More business chiefs ousted for ethical lapses

The share of chief executive officers (CEOs) forced out of office for ethical lapses has been on the rise around the world, according to the latest study by a division of PricewaterhouseCoopers (PwC).

The ‘2016 CEO Success’ study is published by Strategy&, PwC’s strategy consulting business, and analyses CEO successions at the world’s largest 2,500 public companies over the past 10 years.

The study finds that forced turnovers due to ethical lapses rose from 3.9% of all successions in 2007-11 to 5.3% in 2012-16 – a 36% 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% of all successions in 2007-11 to 3.3% in 2012-16 – a 102 percent increase. In Western Europe, the share of CEOs forced out for ethical lapses increased to 5.9% from 4.2%, and in the four BRIC (Brazil, Russia, India and China) major emerging economies, to 8.8% from 3.6%.

“Our data cannot show – and perhaps no data could – whether there’s more wrongdoing at large corporations today than in the past,” commented Per-Ola Karlsson, partner and leader of Strategy&’s organisation and leadership practice for PwC Middle East. “However, we doubt that’s the case, based on our own experience working with hundreds of companies over many years.

“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.”

Five main trends

The five trends identified in the study as shaping CEO accountability are as follows:

• Public opinion: Since the global 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 US and many other countries have moved to a zero-tolerance approach toward bad behaviour in the C-suite.
• Business operating environment: Companies increasingly are pursuing growth in emerging markets where ethical risks, such as the possibility of bribery and corruption, are heightened, while also relying on extended global supply chains that increase counterparty risks.
• Digital communications: 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.

Despite the global increase in forced turnovers for ethical lapses, companies in the US and Canada have the lowest incidence of such dismissals – 3.3% in 2012-16 compared to 5.9% in Western Europe and 8.8% in the BRIC countries. 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.

Bigger company, bigger target

The study also found that at the largest companies – those in the top quartile by market capitalisation – in North America 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,” said 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,” added DeAnne Aguirre, global leader of Strategy&’s Katzenbach Center 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.”

Among other findings from the 2016 study:

• CEO turnover:CEO turnover at the world’s largest 2,500 companies decreased from its record high of 16.6% in 2015 to 14.9% in 2016, due largely to the drop in merger and acquisition (M&A) activity. CEO turnover was highest in Brazil, Russia, and India, at 17.2%, followed by Japan (15.5%), Western Europe (15.3%) and China (15.2%). CEO turnover fell in every region studied, except for the US and Canada.
• Women CEOs:There were 12 women globally appointed to the role of CEOs in 2016 – 3.6% of the incoming class. This marks a return of the slow trend toward greater diversity that had been in place over recent years, and a recovery from the previous year’s low point of 2.8%.
  The share of incoming female CEOs was highest in the US and Canada, rebounding to 5.7% 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.

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