Study warns too few Boards adequately review the danger of senior management putting companies in jeopardy.
Company Boards should take urgent steps to monitor and review behavioural risk, amid warnings that narcissistic or hubristic Chairmen or Chief Executives can inflict serious damage on their businesses, according to a new study by MWM Consulting, the board advisory and search firm that acts for some of the world's largest companies.
The study follows interviews with more than 80 Chairmen, CEOs and experienced Board Directors of leading UK and international corporations. It concluded that Boards find it hard to spot and even harder to deal with successful leaders who over time, as a result of their success and power, display characteristics which can endanger the wider organisation.
Citing the examples of Fred Goodwin, former Chief Executive of Royal Bank of Scotland, Percy Barnevik, formerly of ABB and Jean-Marie Messier, who drove Vivendi to the edge of bankruptcy, MWM warns that Boards often lack the focus, the tools and the confidence to address such business leaders.
"We have established that the risk of CEOs falling prey to behavioural distortions is a real and common one that can have a disastrous effect on the business," said Michael Reyner, Managing Partner at MWM and co-author of the report. "Such CEOs are often very high profile, both internally and externally, and this creates barriers to addressing dysfunctional behaviour. These barriers include awareness – simply being mindful of behavioural risk is important – but in addition Boards need to have the confidence to deal with a potential issue and the courage to tackle any problem in a timely way."
The study identified several symptoms in business leaders – seven potentially 'deadly sins' – that should alert Boards to growing behavioural risk:
• Grandiosity and greed: Boards should be wary when CEOs start to become overly concerned with the trappings of office, losing sight of what is reasonable and conflating business and personal interests.
• Over-concern with public profile: an organisation can suffer when leaders become addicted to the limelight, more focused on burnishing their own reputation than on promoting their business.
• 'Hub and spoke' leadership style: The 'hub and spoke' model, in which the CEO interacts with his direct reports very much on an individual basis rather than collectively, serves to concentrate power, information and authority around one individual. It should be discouraged.
• Over-management of the Board: Over time, as a CEO's confidence grows, some come to dismiss the Board as a nuisance to be managed carefully so that it doesn't get in their way.
• Absence of contrary voices: A clear danger sign is when a CEO displays visible intolerance for challenge – whether it comes from members of his own team or from the Board.
• Disdain for succession planning: Narcissistic CEOs have no interest in succession planning: they give little or no thought to the inevitability that they will have to move on at some point.
• Distorted thinking and decision-making: Emboldened by success, CEOs can become victims of hubris and believe in their own infallibility. They may seek to do big M&A deals or take the business headlong into new arenas, driven by the thrill of leaving ever-bigger footprints.
The MWM study shows that corporate history is littered with colourful tales of proud businesses brought to their knees by once-feted CEOs. Highlighting case studies from RBS, Enron, ABB and Vivendi, the report recommends five fundamental boardroom measures to help avert disastrous action by rogue CEOs.
• Prevention is better than cure – Boards should focus on managing the risks right from the moment of appointing the CEO.
• Build the right Board foundations – it is essential that the Chairman has the character and skills to keep the CEO in check and that the Directors have the experience and confidence to highlight and address concerns.
• Develop sharply attuned organisational 'antennae' – Boards must be able to identify as early and clearly as possible any potential behavioural issues that need to be addressed; direct access to the broader executive team is critical.
• Put behavioural risk explicitly on the Board agenda – behavioural risk must become an explicit part of the Board agenda, routinely discussed both so that issues can be identified and explored before they become major problems.
• Never shirk effective succession planning -Boards must ensure that they are always confident that they have succession plans in place and they are willing and able to enact them when required.
Urging improved monitoring by Boards, Reyner added: "It is vital that behavioural risk becomes an explicit part of the Board agenda, routinely discussed both so that issues can be identified and explored before they become major issues and so that CEOs do not interpret anything sinister in such discussions, rather recognising them merely as part of good governance."
The report can be viewed here: www.mwmconsulting.com/wp-content/uploads/2012/07/Electronic-version-Behavioural-Risks.pdf