Corporate Governance

“Enron’s Skilling is sentenced to 24 years.”New York Times. October 24, 2006

“Goldman banker pleads guilty in massive embezzlement scandal.” November 1, 2018

“More CEO’s were forced out for ethical lapses in 2018 than poor financial performance.”Washington Post. May 15, 2019

“Theranos founder Elizabeth Holmes faces jail time for fraud charges.
Her trial is set to begin in summer 2020.”Business Insider. June 28, 2019

“FTC hits Facebook with $5 billion fine and new privacy checks:
The largest penalty ever levied against a tech company.”The Verge. July 24, 2019

“A Few Dirty Tricks’: Documents Show Audi’s Role in the Volkswagen Emissions Scandal.”New York Times. July 26, 2019

Headlines such as these have been appearing with increasing regularity over the years. The scariest part is this: the people behind these headlines who either bring their companies down and/or end up in prison, don’t come from notorious crime families of the underworld; they are ordinary people like you and us. Board of Directors or Senior Management teams don’t deliberately plan to destroy their companies; yet headlines like these are ever so common.

And what is the typical response when white-collar crime or other bad behavior occurs? More regulation, more controls… we are sure you’ve seen this ‘movie’ several times! While rigorous compliance is important, are increased controls alone enough to prevent misconduct or wrongdoing? Research varies depending on who you ask. Some findings suggest that more controls actually increase fraudulent behavior; others argue that there is no positive correlation between increased regulation and fraud prevention; while still others point to increased (harsher) regulation as the only answer to prevent fraud. The one thing all researchers seem to agree on is the response – that stricter regulations and controls usually follow incidences of bad behavior rather than pro-actively preventing them.

What about the company in which you are a director or C-suite leader? Is it on the path of sustainable value creation or self-destruction? And as one individual within an increasingly complex web of commerce, how do you even find out before it is too late? The answer lies in understanding and proactively addressing the root cause of the problem.

So, what is the single biggest cause of such behavior and headlines?
Bad corporate culture.

In today’s digital economy, much of prevention really comes down to culture. Intangibles such as culture, leadership and talent form anywhere from 65-85% of a company’s valuation at any given time. Yet, as per our latest research, Board of Directors spend only 5% of their time (if at all) on shaping and monitoring culture. Instead of shaping culture, they rely almost solely on rules and regulations to govern and manage risk, which inadvertently ends up stifling creativity and growth.

For most of the 20th Century, the role of the board was largely to preserve value by ensuring management’s compliance of rules and regulations. Even today, most directors cite that as their primary responsibility. The following quotes from two directors sum up current thinking:

“As a director, I have fiduciary responsibility. If I don’t do enough to ensure 100% compliance of rules and regulations, I will be personally liable and at risk.”
“If you want to change behavior, simply change the rule and everyone will fall in line.”

At LEC we believe this thinking falls short in today’s hyper-connected and all-digital open source era. Many things that were important for Boards to monitor in the pre-Google era are now irrelevant, whereas new opportunities and risks abound.

LEC works with Boards to identify and design corporate governance protocols that are better suited for today’s dynamic environment.