The Crisis of CEO Credibility

It used to be that the buck stopped here.

Now it seems to stop everywhere but.

Reset options. Plausible deniability. The always upward compensation ratchet. Golden parachutes. Indictment-free 'missteps' thanks to cowed regulators. There appears to be no downside once you get those three letters beside your name. The worst that can happen? An eight figure payout - at the very least.

But there is an impact, however subtle it is for now and how ever long it may take to become apparent. Polls and surveys, among them the Edelman Trust Barometer conducted in conjunction with the World Economic Forum, show that CEOs have lost credibility. Their opinions are suspect and their role as leaders is diminished.

Ironically, some of the reasons for the reputation decline are due to actions of their own making: chronic staff cuts in order to pay for senior compensation increases have reduced the numbers of people who can double check for internal problems; short-termism in managing and reporting - in part to satisfy financial analysts - has led to decision-making not based on long term economic health of the enterprise; a culture of what might politely be called moral agnosticism has emerged from an 'ends justify the means' obsession; and a 'blame the regulators or politicians for everything' mindset has shifted responsibility and obligation in every direction but home.

The reality is that the CEO position has gotten more difficult and more complex. But CEOs themselves have helped make it so. Globalism has expanded the scale of the enterprise. The cultural and organizational complexity have increased exponentially. The amount of information the CEO is expected to master has risen accordingly. All of which suggests that contemporary leaders need to self-actualize that hoariest of management cliches: there is no i in team. Operational decision-making and leadership example setting need to reflect that if credibility is to be restored. JL

Knowledge@Wharton reports:

Seemingly endless bank scandal have made people start to question the credibility of CEOs everywhere.
In April, when JPMorgan’s so-called “London Whale” derivative trading scandal broke, CEO Jamie Dimon seemed to know little about the errant trades, praising the chief investment officer involved and dismissing the backlash as a “tempest in a teapot.” Two months later, an investigation estimated the losses from these trades at $5.8 billion.

After the LIBOR scandal was uncovered in June, with Britain’s Barclays Bank as one of the primary players, then-CEO Robert Diamond claimed he knew nothing about the possible rate manipulation until the allegations came to light. And even after he resigned, he told Parliament the same line, despite the fact that Diamond had signed off on a 2011 annual report mentioning an investigation of the bank for possible rate fixing.

Meanwhile, questions over when Republican candidate Mitt Romney really left the helm of Bain Capital have become a talking point on the Presidential campaign trail.

Should Dimon and Diamond have known about these massive cover-ups at their organizations? What role did they play in allowing these problems to go on for so long? How much responsibility did Romney have for decisions made at Bain after he was apparently no longer in charge of day-to-day operations? And how has the business environment changed such that the once honorable and respected role of the CEO has turned into such a dubious and scandal-plagued burden? “Right now, we have a crisis of trust and credibility, and CEOs need to overcome that,” says Thomas Donaldson, a Wharton professor of legal studies and business ethics.

Most experts agree that the role of CEO has become much more complicated over the last few decades. As Donaldson notes, the days of Henry Ford-style leadership — when knowing everything about your product was enough — are long gone. For example, in 1927, Ford sold 250,000 Model T Cars to consumers in the U.S. Last year, Ford sold more than five million cars and various other vehicles in dozens of countries. And Ford is no longer just selling cars — it also produces other goods and helps to finance consumers’ purchases. “The complexity and size has really changed over the years,” Donaldson points out.

Technology has also increased the role and responsibility of CEOs, according to Donaldson, who says the business world is still in a state of “tech shock.” For example, he notes how advancements in business technology gave birth to synthetic collateralized debt obligations, which some point to as the root of the subprime mortgage crisis. Shareholder scrutiny has also increased with the help of technology, which has enabled easy access to SEC filings and 24-hour business news. Consequently, somewhere along the way, shareholders and management became acutely focused on improving efficiencies and short-term financial performance, according to Wharton management professor Peter Cappelli.

Cappelli says that these pressures forced companies to cut back on staffing, which led to less internal oversight. Additionally, he notes that many companies have also reduced, or completely eliminated, management training programs. And without management training, “people are being pushed into leadership roles without any preparation.”

Regulatory scrutiny — specifically of CEOs — has also increased, especially after the Enron and WorldCom debacles and the resulting Sarbanes-Oxley Act of 2002, which requires all senior executives to sign off on financial documents. Meanwhile, the Dodd-Frank Act forces companies to be more transparent about CEO compensation. But Wharton marketing professor George Day says that those requirements are often “more of an aggravation” to executives than an effective way to influence CEO behavior.

Leadership Styles

Indeed, the scope and visibility of what CEOs are managing have increased over the years, but Day says it’s the leadership style of the CEO that has really contributed to problems like those at JPMorgan and Barclays. He notes that many of the CEOs embroiled in the 2008 financial crisis had a more “organizational” style of leadership, meaning that they prided themselves on efficiency, focusing on short-term results and looking at challenges from the vantage point of the firm. Because these kinds of leaders see failure as an error, Day adds, employees don’t often admit to mistakes, and CEOs are often caught off guard by major problems.

“CEOs are much more vulnerable to surprises and to missing signals these days,” says Day, who is also the co-director of Wharton’s Mack Center for Technological Innovation. On the other hand, CEOs with a “vigilant” style of leadership see challenges from the vantage point of the customer and seek out diverse opinions. “There is a lot more uncertainty and complexity in business, and vigilant leaders tend to embrace uncertainty.” Day describes Andy Grove, the CEO of Intel from 1987 to 1997, as the “poster child for vigilant leadership.” During his tenure, Grove oversaw a dramatic increase in the company’s market capitalization, but at the same time created a culture where innovation flourished.

Grove was also a typical CEO of his generation, in that he was with the company for decades, beginning in 1968, and worked his way up to the top. These days, however, an overwhelming number of top executives are often brought in from the outside and, consequently, do not have extensive internal knowledge of the firm or a deep connection to lower-level employees. “They don’t have a history with the company and aren’t invested in [it],” Cappelli says.

Additionally, Donaldson points to a type of leadership that some could describe as “hands off,” where the CEO is more of a figurehead than the manager of day-to-day operations. This appears to be the case with Mitt Romney and his tenure as the chief executive at Bain Capital, after he moved on to manage the Olympic Games. Romney claims he resigned in 1999, yet SEC filings have him listed as CEO until 2002. During those three years, Bain started heavily investing in companies that outsourced jobs to other countries.

Donaldson says that while it might be true that a CEO is ignorant of suspect activity going on inside his or her company, he or she will still take the fall, and therefore should be aware. “We hold people at the top ultimately responsible.”

Today’s CEO

How can current CEOs avoid ending up in the same type of situation as Dimon, Diamond and Romney? Simply by being more in tune to what going on, so they will realize when something is amiss, according to Day. “It’s not the case that a good CEO has to be the master of all things; [he or she] just needs to know how to see the signals and act on them.”

Brian Rubin, a partner at law firm Sutherland Asbill & Brennan, takes it one step further, noting that the CEO not only needs to be able to catch all budding problems, but also needs to be deeply involved if any “red flag” situations arise. Additionally, he or she needs to set a tone that the company is serious about compliance and following the rules. “It’s not good enough for a CEO just to know [a problem] has been taken care of,” Rubin says. He or she needs to “personally deal with it and follow up on it. The CEO [should not] walk away feeling uncomfortable.”

One way a CEO can stay in tune with all that is going on at his company is by having a group of top executives who are diligent and involved. “A good CEO needs to have a C-suite that is equally vigilant,” Day notes. The CEO “needs to think [more in terms of] team building than delegation.”

A “culture of candor” is how Donaldson describes the tone that CEOs should set when wanting to run an open organization. To do this, the CEO has to make contact with people at all ranks, going down to the production floor or standing in the parking lot and talking to security guards. Donaldson adds that another way to win over people at all levels is through symbolic significance — instituting programs that do not hurt the bottom line of the company too much, but are very important to employees or customers. As an example, he points to Starbucks CEO Howard Shultz’s offer of health care benefits to employees at all levels. “Something like this can really motivate employees and restore trust.”

Still, Donaldson says that when it comes down to it, all CEOs have to be prepared to face the same challenges that leaders have faced for centuries — outside competition, internal strife and a demanding public. “It’s not that different than Roman times, really.”