Fraud, bribery, insider trading, environmental disasters, inflated resumes, and sexual indiscretions are just some of the ethical lapses committed by CEOs around the world. A new global study from PwC’s strategy consulting business, Strategy& reveals an uptick in the number of CEOs forced out of office for ethical lapses, which suggests that either ethical reporting is getting more rigorous, or the number of ethically ambiguous people making it to the top is on the rise.
“Our data cannot show – and perhaps no data could – whether there’s more wrongdoing at large corporations today than in the past. However, we doubt that’s the case, based on our own experience working with hundreds of companies over many years,” says Per-Ola Karlsson, partner and leader of Strategy&’s organisation and leadership practice for PwC Middle East.
“Over the last 15 years, five trends have resulted in boards of directors, investors, governments, customers, and the media holding CEOs to a far higher level of accountability for ethical lapses than in the past.”
The 2016 CEO Success study released today analysed CEO successions at the world’s largest 2,500 public companies over the past 10 years. Findings reveal that forced turnovers due to ethical lapses rose from 3.9 per cent of all successions in 2007 to 2011 to 5.3 per cent in 2012 to 2016 – a 36 per cent increase, due in large part to increased public scrutiny and accountability of executives.
The increase was more dramatic at companies in the US and Canada. Forced turnovers for ethical lapses at these companies increased from 1.6 per cent of all successions in 2007-11 to 3.3 per cent in 2012-16 – a 102 per cent increase. In Western Europe, the share of CEOs forced out for ethical lapses increased to 5.9 per cent from 4.2 per cent, and in the BRIC countries, to 8.8 per cent from 3.6 per cent. More stringent governance regulation is one likely reason. Both the legislative requirements for codes of conduct and anti-bribery statutes have been tightened significantly in the United States.
The five trends shaping CEO accountability
Since the financial crisis of 2007-08 and the Great Recession that it ignited, confidence and trust in large corporations and CEOs has been declining; the public has become more suspicious, more critical, and less forgiving of corporate misbehaviour.
Governance and regulation
The rise of public criticism of executives and corporations has translated directly into regulatory and legislative action, and companies in the U.S. and many other countries have moved to a zero-tolerance approach toward bad behaviour in the C-suite.
Business operating environment
Companies increasingly are firstly, pursuing growth in emerging markets where ethical risks, such as the possibility of bribery and corruption, are heightened, and relying on extended global supply chains that increase counter-party risks.
The use of email, text messaging, and social media has created new risks for ethical lapses. A company’s digital communications can provide irrefutable evidence of misconduct, and their existence increases the likelihood that a CEO will be held accountable.
The 24/7 news cycle
Unlike in the mid- to late 20th century, when most executives and companies could maintain a low public profile, today the lightning-fast flow of Web-based financial news and data ensures that negative information travels quickly and widely.
Bigger company, bigger target
The study also found that at the largest companies (those in the top quartile by market capitalisation) in the US and Canada and Western Europe, the overall share of CEOs forced out of office was significantly greater than the share forced out in the other market-cap quartiles.
“The fact that forced turnovers for ethical lapses were even higher at companies in the top quartile by market capitalisation in these regions supports our hypothesis, since the largest companies are the most affected by the five trends and are subject to the greatest scrutiny,” says Kristin Rivera, partner and global forensics clients and markets leader with PwC US.
“The increasing incidence of CEOs being forced out of office for ethical lapses may have a positive effect on public opinion over time by demonstrating that bad behaviour is in fact being detected and punished,” says DeAnne Aguirre, global leader of Strategy&’s Katzenbach Centre of Innovation for Culture and Leadership, principal with PwC US. “In the meantime, CEOs need to lead by example on a personal and organisational level and strive to build and maintain a true culture of integrity.”
Today’s global CEO
CEO turnover on the decline
CEO turnover at the world’s largest 2,500 companies decreased from its record high of 16.6 per cent in 2015 to 14.9 per cent in 2016, due largely to the drop in merger and acquisition activity. CEO turnover was highest in Brazil, Russia, and India, at 17.2 per cent, followed by Japan (15.5 per cent) and Western Europe (15.3 per cent) and China (15.2 per cent). CEO turnover fell in every region studied except for the US and Canada.
More women CEOs
There were 12 women globally appointed to the role of CEOs in 2016 – 3.6 per cent of the incoming class. This marks a return of the slow trend toward greater diversity that had been in place over the last several years, and a recovery from the previous year’s low point of 2.8 per cent. The share of incoming female CEOs was highest in the US and Canada, rebounding to 5.7 per cent after falling for the previous three years. Five industries – healthcare, industrials, information technology, consumer staples, and telecom services – did not have a single incoming female CEO in 2016.