CEOs and Board Members: Beware of Unethical Leaders

Article originally published in the Philadelphia Business Journal on August 14, 2018

The CEO or a division executive is incentivized to deliver stellar financial and growth results, but doing so with a demanding and intimidating style that causes some subordinates to violate ethical norms or the law. Does the CEO or division executive they think that they won’t get caught, and if caught, the board will turn a blind eye? What does this say about the individual and the culture of the organization?

In an October 2015 article headlined, “VW employees responsible for ‘Dieselgate:’ Where’s the legal, moral and ethical compass,” I wrote about the scandal involving Volkswagen, whose employees deliberately installed software on diesel cars that would give lower than actual readings in the emissions testing process. Not only did this action permit these cars to pass emission tests, the results were also used in VW’s strategy to market their “clean diesel” vehicle technology.

When questioned about diesel car emissions, Volkswagen at first denied there was an issue, management knowing full well that they were gaming the testing protocols. It was only after the EPA threatened to withhold certification of the company’s new car model did Volkswagen come clean and admit to the fraud.

After the Dieselgate scandal became public, the company’s stock price tumbled. Volkswagen CEO Martin Winterkorn was forced to resign. Two executives were sentenced to prison for their roles in the fraud. The global cost to Volkswagen is estimated to be $63 billion. That is what can happen when a company acts unethically and violates the law.

In a January 2016 article in Entrepreneur Magazine, “The Biggest Lesson from Volkswagen: Culture Dictates Behavior,” Robert Glazer wrote, “Culture is a powerful force that can cause people to make decisions that aren’t in their companies’ best interests.”

Glazer said, “CEO Martin Winterkorn was a demanding boss who abhorred failure. Former executives described his management style as authoritarian and aimed at fostering a climate of fear. A culture that discourages open dialogue and limits checks and balances can prompt cheating and fraud. A culture with high standards that accepts failures as growth opportunities, on the other hand, benefits both the company and employees.”

So, whose job is it to watch for the tell-tale signs that the CEO is so demanding that subordinates act unethically or violate the law to achieve results in order to please the CEO? It is the board’s job. For the direct reports of the CEO, it is the CEO’s job to ensure his or her senior team does not act in an unethical or illegal manner.

How is unethical or illegal activity uncovered? By the audit committee of the board and how it responds to reports that come through the employee hotline. By ensuring that there are controls, checks and balances surrounding the accuracy of key metrics. If data for these metrics are not checked and verified, there could be serious adverse consequences to the company if they are incorrect due to fraudulent intent.

In my August 7 Philadelphia Business Journal article, “Tone at the top & culture are mission-critical to all organizations,” I quoted Sabine Vollmer who wrote in the July 2018 issue of the Journal of Accountancy, “Boards that prioritize corporate culture, watch for red flags and set clear expectations will encourage ethical behavior throughout the company.”

Vollmer said, “Research over the past 20 years has continued to underscore that integrity drives performance. Corporate culture and tone at the top are considered key drivers of ethical behavior, but boards of directors often devote little time to the topic.”

Having once worked for a boss whose style was similar to that of Volkswagen’s Winterkorn, being promoted around him, eventually becoming his boss and then firing him, I have first-hand knowledge of the damage this type of boss can cause. I replaced that fired individual with the best general manger within the company at the time, who changed the culture of that organization.

Shortly after the start of my tenure as the president of one of my company’s world-wide businesses, I called a meeting of all our country managers to launch our continuous improvement program and to develop our operating principles. On that list was “we would obey the laws of the lands in which we operate,” an important principle that sometimes needs to be expressed explicitly.

My message to boards and to CEOs: Don’t tolerate individuals that act unethically or violate the law. Get rid of them, even if they are meeting or exceeding their financial and growth objectives. They are not worth keeping around. When their unethical or illegal activity becomes public, it will cause significant reputational and monetary damage to your organization.

Stan Silverman is founder and CEO of Silverman Leadership. He is a speaker, advisor and nationally syndicated writer on leadership, entrepreneurship and corporate governance. Silverman earned a Bachelor of Science degree in chemical engineering and an MBA degree from Drexel University. He is also an alumnus of the Advanced Management Program at the Harvard Business School. He can be reached at Stan@SilvermanLeadership.com.