For all the good intentions behind Sarbanes-Oxley and other governance guidelines, they do not resolve the real source of corporate disasters. It is the culture of arrogance at the top that needs to be tackled to avoid more Enrons.
The more the development of corporate governance unfolds, the more it is becoming obvious there is one factor which puts a company at greater risk than any other.
It is not an abstract factor, either. It is not the prospect of the systems going belly-up. It is not the risk to the reputation as a result of the company’s products being identified as a health risk. The greatest factor is a human factor – and that human is the CEO.
Now that the great swathe of regulatory action following the Enron disasters is settling down, people are able to assess the past few years more rationally. The governance rules that have been put in force focus – particularly via Sarbanes-Oxley – on process and the responsibility for internal controls. They are a bonanza to US beancounters. They are a bonanza to legal outfits everywhere. And the audit firms are doing quite nicely, too.
But what they are about is the American system attempting, somewhat chaotically, to catch up with the UK system of corporate governance. They are not, as we now see plainly, anything to do with stopping another Enron, or WorldCom, or any other bizarre US corporate collapse. The UK system, spawned by the amiable duo of Sir Adrian Cadbury and Nigel Turnbull, provides checks and balances, and ways for companies to follow best practice without finding themselves hemmed in by rules that make no sense in their particular situation.
The new US system, following Sarbanes-Oxley, throws a trawler net of process over a company’s financial reporting system. No figure will go unticked. Most figures will be ticked numerous times in many types of electronic ink. This process, so beloved by the American business mind, will at least provide a structure through which it may be harder to remove cash illegally.
The problem is that it doesn’t address the factors which brought down all those companies in the first place. As the court cases unwind, what we all thought at the outset becomes clearer. These were mostly frauds. People stole cash on a huge scale from the companies they were running. And, invariably, the people doing the stealing were CEOs caught up in the hubris of US business life.
The courts are now deciding just where the dividing line between being a crook and simply an arrogant business leader lies. But even when that is clearer we will still be left with arrogant CEOs. What they do will be quite legal, but supremely damaging to their companies, the lives of their underlings and the shareholders and investors.
Survey after survey shows that the overwhelming majority of takeovers leave shareholders worse off.
The middle ranks of management have their careers pushed sideways because of some guff about synergy, while the CEOs still cart the cash home. Even when the corporate collapse is being unravelled it is the directors who go home to their houses with their tennis courts and swimming pools. None of that is touched.
But it is now clearer that it is not only takeovers and the more flamboyant end of CEO behaviour which brings grief. It is becoming clearer that the most basic strategy initiatives follow the same pattern. CEOs shove a strategic plan down the slipway and everyone, bar them, is left hauling on the ropes in a desperate attempt to salvage the resulting disaster.
These disasters are only dealt with inside the corporate structure. The outside world rarely glimpses the human misery and loss of shareholder value that CEOs create. And the reason why all this remains unseen is that no one ever asks the people further down the management pyramid what really happens.
Interestingly enough, a couple of academics at business school INSEAD have now started a process of tracking what they call the third tier. Francesco Zingales and Luk Van Wassenhove have set up a survey to see how perceptions about strategy implementation differ between the CEO, the top management team and the management tier beneath. The survey is designed to flush out the extent to which the people at the lower management level know that a strategic plan is flawed operationally and has no chance of succeeding.
The problem is that if the CEO is powerful enough, then strategy can simply embody the CEO’s hunches and will inevitably fail, because the structure or culture of the company simply cannot implement them.
The corporate world should worry less about the post-Enron overload and more about the threat to effective corporate governance which the role of the CEO poses.
This article original appeared in the April edition of our sister publication Financial Director.