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Reputability LLP are thought leaders in the field of reputational risk and its root causes, behavioural risk and organisational risk. Our book 'Rethinking Reputational Risk' received excellent reviews: see www.rethinkingreputationalrisk.com. Anthony Fitzsimmons, one of its authors, is an authority and accomplished speaker on reputational risks and their drivers. Reputability helps business leaders to find these widespread but hidden risks that regularly cause reputational disasters. We also teach leaders and risk teams about these risks. Here are our thoughts, and the thoughts of our guest bloggers, on some recent stories which have captured our attention. We are always interested to know what you think too.

Thursday, 7 June 2018

Helping NEDs see through CEO charm

Leaders found to be dominant or hubristic regularly unleash unpleasant surprises after years of charming behaviour that camouflaged the vulnerabilities. Can investment managers reduce such risks?

Once upon a time, a bright young accountant called Fred Goodwin impressed John Connolly, then UK managing partner of Touche Ross. He became their youngest partner before moving on to be chief executive of Clydesdale Bank. Ian Fraser’s book Shredded relates how Goodwin shocked staff by his delight in “shredding” people in front of colleagues.

George Mathewson, then chief executive of Royal Bank of Scotland, was charmed by Goodwin, who arrived at RBS as chief financial officer and Mathewson’s heir apparent. He became confrontational, though charming when it suited him, leaving staff unwilling to speak up.

Weeks before becoming chief executive, Goodwin had a “contretemps” with Amyas Morse, PwC’s audit partner, who would not approve Goodwin’s accounting treatment of the NatWest acquisition.

Goodwin reportedly “unilaterally fired” PwC and “appointed” his old firm, by now called Deloitte and led by Connolly, only later seeking audit committee backing. If Fraser’s narrative is right, the alarm bells should have been deafening.

An effective board needs a non-executive director team with the skills, knowledge and experience to understand every aspect of the business, including its people, and especially the chief executive. NEDs need courage and social skills if they are to challenge executives. Most failures have their roots in board weakness.

The Ivey Business School “Leadership on Trial” research group, forged in the aftermath of the banking crisis, provides insights for boards into the role of character in leadership.

Two stand out. The notion that competencies determine what leaders can do, whereas character determines what they will do, is obvious. Less so is the conclusion on seemingly paradoxical traits. A leader with balanced characteristics — confidence with humility, drive with patience, candour with compassion — will be a better leader than one with unalloyed self-confidence, aggression or bluntness: and they will be less risky, too.

One of NEDs’ most important responsibilities is to select chief executives and the non-executive teams that should support and challenge them. Research from the London School of Economics, “Head-hunter methods for CEO selection” by Max Steuer and colleagues, suggests that outsourcing the recruitment of a chief executive to headhunters is a sign of widespread, fundamental board weakness.

Reputability’s research note, “Designing better boards”, confirms the weakness. It found FTSE 100 NED teams overwhelmed by board and financial experience and starved of NEDs with a deep understanding of people. A tiny proportion professed proficiency in fields such as social sciences, anthropology, psychology or HR, skills needed to evaluate character, behaviour and competence.

This makes it no surprise that so many boards seek seeming safety by outsourcing board appointments and pay to headhunters and consultants. The truth is that delegating any task without know-how is risky. The LSE report vividly illustrates the danger. In contrast, it seems no coincidence that at Weir — which recently devised a compensation structure beyond long-term incentive plans — Clare Chapman, an HR professional, chairs the remuneration committee.

Beyond recruitment and pay, it takes skill, know-how, self-awareness and effort to overcome deep-rooted biases and behaviours. Charm blinds us. We believe our own PR. Self-serving bias, the halo effect and overconfidence lead us to see ourselves, and those we have appointed, as better than we are. Social silences lead us to ignore subjects considered impolite, dull or taboo. NEDs who get past such issues need courage as well as social skills to overcome the social norms that shepherd us towards conformity.

The basic weakness is the lack of NEDs’ skills, knowledge and experience in recruiting people at and around board level. Responding to the Financial Reporting Council’s recent consultation on board effectiveness, we recommended putting a top-class people specialist in charge of the nomination and remuneration committees. In time, this will reduce the risk of unpleasant surprises. Investment managers, too, can encourage boards to follow suit.

This piece, published here by the Financial Times, has its origins in an article written for Financial World, the London Institute of Banking & Finance magazine.

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