Study: Firing CEO May Be “Solution Of Choice” For Companies In Ethics Scandals

Image courtesy of Gilbert Mercier

Not that long ago, when you saw a news story about a corporation doing something unethical — pollution, corruption, graft, fraud, to name just a few — you might holler “fire the CEO!” at the TV, but that was about as far as it got for many people; odds were you didn’t even know who that CEO was. Now, we not only have the CEO’s name and history at our fingertips, but also the means to repeat and amplify those calls for accountability, and a new study confirms that more top execs are indeed being fired for ethical concerns, even if it’s just to hold someone responsible.

This is according to a new study from spacebar-hating PricewaterhouseCoopers’ Strategy& (not a typo) consulting group, which has been looking at CEO turnover at the world’s 2,500 largest companies for nearly two decades.

From 2007 through 2011, the report says that 3.9% of CEO changes at these corporations were tied to some sort of ethical lapse — defined as scandals including “fraud, bribery, insider trading, environmental disasters, inflated resumes, and sexual indiscretions” — by the CEO or others. So these CEOs did not need to have been caught bribing officials to dump the naked uranium-tainted body of their personal assistant into a designated wetland; it just had to have happened on their watch.

Between 2012 to 2016, the rate of CEOs dismissed under the cloud of scandal jumped up to 5.9%, an increase of 36%.

Here in North America, the increase was even more pronounced. CEOs on this side of the Atlantic were already above the global average in 2007-11, when 4.6% of them were let go because of an ethical lapse. In the five years since, that soared 68% to 7.8%.

Are CEOs Being More Unethical?

Just looking at those numbers, you might infer that more CEOs are twirling their mustaches while admiring their ivory cufflinks, but the report acknowledges that it can’t really know what is in the hearts of these business tycoons and their lackeys.

“Our data cannot show — and perhaps no data could — whether there’s more wrongdoing at large corporations today than in the past,” explain the researchers. “However, we doubt that’s the case, based on our own experience working with hundreds of companies over many years. In fact, our data shows that companies are continuing to improve both their processes for choosing and replacing CEOs and their leadership governance practices — especially in developed countries.”

Instead, they surmise that the higher rate of ethics-related turnovers is more likely the result of increased awareness and public pressure for accountability.

“In this pressure-cooker environment, it’s easy for the removal of the CEO to become the public’s — and eventually the company’s — solution of choice.”

We, the public, have “become more suspicious, more critical, and less forgiving of corporate misbehavior,” notes the report, which spotlights the Great Recession as a pivotal point in this change, with formerly unshakable banks and auto manufacturers taking taxpayer bailouts, paying hundreds of millions — sometimes billions — of dollars in fines and damages to the government and consumers. It didn’t help that, even though bank CEOs were trotted out before Congress and made to answer for their failings, they didn’t face criminal charges.

“Media attention has also focused more and more on corporate tax avoidance and the offshoring of jobs, as well as record-high rates of executive compensation and rising income inequality in general,” notes the report. “Those are the areas that, although not illegal, do not promote goodwill.”

There has also been an important shift in the way large companies govern themselves, with many having done away with the notion of a CEO who also controls the board of directors. The report notes that since 2005, the percentage of board chairs that are truly independent from the company has tripled, from 9% to its current level of 27%. Additionally, activist investors may buy their way onto a board. These outsiders may be less hesitant to axe a CEO than boards of yesteryear.

Additionally, the digitization of virtually all corporate communication has made it harder for companies to keep secrets and easier to find fault with executives. For instance, when hackers breached Sony’s corporate emails in 2014, they didn’t reveal anything illegal, but there were so many personally and professionally embarrassing remarks made in those communications that Sony tried to force media outlets from reporting on the leaked emails.

So even when a CEO might not be at fault — or only tangentially related to an ethics breach — they may still find themselves pushed out, just to stop the feeding frenzy of public outrage, media reports, and regulatory probing.

Or as the study puts it, “In this pressure-cooker environment, it’s easy for the removal of the CEO to become the public’s — and eventually the company’s — solution of choice.”