Directors must act on signals

How do you deal with a high performing CEO who is arrogant, in-your-face and cocky? Watch very carefully for prodromal signals and act on the 5Cs: Consider, consult, counsel, coach and, if all fail, then confront. 

Before any disaster, there are prodromal signals, which portend a development. For example, in Newark, USA, recently, the municipal water tested positive for lead. Despite this, the insensitive and defensive mayor wrote to reassure the public, followed by a condemnation of the "false statements". The federal government heavily intervened to reverse the mayor last week. Another example: In 2011, John Looker, suffering from brain cancer, raised millions of dollars from Americans. Gradually, a small club of doubters developed on whether Looker had cancer at all. Upon confrontation, John Looker admitted to his lies. A bigger scam was averted by responding to the behavioural signals (refer article by Abby Ellin, The New York Times, August 1, 2019).

If board directors perceive unusual, unproven signals, should they act, and if so how? I suggest through a 5C Action Ladder — consider, consult, counsel, coach and, if all fail, then confront. Even if the evidence is not legally provable, they should act. Boards are not ceremonial, they have obligations; their actions must be based on facts and shared judgment, a sort of intuition. 

Every recent case of corporate governance failure had developed through a trail of early signals, which directors did observe. JP Morgan received an internal warning about the risks of continuing to deal with Jeffrey Epstein, who finally committed suicide in a New York jail (on August 10). But nobody listened. Consider the prodromal warnings in the cases of Ranbaxy, Jet Airways and Yes Bank. After the disaster, media strings together the sequence of events and then it appears obvious that the board should have acted. At a recent governance conclave, participants seemed to agree on how to deal with a superlatively performing chief executive, who is arrogant. 

Here is an ongoing drama about a real institution, presented as if it were a company. 

The CEO had consistently positioned the company as the fastest growing, particularly since he took over. Growth targets were announced with panache, accompanied by spending plans on grandiose projects. These were cheered with great enthusiasm by credulous investors. The CEO oozed charisma and had a Demosthenes-like oratory skill; he repeatedly pointed out that his predecessors had been losers, and promised to move fast and compensate for lost time. The CEO expressed his vision of quadrupling the value of the company by 2030.  Meanwhile, some signals started to accumulate:

• While competitors faced business headwinds, the CEO did not even admit to a problem. His front-facing employees and business associates were bewildered.
• The chief accountant (book keeper) of the company observed that the deficit in the company cash flows was higher than what had been projected in the annual accounts. He felt that the barrier of prudent management had been breached by the real deficit. The CFO diplomatically responded that this would be "investigated seriously".
• The company’s former chief of business strategy later announced doubts about the company’s revenue recognition methodology. The growth required to be corrected, according to him, because the growth over the last few years had been overstated. Amazing!
• The company had a risk management department. The head and the deputy head had a simmering difference of opinion and styles. This difference broke into the open, causing directors to wonder how reliable its functioning was.
• Some independent directors expressed concern about the internal matters and the functioning of the board. The CEO soft-pedalled and agreed to investigate their complaints.
• Another independent director, who chaired the board’s treasury and risk management committee quit the board; later ad­mitting to serious differences on prudent management of risks.
• The CEO had announced major projects, involving significant capital purchases from overseas. Unconfirmed signals suggested that company procedures had been subverted. The CEO, of course, denied the allegations strongly.
• In two independent communications, a group of suppliers and distributors expressed concern about the company’s pra­ctices. As committed partners of the company, they wished to alert management. This was refuted in strong terms by an­o­ther group of suppliers and distributors, who expressed loyalty to the company, implying that the first group was disloyal.

In this case, should the directors do something, maybe along the 5C path or any other? Does the answer not seem a big “yes”?

The author is a corporate advisor and distinguished professor of IIT Kharagpur. He was a director of Tata Sons & a vice-chairman, HUL

rgopal@themindworks.me