Unethical CEOs Shown the Door More Often

Top executive lapses can be costly

By Eve Tahmincioglu

The number of CEOs who were ousted for ethical lapses has been increasing at public companies around the globe, but such dismissals aren’t as prevalent at U.S. companies.

The 2016 CEO Success study by Strategy&, PwC’s strategy consulting business, analyzed CEO successions at the world’s largest 2,500 public companies over 10 years, and found that forced turnovers due to ethical lapses jumped 36% during the four-year period ending 2016, compared to the four-year period from 2007 to 2011.

While the increase was higher at U.S. and Canadian companies, about 102% over the same period, the two countries have the lowest overall cases of ethical-lapse firings than other countries in the study.

 “Over the last 15 years, five trends have resulted in boards of directors, investors, governments, customers, and the media holding CEOs to a far higher level of accountability for ethical lapses than in the past,” said Per-Ola Karlsson, partner and leader of Strategy&’s organization and leadership practice for PwC Middle East, in a statement.

(Related Article: Taking the Emergency Out of CEO Emergency Succession.)

The five trends include:

  •       Public opinion: Since the financial crisis of 2007–08 and the Great Recession that it ignited, confidence and trust in large corporations and CEOs has been declining; the public has become more suspicious, more critical, and less forgiving of corporate misbehavior. 
     
  •      Governance and regulation: The rise of public criticism of executives and corporations translates directly into regulatory and legislative action, and companies in the U.S. and many other countries have moved to a zero-tolerance approach toward bad behavior in the C-suite.
     
  •      Business operating environment: Companies increasingly are (1) pursuing growth in emerging markets where ethical risks, such as the possibility of bribery and corruption, are heightened, and (2) relying on extended global supply chains that increase counterparty risks.
     
  •    Digital communications: The use of email, text messaging and social media creates new risks for ethical lapses. A company’s digital communications can provide irrefutable evidence of misconduct, and their existence increases the likelihood that a CEO will be held accountable.
     
  •    The 24/7 news cycle: Unlike in the mid- to late-20th century, when most executives and companies could maintain a low public profile, today the lightning-fast flow of Web-based financial news and data ensures that negative information travels quickly and widely.

Clearly, CEO lapses of all kinds can hit the bottom line hard. A study by the Trulaske College of Business at the University of Missouri, The Consequences of Managerial Indiscretions: Sex, Lies and Firm Value, found that such indescretions lead to an immediate 4.1% loss in shareholder value, translating into an average loss of $225 million in market capitalization.

"Our research certainly suggests shareholders and potential business partners perceive that someone who is duplicitous in his or her private life could be more willing to mislead professionally,” says Adam Yore, an assistant professor of finance at the college. “Personal integrity at the top matters and can have major impacts on these companies.”