the PwC network, analyzed CEO successions at the world's 2,500 largest public companies based on market capitalization. The study defined an ethical lapse as "a scandal or improper conduct by the CEO or other employees." Ethical lapses include behaviors such as bribery, sexual indiscretions, fraud, insider trading and negligence that leads to environmental disasters.

Ethics Firings Double in U.S.

Researchers compared data from the United States and Canada, countries in Western Europe, and the BRIC countries—Brazil, Russia, India and China. Among the regions, U.S. and Canadian companies had the lowest incidence of firings for ethical lapses: 3.3 percent during the 2012-16 period compared to 5.9 percent in Western Europe and 8.8 percent in the BRIC countries.

At the same time, the share of all successions in the U.S. and Canada attributable to ethical lapses more than doubled (to 3.3 percent of all successions in 2012-16 from 1.6 percent in 2007). In Western Europe, they increased to 5.9 percent from 4.2 percent, and in the BRIC countries rose to 8.8 percent from 3.6 percent.

This does not mean, however, that more ethics violations are occurring. "Our data cannot show—and perhaps no data could—whether there's more wrongdoing at large corporations today than in the past," said lead researcher Per-Ola Karlsson, partner and leader of Strategy&'s organization and leadership practice for PwC Middle East.

Five Trends Contributing to Ethics Firings

Karlsson explained that analysis of the data showed several patterns that explain the increase in CEO terminations for ethics violations: "Over the last 15 years, five trends have resulted in boards of directors, investors, governments, customers and the media holding CEOs to a far higher level of accountability for ethical lapses than in the past."

The five trends are:

  • Public opinion. Trust and confidence in large corporations has declined significantly since the 2008 financial crisis and Great Recession. According to the 2017 Edelman Trust Barometer, only 37 percent of people consider CEOs credible today, down from 49 percent just a year ago and representing an all-time low in the survey's 17-year history. Additionally, a long-running Gallup poll revealed that only 18 percent of respondents in 2016 said they have "a great deal" or "a lot" of confidence in big business, compared to 34 percent in 1975.
  • Increased governance and regulation. Increased public criticism of corporations and executives has resulted in more stringent government regulatory and legislative action. For example, U.S. legislative requirements for codes of conduct and anti-bribery statutes have tightened significantly. That has led companies in the U.S. and many other countries to adopt a zero-tolerance approach toward executive misbehavior.
  • Business operating environment. More companies are operating on a global scale and seeking growth in developing markets where there are higher ethics risks, such as bribery and corruption. In addition, companies must rely on extended global supply chains with increased risks of default and unethical behavior.
  • Digital communication. The prevalent use of e-mail, social media and text messaging creates new ethics risks. Digital records, whether a CEO's own or those created by others, are easily and rapidly shared and provide irrefutable evidence of misconduct.
  • The 24/7 news cycle. CEOs and top executives are well-known. The constant news cycle, transmitting data and financial information over television, websites and social media, guarantees wide and rapid dissemination of negative news and images.

What Can Companies Do?

Of the five trends, Gerald Maatman Jr., an attorney in the Chicago office of Seyfarth Shaw, believes that social media and the 24/7 news cycle are the two main drivers in lawsuits that lead to firings. "Anyone with a smartphone can launch something and it is out there. CEOs are targets for activists, and [incidents] tend to be picked up."

Maatman pointed out that CEOs are often held to a higher standard. "Anything CEOs do—whether inside or outside of their work situation—their judgment always is at issue. They are the alter egos of the company. The rules apply to everyone, but a breach by the CEO is treated more seriously."

Jonathan A. Segal, an attorney with Duane Morris in Philadelphia and New York City, thinks ethics risks must be viewed in a broader picture. "It's not good to have a view of compliance that is only legal and not values-driven," he said. "In my experience, leaders who look at compliance solely for compliance' sake are those who most often get into trouble."

One of the most effective ways to reduce the risk of ethics violations by executives, according to Maatman, is to have an all-purpose, thorough code of ethics with clearly defined expectations and practices that the C-suite must abide by. "Codes of conduct can require uber-clean ethical behaviors," he said, with CEOs required to give simple affidavits affirming their compliance.

Segal said companies and their executives should seek to comply not only with the letter of the law but also with the spirit—that is, avoiding wrongdoing as opposed to taking a check-the-box approach.

What Should HR Do?

When ethical lapses by CEOs occur, they can put HR in a difficult position. "How do you investigate the boss?" Maatman asked. "Rules apply to everyone in theory; in practice, that breaks down."

Boards and outside attorneys or investigators should take over to protect the integrity of the investigation, he recommended. "The stakes are high," he said. "HR has the expertise to conduct the investigation, but it's safer for HR to team with the investigation and support it but not direct or lead it."

Segal said HR should "speak truth to power." He outlined some options for HR to use:

  • Be direct with the CEO.
  • Be empathic and don't impute motives.
  • Remind the CEO that whistle-blowers will go outside the organization if they are not comfortable bringing the information inside.
  • Go to the board. This often is a viable option, "but you won't be loved," he said. Mentioning this option to the CEO also can help (e.g., "I don't want to go up the ladder, but I can").
  • Have a third-party ombudsman handle complaints and investigations. There are questions to consider with this choice: Will complaints be kept anonymous? Who receives the report? If it's just one senior leader, what happens if that is who the complaint is about? If it's all the senior leaders and they shoot down the report, the company has a big problem.

In the wake of a scandal, Maatman said, the most important issue for HR is that the company needs to get back on track and get back to business. A strong HR function that helped in the investigation and set good standards lays the groundwork of expectations for and helps attract the next CEO.

Robert Teachout, SHRM-SCP, is an editor with XpertHR in Washington, D.C.

 

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