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CEO Accountability: Rise in Dismissals for Ethics Lapses

May 24, 2017
Categories: Compliance, Corruption

The number of CEO dismissals for ethical lapses is rising, according to PwC’s CEO Success study. An ethical lapse according to the study is “the removal of the CEO as the result of a scandal or improper conduct by the CEO or employees.” Examples of such conduct include fraud, bribery, insider trading, and environmental disasters.

Formally, in the late 20th century even very public cases of corporate lapses rarely led to the dismissal of a CEO. Criminal prosecutions were also rare, and financial penalties tended to be modest. Now in cases of public scandal CEO’s are typically dismissed quickly, financial penalties have soared, and it is not uncommon to see criminal indictments of corporate officers.

While the number of CEO’s dismissed from the 2,500 largest public companies is increasing, it still represents a small percentage. In 2016, 18 CEOs (out of 2,500 companies) were dismissed for ethical lapses. Global dismissals for ethical lapses rose from 3.9% in 2007-2011 to 5.3% in 2012-2016. This is a 36 percent increase. The increase was notably larger in North America and Western Europe – rising from 4.6% in 2007-2011 to 7.8% in 2012-2016. This is a whopping 68 percent increase in dismissals.

The study offers a few possible reasons for the rise in dismissals – the overarching theme is a changing business environment. The report outlines five reasons for the “tectonic shift” in CEO accountability.

  • The public is more suspicious of companies after the 2008 financial crisis and they are less forgiving when mistakes and ethical lapses occur.
  • Governance and regulations have become stricter, leaving less wiggle room and grey area.
  • Companies are expanding into emerging markets where the ethical risks are heightened. In particular, as the global supply chain grows there is an increased chance of bribery and corruption.
  • The rise in digital communication has meant that there are new channels for indiscretions to play out. Social media and email have the potential to create an ethical incident. The potential for hackers to steal and release incriminating documents also exists.
  • The 24/7 news cycle means that as the news of a lapse breaks, public pressure can mount quickly to the point where the dismissal of the CEO becomes the go-to option for both the public and the company.

The study offers some advice by suggesting that organizations can protect themselves by making sure that controls and compliance programs they have in place are “world-class.” For example, organizations should make sure that expectations on corporate culture are clear, and the ethical conduct expected from employees is communicated and understood.

Of the U.S. respondents in the study, nearly two thirds said that their companies had a code of conduct in place that covered key risk and policy areas and set out organizational values and behaviors expected. On the other hand, only 44 percent of respondents globally said the same. Also, only 14% of U.S. respondents said that their companies had experienced incidents of bribery or corruption over the preceding 24 months compared with 24% globally. This may be related to the legal requirements for codes of conduct and anti-bribery statutes that have tightened significantly in the U.S.

Organizations should also seek to:

  • Build a culture of integrity and one that does not create pressures that might lead employees to act unethically;
  • Ensure financial controls and business process minimize opportunities for unethical behavior;
  • Prevent employees from finding ways to rationalize breaking the rules.

In a separate report, PwC’s 20th CEO Survey takes note of what CEOs can do to balance the risks posed by globalization and technology while still taking advantage of opportunities that arise. According to this survey, this balancing act is something that CEOs struggle with because they’re uncertain about their company’s social obligations and because of an emphasis placed on shareholder value.

The survey suggests that the successful CEO in this situation will need different skills. Chief among these skills is the ability to give and receive feedback. As organizations face challenges, CEOs will need to be able to collaborate widely and be comfortable with a decentralized decision making process.

Survey and report:

20th CEO Survey: 20 years inside the mind of the CEO…  What’s next?-Survey from PwC which includes insights from CEOs on challenges they face and strategies they consider. This survey can also be found on the PwC publications page.

Are CEOs Less Ethical Than in the Past? -Report from PwC’s Strategy consulting service that addresses the question of whether CEOs are less ethical than in the past or if there are alternative explanations that may explain an increase in CEOs dismissed for ethical lapses.

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