Should Boards Monitor CEO Morality?

A Board of Directors is responsible for overseeing the management and direction of a company, and that task includes monitoring the full range of risks to which a company might be subject. But what if the company’s CEO is one of those risks? What should a board do when a CEO’s off-the-job behaviour raises concerns? The IMF’s Dominique Strauss-Kahn is a case in point. Long before his recent arrest, Strauss-Kahn’s behaviour towards women raised eyebrows. Should it also have spurred the IMF’s Board to act?

See this story, by Janet McFarland, in the Globe and Mail: When and how to confront a wayward leader

Most corporate directors find it hard enough to confront a respected CEO about work-related poor performance, but it is even harder to tip-toe into the minefield of rumours about problems in an executive’s personal life.

(I’ve blogged before about whether ‘private’ vice is a business issue. I’ve also written about whether a CEO’s divorce is a purely personal matter or not.)

McFarland quotes me in her story, but let me give a slightly fuller version of my comments here.

To start, it’s worth making a distinction. There are personal vices that are strictly personal (including most of what goes on between consenting adults behind closed doors.) And there are personal vices that are very likely to impinge upon the workplace or on performance at work. A tendency to engage in sexual harassment is an obvious example, as is heavy drug use.) But, when you’re a CEO of a name-brand organization, that distinction tends to break down. High profile means that personal vices can turn public very quickly, and affect the organization.

Also, bad behaviour on the part of those in the public eye can easily lead to blackmail, which can result in misuse of position and other kinds of bad decision-making. This is another example of why great power brings great responsibility.

On the other hand, there are lines boards should be hesitant to cross, on principled grounds. A CEO’s sexual orientation, for example, should be off-limits. This is obviously less of an issue in 2011 than it would have been in 1951, but even today a gay CEO might be seen as a risk factor (especially for an organization with a conservative customer base) but boards should take a principled stand against taking an interest in their CEO’s sexuality. The board has fiduciary duties to protect the company, but even fiduciary duties have their limits.

The last point I want to make here is that, when faced with a CEO’s bad behaviour, a Board faces more than a yes-or-no question. The ethical question here is not just a matter of whether to confront the CEO, but how to do it. A Board in such a situation needs to formulate a plan — a method of proceeding, including answers to questions like:

  • Will the Chair of the Board approach the CEO solo, or should an ad hoc committee do it?
  • Should they raise the issue explicitly, or obliquely?
  • Should they give the CEO an ultimatum, or ask his or her suggestions for how things might improve?
  • Given various anticipated responses by the CEO, how will the Board/Chair plan to react in turn?

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