Companies have become much more likely to dismiss their chief executives over the last several years because of a scandal or improper conduct by the CEO or other employees – including fraud, bribery, insider trading, inflated resumes and sexual indiscretions.
Larger companies are more at risk than smaller ones, as are companies where the CEO has been in office for a long time and companies where the CEO is also the board chairman, according to a recent study by PwC.
From 2007 to 2011, forced turnovers due to ethical lapses represented 3.9 per cent of all successions at the world's 2,500 largest public companies. From 2012 to 2016, that figure rose to 5.3 per cent. While that might sound small, it's a 36 per cent increase.
On a regional basis, the share of all successions attributable to ethical lapses rose most sharply in the United States and Canada, in western Europe, and in the BRICS countries (Brazil, Russia, India, China and South Africa).
We see five reasons for the rise of ethics-based dismissals.
First, the public has become more critical and less forgiving of corporate misbehaviour.
Second, governance and regulation in many countries have become both more proactive and more punitive.
Emerging markets
Third, more companies are pursuing growth in emerging markets in which ethical risks are heightened due to higher levels of corruption and less mature governance structures. More extended global supply chains also increase these counterparty risks.
Fourth, the rise of digital communications has exposed companies and the executives who oversee them to more risk, both from whistleblowers seeking to expose wrongdoing and from hackers attempting to access customer data.
Finally, the 24/7 news cycle and the proliferation of media in the 21st century publicises and amplifies negative information in real time.
The data also identified three factors that can increase risk for companies:
– Large size: From 2012 to 2016, CEOs at the companies in the top quartile (by market capitalisation) were significantly more likely to be dismissed for ethical lapses – 7.8 per cent, compared with an average of 3 per cent for smaller companies.
– Long-serving CEOs: We also found that CEOs forced out of office for ethical lapses had a median tenure of 6½ years, compared with 4.8 years for CEOs forced out for other reasons.
– Combined CEO-chairman roles: We found that 24 per cent of ousted CEOs with joint titles were dismissed for ethical lapses, compared with 17 per cent of those with the CEO title only – a 44 per cent difference.
For all CEOs, and especially those who oversee large organisations, the responsibility for preventing or minimising wrongdoing is daunting. The best way to prevent ethical lapses in the current environment of strict scrutiny and instant scandal, is to build a culture of integrity – and to put in place effective governance structures, processes and controls that discourage wrongdoing.
– Copyright Harvard Business Review
Kristin Rivera leads PwC's fraud risk and controls team and serves as the global forensics clients and markets leader. Per-Ola Karlsson leads the organisation, change and leadership practice in the Middle East for Strategy & PwC's strategy consulting business.
