Lack of ethical integrity sees CEOs ousted in increasing numbers

18 July 2017 Consultancy.uk

CEOs worldwide are increasingly being fired because of unethical behaviour. The percentage forced to pack their briefcase over the past few years has risen by 36%, according to research by Strategy&.

The annually produced ‘CEO Success Study’, which was published by Strategy& – the Strategy arm of PwC’s Consulting Practice – explores the phenomenon of CEO successions across 2,500 of the largest listed companies in the world. The study revealed UK CEOs now have an average five year life-cycle, before jittery share-holders seek new blood – partly due to increased public scrutiny of corporate behaviour. Consistent with trends in five of the last year years, the median length of service at the top for the biggest 300 British businesses has shrunk to 4.8 years, down 73% from 2010’s high of 8.3 years.

Globally meanwhile, the survey shows that company boards continue to improve when it comes to appointing appropriate CEOs, managing the company and planning a smooth succession process. Over the past decade, the number of forced redundancies has fallen sharply among the 2,500 largest companies, 31.1% to 20.3% between 2012 and 2016. However, the number of CEOs who had to leave for an ethical misconduct has risen sharply in the last five years, both globally and in the three major regions where the 2,500 largest listed companies are located - the North America, Western Europe, and the BRIC countries (Brazil, Russia, India and China). According to researchers, unethical behaviour is relate to cases where the CEO or other executives are blamed for a scandal or maladministration, such as fraud, bribery, insider trading, environmental disasters, incorrect CVs and sexual harassment.

CEO Turnover by Region

The largest increase in CEOs forced out due to unethical behaviour is seen in companies in the BRIC region, where the proportion of redundancies due to ethical misconduct has more than doubled from 3.6% to 8.8%. But there was also a significant increase in Western Europe (from 4.2% to 5.9%), and especially in North America (from 1.6% to 3.3%). Worldwide, the proportion of people fired due to unethical behaviour grew from 3.9% to 5.3%.

The main reason for the increase in ethically motivated redundancies is pressure from key stakeholders and the wider public, both of whom have become increasingly critical. According to the researchers, the 2008 financial crisis and its aftermath did not only lead to a huge dent in public confidence in the banking sector, but also in general confidence in CEOs as such. The increase is also partly due to the tightening of legislation and regulations that followed the crisis; and, in addition, many companies in the US and beyond introduced a zero tolerance policy on unethical behaviour. Digital communication meanwhile has also made organisations more accountable, as they are automatically stored in a system beyond the individual’s control, often offering concrete evidence of maladministration.

Wrong-doing

“Our data cannot show — and perhaps no data could — whether there’s more wrongdoing at large corporations today than in the past. However, we doubt that’s the case, based on our own experience working with hundreds of companies over many years,” said Per-Ola Karlsson, Partner and leader of Strategy&’s organisation and leadership practice for PwC Middle East. “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 bigger they are - The size of companies and dismissals for unethical behaviour

Other executives have also become increasingly at risk of losing their jobs due to unethical acts further down the corporate hierarchy. A good example is Uber, where over the past few months more than 20 employees have had to clear their desks because of sexual harassment. The increased rate of firing is also due to today's razor sharp 24/7 reporting, which spreads bad press on a firm in no time, along with the constant instantaneous live-feeds of social media platforms like Twitter and Facebook.

While Strategic&’s research suggests that CEOs are increasingly engaging in misconduct, an earlier study by Stanford University shows that there is still a lot of inconsistency when it comes to how companies punish CEOs for unethical behaviour. In 58% of cases of unethical behaviour, the CEO was ultimately fired for their behaviour. Only when there was clear financial misconduct, dismissal followed in all cases. In all other forms of unethical behaviour, there appears to be situations in which the person remained. Even with regard to employees who make themselves look better by lying on their resume, opinions appear to differ within the various boards about appropriate repercussions.

DeAnne Aguirre, a Principal with PwC US concluded, “In the meantime, CEOs need to lead by example on a personal and organisational level and strive to build and maintain a true culture of integrity.”

The rate of Chief Executive Officer sackings over ethics has reached such a level that a new executive programme from Rotterdam School of Management Erasmus University (RSM) has been launched. The university hopes to take advantage of increasing business anxiety regarding the ethical lapses of future CEOs by pledging to help organisations to train their leaders how not to breach protocol, and to build and maintain a broader ethical culture in their companies.

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