Over the past few weeks, I have watched two examples of how corporate boards handle scandals. The first should raise red flags for any investor.
I call it the slow-burning fuse. There is something unethical or illegal happening in a company that is well-known to insiders and outside stakeholders but left unsaid and often actively covered up because it involves C suite executives. The top of mind example is Harvey Weinstein. The co-chairman and co-founder of the Weinstein Company, Weinstein is facing mounting allegations by women of sexual harassment and assaults over several years. Reporting from major news outlets revealed that Weinstein had a well-known reputation in and out of the entertainment industry for bad behavior towards women.
His board made the correct decision to fire him. The abuse of female, or male, employees in the workplace by corporate executives is unacceptable. Full Stop. While the board’s actions were commendable, they are far from blameless. They were silent witnesses and enablers of a toxic culture that had festered into a full-blown crisis that will surely result in the company’s loss of reputation, talent and revenues.
Why do some boards act decisively in the face of a scandal in the making and others seem to look the other way? Corporate governance expert Len Sherman writes in Forbes “The short answer is that CEOs often suffer cultural myopia and outside directors frequently fail to provide adequate oversight” (https://www.forbes.com/sites/lensherman/2017/03/13/why-boards-must-step-up-to-deter-corporate-scandals/#1a97f9b61b79).
Sherman doesn’t lay blame on impulsive behaviors by CEOs and management, but to a gradual falling away by corporate leadership from a company’s visions statement, and because outside board directors are not getting reality checks from outside sources to compare with the information they receive from the company.
In my experience in working with board members at large and small publicly and privately held companies, the directors who had a positive influence on the company were the ones who were actively engaged with senior management and often challenged them on strategy. They were curious and sought out opinions from staff and consultants working with the company and would speak with customers. They made sure that they knew the marketplace, the competition and the company from the inside and out. In sum, they would not allow themselves to be siloed into a one-track flow of information.
The activist outside board director is now getting a lot of attention these days. High-profile hedge fund investors like Carl Icahn, Nelson Peltz and Bill Ackman buy a lot of shares in companies they believe are underperforming and attempt to leverage their shareholder positions in order to force changes in executive leadership and strategy. Critics charge that many of the reforms that get proposed, like cutting staff and R&D costs, are only short-term fixes that boost short-term shareholder earning while sacrificing quality strategies to build sustainable growth.
The voices for shifting the metrics of corporate success away from short-term, quarterly results to longer-term measures of growth and sustainability are growing among well-known influencers in business, politics and academia. One of the most eloquent is Ira Millstein. A renowned expert on corporate governance, Millstein argues that many past corporate meltdowns could have been avoided if board directors had challenged CEOs and management when they introduced strategies for short-term shareholder gains, which they passively gave their approval to while growth oriented strategies were put aside, or questioned bad behaviors by the CEO, which they turned a blind eye to. The solution, according to Millstein, is for companies to embrace the need for a board that is actively engaged in the running of the company and to recruit board directors that fit this mold.
Millstein, a lawyer and advisor to corporations, non-profits and government over a 60-year career, is the author of the book, The Activist Director: Lessons from the Boardroom and the Future of the Corporation, 2015, Colombia Business School Publishing. In it, he examines the problems and offer solutions, such as how to recruit and vet potential directors. I have and will continue to recommend Millstein’s book to executives and board members I know in business and the non-profit sector.
The second example of how corporate boards can handle scandals is what I call the Smokey the Bear approach. Smokey is the well-known bear who is beloved by generations of children and adults when he starred in decades of fire prevention media ads wearing a forest ranger’s campaign hat and communicating a simple message: “Only you can prevent forest fires”. This is the kind of thinking that corporate boards need in order to take immediate and preventative steps to stop bad behaviors by executives before it ignites into a blazing scandal.
Here’s how it works in practice. In September, the board of KB Homes, a national home building company, took away 25% of CEO Jeffrey Meltzer’s 2017 bonus after his sexist and homophobic rant to his neighbor, the comedian Kathy Griffin and her boyfriend, was caught on a security camera and posted on social media. As public outrage grew, the mainstream media also picked up on the story. The board didn’t dither but swiftly stepped in to address the problem. The result: Meltzer issued a public apology to Griffin and her boyfriend. In addition to cutting Meltzer’s 2017 bonus, the board also stated publicly that he would be fired if something like this happened again (https://www.nytimes.com/2017/09/21/business/kathy-griffin-kb-home-ceo.html?_r=0). By the way, Meltzer is KB’s board chairman.
I wonder if the boards at VW and Wells Fargo, both in the midst of major scandals, had taken the Smokey the Bear approach to their oversight responsibilities would they be in the mess they are in today that is costing each company billions of dollars in fines, lost shareholder value and significant damage to their brand and reputations?