“The fish rots from the head.”
It's an excellent metaphor for a failure of behavioral governance, while also describing how directors, separately or as a board, can often be the leading cause of organizational failures.
This sentiment was made famous by Bob Garratt's seminal book on governance, The Fish Rots from The Head: Developing Effective Board Directors, the theme of which was continued in his follow-up, Stop the Rot: Reframing Governance for Directors and Politicians. Commenting on his second book, Garratt wrote, “Corporate governance turned up a blind alley some 15 years ago. It lost its initial focus on directors delivering the long-term health of their business and degenerated into a series of compliance-fixated, and short-sighted box-ticking exercises.” He added that “… the presenting problems are not ethical alone but more based on ignorance of the legal roles of directors coupled with a lack of induction into these roles, and the non-development of directors' critical thinking abilities in formulating policy and developing strategy. Put another way — directors do not see their roles as professional or even important.”
Why is it, then, that after decades of reform and prescient observations such as those above, the same issues, culture, greed and poor-performing boards that drove the original Cadbury Report are still evident today? Because what really determines governance performance is not codes or regulations, but the behaviorsof directors and boards. These behaviors, separately and collectively, influence and affect governance performance. And governance performance ultimately determines whether an organization fails or succeeds.
I propose that governance practitioners and regulators have completely misunderstood, either willingly or out of ignorance, the influence directors' and boards' behaviors have on an organization’s performance. This is especially true for boards that, in all but a few exceptional cases, have a true aversion to any form of analysis that might lead to the conclusion that the behaviors of one or several directors resulted in poor company performance.
PwC's 2024 Annual Corporate Directors Survey found that 49% of directors think one or more of their fellow board members should be replaced, while 25% thought two or more directors should be replaced. Also, 88% said they trusted their board to effectively assess their performance, while 74%thought their board leader was effective at dealing with underperforming directors.
According to the survey respondents, directors who need to be replaced exhibit the following behaviors, among others:
- Oversteps the boundaries of his or her oversight role
- Is consistently unprepared for meetings
- Is reluctant to challenge management
- Negatively impacts board dynamics (e.g., culture/fit) through their interaction style
- Board service is largely driven by director fees
Responses also identified that “… directors cite collegiality and personal relationships, the awkwardness and time involved in replacing a director, and board leadership's reluctance to engage in difficult conversations with underperforming directors.”
Put another way: Directors are concerned with maintaining networks and relationships, which are critical for future roles. It's also easier to blame another person than to act. Blaming the chair's lack of action and ability to have “difficult conversations” is buck-passing and reflects directors' inability to support the chair in his or her actions.
The PwC survey reinforces the applicability of the metaphor “The fish rots from the head” by highlighting that chairs and directors knowingly allow “rot” to take hold and allow the behaviors of a few to influence and affect governance — and organizational — performance. Their behaviors contribute to the metaphorical spread of the rot and possible destruction of the organization. Here are two examples of this rot, showcasing additional actions that facilitated the destruction of wealth.
Behaviors That Lead to Failure Are Universal
UBS: Fraud and corruption. UBS, the Swiss banking giant, was fined $1.5 billion by authorities in settlement of charges relating to a multiyear scheme to manipulate interest rates. In defending his and the board's position, the UBS CEO, Sergio P. Ermotti, said in a statement: “We discovered behavior of certain employees that is unacceptable … We deeply regret this inappropriate and unethical behavior. No amount of profit is more important than the reputation of this firm, and we are committed to doing business with integrity.”
Balance that against this comment from Tom Hayes, one of the convicted traders: “The practice was tried and tested. It was endemic within UBS. I just thought … this can't be a big issue because everybody knows about it … [it was] an open secret.” Another broker cautioned a UBS trader on his strategy, warning that it could look very “fishy.”: “I’d be very careful how you play it.” The broker added that it “might get people questioning you.” Another strategy used by employees was to “spoof the market” by asking brokers to make false bids and offers. The goal, according to British regulators, was to “skew the market perceptions of the rates.”
At the behest of traders, brokers also altered the rates on electronic screens for the purpose of “disseminating false information.”
Crown Resorts: Corrupt behavior. After stories in The Age and The Sydney Morning Herald and a report on 60 Minutes in 2019, a Royal Commission investigated Australia-based gaming and entertainment group Crown Resorts for the irresponsible treatment of problem gamblers, violations of laws and regulations, and dodging of taxes. Most arrogant of all was Crown’s refusal to cooperate with gambling regulators.
The Royal Commission found Casino Resorts was “unfit” to run the Southbank Casino complex, with Commissioner Ray Finkelstein saying that “for many years, Crown Melbourne had engaged in conduct that is, in a word, disgraceful.” He added that “some of the conduct was so callous that it is hard to imagine it could be engaged in by such a well-known corporation.” James Packer, the former chairperson of Crown Resorts, was made to sell down his 37% stake in Crown to 5%. Finally, the Royal Commission report accused Crown's board of failing to carry out one of its prime responsibilities: “to ensure that the organization satisfied its legal and regulatory obligations.”
Words such as “unfit,” “conduct,” and “disgraceful” are all words that describe behaviors. The behaviors that facilitated the actions in both the UBS and Crown cases were:
- Permission to act.
- Social proof.
- Obedience to authority.
Permission to act gives implicit — not explicit — permission to act while allowing deniability. In the UBS case, permission to act as Tom Hayes did was seen as an “open secret.”
- Management did not explicitly forbid the practice.
- There was a lack of oversight and controls.
- The behavior was tacitly rewarded through bonuses tied to trading profits.
This allowed the CEO to deny responsibility. Permission to act relies not on what is said or done, but on what is left unsaid or undone.
Social proof allows the actions of others to influence the actions we take. It is often manifested in a type of “mob mentality,” e.g., “Everyone else was doing it, so it must be right.” In the UBS case, it was identifiable in the action or inaction of brokers and traders regarding illegal trading and spoofing the market. This principle becomes more powerful still when combined with other unspoken social and cultural norms, those imbued in the organization through the behaviors of directors, partners and the board. This was the case with UBS, where the “open secret” was implicitly condoned via bonuses.
Obedience to authority is programmed into us from birth. This behavior is identified as the root cause of many disasters. For instance, there is a well-researched and proven connection between “obedience to authority” and air crashes and medical misadventures. In the cases of UBS and Crown Casinos, “obedience to authority” would have played a role, especially if the actors thought their actions were implicitly condoned by those in authority. Questioning this implicit authority would have been culturally impossible to do because it may incur social exclusion or worse. Those who see themselves as having a lesser status may put aside their own values and simply act.
Codes of Conduct
Board codes of conduct are seen as critical to driving director and organizational behavior. An example of the sort of language you may find in a board code of conduct is:
“… The board has defined the values that determine the group's social and ethical self-image and provides the essential framework for guiding our actions. It is based on three principles:
- Integrity and reliability
- Communication, privacy and transparency
- Respect and responsibility”
The words are strong, concise and meaningful. They may even reflect your own code of conduct. If so, you should be nervous. This extract is from Wirecard's code of conduct. As events showed, they are not meaningful; they are meaningless.
Wirecard was a German financial technology company that provided electronic payment processing and financial services. At its peak, it was valued at 24 billion Euros and replaced Commerzbank in Germany’s prestigious DAX stock market index in 2018. The Financial Times began publishing investigative reports in 2015 questioning Wirecard’s accounting and identifying falsified accounts, inflated revenue and profit, and 1.9 billion Euros in cash that didn't exist.
The Wirecard case highlighted how poor behavioral governance and the resulting culture undermined the regulatory and compliance functions, which highlights that rules and structures aren't enough if behaviors are bad, that groupthink and national pride can blind regulators and market participants, and that cognitive biases prevent directors from seeing or acting on warning signs.
I have spent more than a decade assisting boards in developing and refining their codes of conduct. What I have seen are amazing documents that speak to the heart, but as a statement of action, they are worthless. Far from reflecting the values and actions of boards and directors, they are — as Congressman J. D. Long said he wanted prior to the passing of legislation in 1887 — “Something having a good sound, but quite harmless, which will impress the popular mind with the idea that a great deal is being done, when, in reality, very little is intended to be done.”
Just as our behaviors are reflected in our children, so is the behavior of boards and directors reflected in their organizations. It is time that directors recognize and accept that their behavioral governance, culture, ethics and actions (or inactions) are what give employees “permission to act.”