Boards of Directors Own Greater Responsibility than Reported for Leadership Misconduct

Doug Noll, lawyer, law professor and professional mediator

Leadership misconduct — is there responsibility for it beyond the leader themselves? If so, at whose feet does that responsibility lie? Some look at human resources and others point fingers at boards of directors. Others still say the leader alone owns it. The debate is a worthy one.

“The board has the ultimate responsibility for overseeing corporate leadership,” says Doug Noll, a lawyer, law professor and professional mediator with two decades plus experience resolving corporate and board of directors conflicts.

“Generally, if a board suspects leadership problems, it should conduct an investigation using independent board members and outside investigators, usually led by an experienced and seasoned attorney,” he says.

Problematic is that most companies lack clarity of that wisdom and practice and its protective qualities. The benefits are many of being prompt to learn of concerns early, conducting thorough research, identifying problems and following up immediately to address and ethically and fully correct them.

An absence or under use of a formal process to learn of leadership troubles remains an error of structure and practice as mistakes and errors cannot be discovered and addressed early when they are more manageable.

“It is a problem,” Noll says. “The board hires the CEO. In theory, the board should be overseeing the CEO to assure that the broad goals of the company are being met.”

Yet that oversight, engagement, learning and correction is not being done sufficiently well as news of scandals and crisis are regularly reported by media. Then there are the stories not told in the media yet are being viewed, judged and told within an organization, creating distrust about leadership. Not all misconduct gets to the media.

There are some reasons, not necessarily good ones, for this shortcoming of identification, problem solving and prevention of scandalous stories and expensive outcomes.

“Boards tend to be, one, very clubby and two, chosen by the management team and therefore friendly. CEOs have a lot of influence on who is nominated to a board,” Noll says. “In large companies, board positions are pretty cushy and financially lucrative. Therefore, most board members are not too interested in scrutinizing leadership issues unless the problem is blatant.”

Slow response or an absence of one is risky decision making and could arguably be labeled, indifference and dangerous. It is common. The respect of greater autonomy offered to a leader so as to not micromanage can become too hands off, allowing for misconduct to continue, thrive and grow exponentially. This becomes mismanagement of risk and drives increased exposure to organizational reputation damage.

The board of directors however, in all fairness, doesn’t own full responsibility. The CEO bears it too for their team of leaders. However, they must take that duty seriously, through role modeling ethical behavior, assuring that high standards of conduct are the norm, measured, praised and rewarded and anything less is used as a learning experience while being corrected.

“The CEO is responsible for hiring the senior management team. If there is a bad apple there, the CEO is responsible, not the board,” Noll says. “A good, well-functioning board will instruct the CEO to clean house if necessary. If the CEO refuses or delays, a strong board will find a replacement. The solution is, of course, to have independent board members receive anonymous complaints for review and disposition.”

Yet boards must hold themselves accountable and not absolve themselves of a CEO’s weak ethics, mistreatment of people or corruption.

The use of independent boards or outside investigators to examine concerns regarding a leader’s actions is a critically smart practice. Noll believes it is becoming more common as the risk protection benefit is recognized as invaluable. He explains why boards operating outside of their competence and assuming their biases won’t come into play is an error.

“Most board members do not have the experience or expertise to interview people, build a history, understand the legal ramifications and make independent judgments,” he says. “Boards are happy to hire outsiders to do the dirty work of investigation.”

Scandals and crises happen. The evidence in plentiful. They are far more frequent than they should be and certain organizations are repeat offenders. It’s legitimate then whenever media reports on scandals and crises to inquire where was the motivation to prevent, mitigate and solve problems before scandal and crisis developed?

“Corruption; poor leadership, for example, not qualified to lead; denial, arrogance, laziness, lack of integrity,” Noll says. “The reasons are always obvious and point to human failing.”

While boards must accept a great responsibility to observe, with a discerning eye, the quality level of leadership and ethics their CEO and team are producing, it’s important to realize something: that in most but not all instances, board members care about their ego, reputation and professional standing and thus will act assertively when recognizing misconduct. It’s also true that this isn’t an absolute.

“Board members do not want to look stupid or ill-informed so they will protect their personal reputations as well as the corporate reputation,” Noll says, with the disclaimer, “That being said, there are a lot of very lazy, stupid board members out there that would rather let bad leadership persist than stir the pot and create controversy.”

The phrase speak-up culture is gaining momentum and greater prominence in corporate speak. While its practice and intensity might feel offensive to leadership it provides early warning benefits. There might not be, however, psychological safety in organizations regarding it. Board members may not be confident in engaging in it when it comes to addressing CEO thinking, communication and other behavior. Therefore, assumption of risk becomes a cost willingly accepted.

“The smart companies think like that,” Noll says. “In insular companies, board members risk their seats if they rock the boat in the wrong organization. Integrity can be a costly personal commodity. A lot of people simply would rather look the other way than face personal consequences for calling out problems.”

This indicates a need for improvement in ethics, governance, trust and psychological safety for the benefit of the organization and protective risk management.

This is necessary as it then allows for those who learn of leadership misconduct to be able to communicate it in the pursuit of ethical remedy to prevent the destructive, expensive internal damage to organizations and-or highly problematic reputation and financial damages due to negativity in media coverage, harmed public relations, angry investor relationships and increased legal risk.

Michael Toebe is a specialist who helps individuals and organizations accurately evaluate and wisely respond to reputation crisis and scandal. He writes Red Diamonds Essays and Reputation Specialist Essays (both on the Medium platform) and contributes analysis and advisory for: Chief Executive, Corporate Board Member, New York Law Journal, Physicians Practice and Corporate Compliance Insights. He is the voice of the Red Diamonds Podcast.

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