Position Your Board And CEO For A Corporate Governance Win

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There have been enough inquiries, reams of paper, and stacks of books written, yet we still see shocking headlines outing bad (often criminal) behavior in the corporate world. With so much information available to address corporate governance, why is there still no understanding that the behavioral styles of executives and the resulting actions are central to the issue?

“Corporate Governance” includes practices and procedures by which a company is guided, balancing the interests of its many stakeholders, and ensuring there is a framework to attain agreed-upon objectives while adhering to all laws and regulations. In recent years, the U.S. Federal government has turned the spotlight on corporate governance (e.g. Sarbanes-Oxley).

Corporations rushed to find solutions to demonstrate their governance was strong. They seemed to be addressing risky behaviors. But many continued to miss the point. It’s not cynical for boards to question the rapid growth and success of a business; sometimes success has a direct correlation with rogue behavior. Yet questions aren’t asked, because success often equals bonuses.

Micro-management is not necessary. What is required are clear value statements, sound governance and risk management practices. Also needed is a board with a majority of independent and experienced directors asking tough questions, and a culture of risk-taking that is balanced. Most importantly, corporations need the behaviorally smart insight to “know people before numbers.” In other words, get to know who is likely to go rogue.

(Hear Behavioral Strategist Hugh Massie talk about Operational Risk Management.)

Board members are required to be even more accountable than employees in terms of their oversight, and to hold key executives to account. Day-to-day running of the organization belongs to the CEO and management team.

Two crucial relationships in the governance debate are between the CEO and board, and the other between the CEO and CFO. The latter, in some respects, will feed into the former in that, if the CFO is vulnerable to bullying by an intimidating, strong minded, and willful CEO, information flowing to the board will be compromised. A behaviorally smart CEO will know the value of a good relationship with their CFO, and ensure their skills and behavior complement each other. The board has responsibility to ensure both CEO and CFO have access to and a trusting relationship with the directors.

When inappropriate due diligence has been applied to these two relationships, managerial functions will, if not watched closely, endanger the business. The CEO is responsible for overseeing the execution of the board’s directions and policies. If the board has, for instance, hired a CEO whose credentials shine but whose behavior is questionable, they will have difficulty building a transparent relationship and establishing trust.

Boards need to be ever-alert to CEOs who adopt risky practices as new business opportunities arise and the business environment improves. Likewise, they need to be alert to the CEO who is unduly pressuring other key executives. Has your business got the governance structure in place to deal with a CEO who fails the transparency test or becomes the rogue employee?

The more the board members understand the strengths and behaviors they bring to their roles, the better able they will be to ensure there is a robust strategy in place to handle inappropriate behavior.

Potentially 5 percent of the workforce includes employees that are a high-security risk. The cost of all types of fraud is a staggering 5 percent of turnover, per the 2014 Global Fraud Study by the Association of Certified Fraud Examiners (ACFE).

While larger businesses are investing more in cybersecurity and other monitoring programs, virtually nothing is being put toward identifying and monitoring costly employee behavior risks from the CEO down. The problem is that many of these insider threats are already in your business and the situation is stealthily gaining momentum. The Global State of Information Security Survey 2015 recommends that 23 percent of the annual spend on business security be directed to behavioral profiling and monitoring of employees.

Research shows that the following problems are caused by human behavior:

  • Combinations of human behavioral factor outliers and external environmental factors (e.g. financial difficulty) trigger emotions causing negative behavior toward the company.
  • Combinations of employees with too similar or too different styles working in a high-risk environment cause internal control issues.

A key part of the solution is the deployment of a validated personality discovery process, providing insights to hidden, hard-wired traits and a reliable prediction of where security or compliance risks exist.

The employee behavior review using personality assessment methodologies should be uniformly applied to every employee in the business from the top down to distill “hot spot” areas. The high-performing leaders down through the sales and operations teams to the disgruntled bookkeeper are not exempt – new hires, or old guard – every individual including board members.

Using behavioral insights, management can dynamically match employees with specific environmental conditions to determine their potential response. They can also discern the degree to which such responses could create rogue behavior and negative actions toward the business. Lastly, management can apply these insights towards talent re-allocation, employee evaluation, team development and improved hiring processes.

Effective corporate governance begins with the directors in the boardroom. It includes the relationship between the board and the CEO. Understanding behaviors and inter relationships could actually be the key to delivering high-quality governance in any organization, rather than being seen erroneously, as it often is. as a soft approach not worthy of investment.

The advantage gained by institutionalizing the behavioral insights process combined with strategic oversight processes and procedures can and will deliver an environment that minimizes or eliminates rogue behavior. Don’t be part of another headline heralding: Corporate Governance Fails Again!

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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