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‘Tone at the top’ and corporate governance
Peter Giblin
Cass Business School
1. Introduction
Proper corporate governance is about the standards set by those who are in a position to establish
and enforce those standards. It is about leaders who know what appropriate attitudes and systems
are required and how to deliver the message from positions of power.
Much is written and spoken about crisis management and risk management, but too little attention is
paid to risk awareness and risk readiness. This whole area is a continuum, a reflection of problematic
evolution, so let us start at the beginning. Everyone faces risks every day; everyone makes a decision
explicitly/implicitly to accept risks, addressing and accepting cost/benefit or risk/reward. Driving a car
to work is a risk - the car might break down, run out of petrol or an accident could incur. There is no
realistic travel alternative, so the risk is accepted by millions, because it is minimal, and more than
counterbalanced by financial gain, job satisfaction or prestige. The same can be said for thousands of
other decisions made by billions every day, affecting health, safety and a myriad of other concerns.
In this chapter we will focus on this phenomenon as it affects senior level decision-makers in a wide
range of institutions, private and public, and consider how these leaders address the simple challenge
outlined above in much more complex circumstances. The issue at its core can be reduced to the
question: what is the probability of something happening and, if it does, what is the impact? The goal
is to calculate exactly what it costs to be ‘ahead’ at all times.
On a personal level, taking out a 20-year life insurance policy seems to have been a significant waste
of money after 21 years, but death in year two seems to be an excellent financial return for the estate.
The policies are sold, because the insured/beneficiaries believe the comfort level benefits outweigh
the cost.
In a corporate environment the issues are more complex, nuanced and ambiguous, and may involve
huge numbers from a financial perspective, and a potentially catastrophic impact on reputations -
individual and entity - if things go wrong.
Every day the media has coverage of someone, or group of people, who got it ‘wrong’ by failing to get
the risk/reward ratio properly balanced - accidentally or deliberately - and may or will pay the price,
corporately or personally or both.
What happened to Enron, WorldCom, Arthur Andersen, Siemens, aspects of the British banking
sector and certain members of their respective senior management? What will happen to Wal-Mart,
and how long will the Libor scandal continue?
In all cases, risks were taken, and for certain individuals the rewards were high, at least temporarily,
but the probability of something going wrong was underestimated, and the impact in every case was
very large.
This chapter is about the positive aspects of corporate governance, assessment of values and
attitudes, and behaviour that drives people and institutions towards an atmosphere that recognises
the omnipresence of risks, boundaries that will not be crossed, and focuses on those who lead in this
constantly evolving world of complexity.
We will look at corporate cultures - where do they come from, what drives them; is there a difference
between old and new, public and private? Are ‘old values’ less relevant as the speed and access to
information changes? Who decides? Who holds the keys to the kingdom?
Even if there is a ‘message’ from the top, how does it get disseminated? How do we know that all our
people will do the right thing?
As this focus turns to specific individuals, how do we determine that this person is the right one at the
right time? Many institutions get it wrong because they underestimate the risks of making ill-informed
decisions, and they underestimate the potential damage that an ill-informed decision may cause.
This is about having a culture, a view, values, foresight, as well as hindsight, and a base line that puts
shareholders, as well as other stakeholders, in the forefront.
Assuming that we can get to this stage with a sense of comfort, how does a senior leader function in
the boardroom with conflicting objectives (and perhaps conflicting personal values)? For example,
what if the chairman and the chief executive officer (CEO) do not like each other, do not trust each
other, do not share information and have different personal objectives. How does this impact on the
drive for proper corporate governance?
2. Tone at the top
When people speak of ‘tone at the top’ they are normally referring to a perception of appearance or
behaviour that delivers a message of some sort, directly or indirectly. It is sometimes thought of as an
impression that others have, such as “she makes a good first impression”. We are concerned with the
depth that actually supports that impression, and the impact it makes on the supporting cast, and the
stakeholder community.
It is quite clear that ‘tone’ reflects a ‘talk the talk’ and ‘walk the walk’ approach, and that any
disconnect is evident to those affected. The relevance is particularly important when distinguishing
between corporate governance and compliance. The latter may form a piece of the former in certain
circumstances, particularly in highly legalistic environments, but proper corporate governance, or the
lack thereof, is much more pervasive. It exists in any circumstance where an individual or small group
has an impact on a larger body.
If the CEO of a large multinational organisation, public, private or not-for-profit, makes a statement or
initiates a practice, he or she will or will not be taken seriously depending on the attendant behaviour.
For example, suppose a message from the top is issued that, “The Anti-Bribery Act has just been
passed, and what follows is what you can and cannot do, and we always act responsibly to our staff,
customers, etc, and obey the law”, and a copy or version of this message is sent to all staff, and that
is it! This feels like compliance - “I told everyone, that’s what I was required to do, my job is done”.
There is no sense of serious concern or commitment, and others will know that, and, perhaps, act
accordingly. On the other hand, if the message is more comprehensive and includes a series of steps
that will be implemented over an extended period of time, the impact will be much more significant.
Such a message might announce an information dissemination, training and tracking programme, and
the establishment of a whistle-blowing hotline, as well as clear guidelines for reporting and protection.
The purpose of this programme is to ensure that anyone potentially affected by such legislation knows
what it is about, how it impacts them, and the penalties to personal and employer reputation, as well
as possible job loss, fines and jail. Imagine the power a message has internally and externally if it is:
We take this very seriously, and we are instituting a series of explanatory sessions with all
relevant staff, and have arranged for an online training programme, linked with a short quiz to
ensure that we are all comfortable knowing what to do when. We will be able to track when
you received the case studies pack, and quiz, when you opened it, when you took the quiz, how
long it took, and what your answers were. We will periodically update the entire process, and
encourage you to ask questions of your manager on any points at any time to ensure full
understanding and compliance [that word again!].
Suppose you are a regulator with full powers to investigate and penalise, and you have suspicions
and information indicating that an entity has breached the provisions of the Bribery Act 2010 in a very
serious manner. You are presented with the two written messages, as outlined above. Both may claim
to be doing what is required, but how will the regulator react? Will he or she see or feel the difference
in the ‘tone at the top’? Probably. Assuming that an infringement did take place, it is entirely possible
that the penalty in the first case will be imposed in full, and lead to a search for further breaches. In
the second case, the reaction could well be, “they have taken this seriously, done what they could
reasonably be expected to, and put procedures in place to deliver and track the message”. Result?
Perhaps a lesser penalty, and an earlier closure to the investigation.
The author recently engaged with the CEO and director of human resources of a 200-year-old Swiss
company to consider initiating a programme along the lines of the second alternative above. The
company, although not a household name, is the world leader in the manufacture of certain types of
components, and has 40,000 employees in many countries. For the first 90 minutes of the two-hour
meeting, the CEO spoke of the history of the company, the brand, the reputation, the absolute
necessity of delivering clear behavioural messages to all staff and his strong concern not to breach
any transnational laws and guidelines. Only then did he actually ask for details of our firm’s services.
The Tone at the Top was very clear.
It was also clear that he believed what he said, and that he expected others to believe and act
accordingly. He would do his very best to deliver his values and message to all of his staff and use the
latest methods to ensure this was effected.
This leads to a result which may be underused by even the most effective leaders - the effective use
of the internal audit function.
Historically, the internal audit function has been used to ensure the cohesion, honesty and financial
integrity of an entity, by collecting a ‘picture’ of what is happening throughout the organisation on a
selective ‘snapshot’ basis. At its most basic, it periodically visits all departments/divisions of the entity,
probes to check for veracity of the facts, as well as compliance with standards systems and
procedures, and makes suggestions for improvements based on, for example, what other parts of the
organisation may be doing or contemplating. It will then issue a management letter to the auditee in
draft form, highlighting findings, and asking for a response and a plan of action; but it does not make
management decisions. Once completed, the report goes to the CEO and the chairperson of the
board audit committee for review, comments and action if required. (An entity’s audit charter must
provide for independence of thought as well as of action, and as such it exists in an ambiguous
environment. The head of the audit department must report functionally to the chair of the board audit
committee, as well as administratively to someone within the organisation - the CEO or a delegate
therefrom.)
Regretfully, while it is clear that the audit function has a unique brief to visit any part of the entity at
any time, and a broad knowledge of the daily functioning of the entity, it is generally underused as a
communicator of risk challenges and concerns. This is not to suggest that such function should have
line management authority for making risk-related decisions, but rather as it perpetually moves around
performing its audit function, it should keep its risk register up to date, and make suggestions that may
be of value to the auditee, and perhaps to the entity as a whole.
The effective master of the Tone at the Top understands the value of the audit function, and supports
its independence implicitly and explicitly, and uses its structure, brief and power to help address the
key challenge of risk awareness and risk readiness, so as to minimise the need for risk management
and crisis management.
3. Why will all of our people do the right thing?
So who are these people, and who pays attention to them?
They are effective leaders who set the right tone at the top. They are credible, respected and appear
to do what say they will do. That leads us to an examination of what these people are. They are
resourceful, astute, compatible and knowledgeable.
Resourcefulness indicates action-oriented drive, with a will to accomplish and eagerness to be
involved, with an ability to innovate, to seek new and better ways, to champion original ideas. It
reflects intellectual curiosity, a willingness to improve, and a propensity for mobility and challenges,
and a fear of the ‘comfort zone’. It also reflects speed of thought, although not always speed of
response, stamina, willpower, and tenacity, and an ability to act, while rejecting gratuitous
perfectionism.
Astuteness indicates an innate knowledge of when and how to act, a sense of timing and limits, good
judgement, as well as a commercial, technical or financial understanding. This often shows as a
‘feeling’, and ability to be ‘to the point’, to channel time and energy on key issues; in essence a focus
on quality not quantity. It also indicates a long-term vision, and ability to keep sight of goals, a clear
view of future objectives. This is balanced by flexibility in execution, and a balance between acting
directly and delegating responsibilities. An ability to adapt to circumstances is prevalent, a practical
and political common sense, with an innate recognition of the need to plan for contingencies. It also
demonstrates an ease with ambiguity, an instinct for addressing real problems, and understanding
covert messages and paradoxical information.
Compatibility indicates skills in dealing with others, and the ability to use people effectively; empathy,
and open-mindedness - hearing what is said and, most importantly, what is not said. It means
effectiveness as a communicator, convincing, adept salesmanship, coupled with a sense of when to
accept disagreement and rejection. This is often demonstrated as diplomatic skills, tact and a respect
for others - an ability to see others’ possibilities and to develop their potential, and a sense of team
spirit and how to develop the interpersonal skills of others. This is closely related to negotiating skills,
as well as psychological and emotional intelligence. In essence, an ability to inspire others, to
motivate and to communicate a ‘can do’ attitude.
Knowledge is intellectual prowess, demonstrated reliability, a presence of know-how, a projection of
being ‘on top of’ any specific problem of relevance. This is often accompanied by excellent analytical
skills, the ability to dissect a problem to detect relationships and consequences. It also reflects an
ability to be abstract, to be comfortable tackling complex problems with a clear mind, which
demonstrates logical thinking and the skill to rehearse the sequence of future events. This is about the
ability to integrate all facets of a problem, to sort out relevant details, to summarise and synthesise,
and requires an excellent memory, as well as accumulated experience or competence. Organisational
skills are essential; being effective, practical and capable of finding concrete solutions. In summary,
always having or finding the time, at ease under pressure, and in complete self-control.
An individual who is seen by others as being particularly resourceful, generally astute in his or her
decision-making, compatible with most of those with whom she comes into contact and
knowledgeable in the area of focus is likely to be regarded as a leader. If such an individual expects to
be considered a true leader, he or she will have been resourceful in defining his or her objectives,
while separating the means from the end, astute in recognising various priorities, will have made an
effort to be compatible with the target group, and will know what is required.
The leader with the right tone at the top, and with the most effective combination of attributes outlined
above, now has an obligation to ensure that the people in their organisation know what is expected of
them, understand what this means to them personally, and to the organisation as a whole, and
believe in the message and course of action, and will be capable of doing what is expected of them.
4. So who is this person?
We now have a sense of what a proper tone at the top is, who can set this tone and what leadership
looks like. That is fine up to a point, but now we have to find out who that person is, and how to assist
him or her in being effective to a maximum extent. Whether the individual is new to the position,
internally or externally, or is involved in a periodic performance review, it is essential to focus on what
is expected from the ‘decision-makers’. For sake of this discussion, let us assume that the board of
directors of a corporate entity has decided to change the international strategy of the organisation,
and need to be confident that the chief executive, who has been in place for a relatively short time, not
only ‘knows’ what is expected of her, but also genuinely ‘understands’, and ‘believes’, and has the
‘capability’ to do what is necessary.
The exercise should include not only the formulation of a clear goal, together with rationale, strategy
and tactics, but also a realistic, cogent job description for the incumbent, and a professional approach
to review and assessment, particularly given the change of direction. The proper management of this
process is extremely important so that the perceived need is clear, and the appropriateness and
interest of the incumbent is assessed, That can be addressed by a series of interviews, which may be
sufficient, but the inclusion of a properly presented, explained and executed psychometric
questionnaire may be very valuable, particularly one that focuses on real needs and interests.
Psychometric testing continues to evolve, in part influenced by the proliferation of the internet and
online assessment tools. Some are very good, some are out of date and some are irrelevant. The
very best can be a major contributor to assessing and minimising risk when selecting or assessing
senior executives; and the standard bearer for this purpose will focus on personal preferences rather
than abilities. This is because those who work in areas and on matters that are of interest tend to
spend more time on them and become more knowledgeable; the task becomes the vocation.
By definition, one cannot be interested in everything, and most effective in all areas. So let us
examine the possibilities, and draw some conclusions. First, how does a key person deal with
challenges, problems? Can she properly evaluate them, using credible methods and tools of
analysis? Can she then investigate emergent issues with purpose and intent to ensure that available
resources are brought to bear on what matters. Can she then foster an environment which
encourages open debate, and possible innovation in dealing with these problems - that is, find the
solutions and implement them?
Second, how effective is she influencing people? Can she build effective relationships with the
necessary team or followers, or other stakeholders? Generally, it is not too difficult to work with
someone who shares the same ideas, philosophy and objectives; it is not so easy to work with
someone who does not. How does she work with the latter? How does leadership emerge in these
circumstances, and how does one accept that it exists? Pearson CEO Marjorie Scardino, the late
Steve Jobs of Apple or Virgin’s founder, Richard Branson, clearly are people of influence but their
vision, styles and focus have been different. Third, how effective is the leader when faced with serious
roadblocks? Can she adapt her approach to new circumstances? Is there resilience when faced with
technical, regulatory or competitive issues? Who takes the next step? Having demonstrated
resilience, does she have the ability to change direction, without losing the followers, who expect
decisiveness from their leader? How about giving support to those in need? This requires an ability to
explain and motivate at the same time as saying: ‘We value your efforts and commitment, but we are
obliged to go in a different direction for the following reasons …’
Fourth, it is all about delivering results. Does she know enough about the essence, the details of the
challenge, to be confident of making the right decision and bringing the stakeholders behind her? Has
she ensured that the tasks required to reach the agreed goals are clear, and that the attendant
authority and resources are available?
The Wave questionnaire, created and developed by Saville Consulting,1
is the leading provider of
answers to these crucial questions. It is able to link ipsative and normative evaluations within a single
instrument in a unique manner and accordingly its conclusions are valid and highly credible.
Certain other observations emerge from an examination of the results from this questionnaire across
a wide variety of organisations. Those who succeed or excel at the top clearly demonstrate leadership
for the entity in question, show resilience and can adjust to change. They are also effective in
communicating information, building relations and encouraging innovation (not necessarily new
products, but new ways to approach issues), and are driven by achieving ‘success’, however that may
be defined. Nevertheless, perhaps surprisingly, such people tend not to evaluate difficult situations or
investigate issues personally - how often have we hear the expression ‘don’t bring me problems, bring
me solutions’? They are less likely to be involved in processing details or structuring specific tasks.
A clear explanation of the purpose for taking the questionnaire, coupled with proper administration
and professionally provided feedback, should reduce the risk of hiring or promoting inappropriate
individuals into positions to which they aspire but which require skills, interests or attitudes which they
do not have. No person is omni-skilled or omni-interested in everything. It is not possible to spend all
day thinking of the next product, and reading documents, and speaking to key colleagues, and visiting
essential customers, and meeting with regulators to discuss or influence impending legislation. What
we are seeking to do to is clarify what the position requires, to determine who is this person in front of
us, and thus minimise the risk of permitting or encouraging enterprise damage.
5. Into the boardroom
The chapter began with some comments on risk, highlighting the crucial need to be aware of
enterprise risk in all stages of life, and at all levels; to maximise risk awareness and risk readiness, so
there should be less reliance on risk management and crisis management. We are well aware that
organisations are run by people, and that the more effective leaders must be identified - internally or
externally - attracted or retained, and certainly developed, properly managed and promoted, in the
broadest sense of the word. We have considered the need to have a proper corporate culture with a
clear and well-understood ‘Tone at the Top’, which should have the effect of a strong magnet -
attracting and holding the best talent. We have considered what attributes successful leaders should
possess and demonstrate, and outlined a way to determine what is necessary about specific
individuals.
Now we are going to incorporate this into an individual who has recently joined the board of a large
enterprise. For the purposes of the argument, we will not categorise the individual as chairman, CEO,
1
http://www.savilleconsulting.com/products/wave.aspx.
an internal director or non-executive director, but rather call them an ‘integrated individual’. We will not
address the issue of whether this person is an internal promotion or external hire, because we want to
place the person, as the ‘right’ type (for whatever position) based on what we are hoping for, in an
environment with personal and professional conflict to observe, think, reflect and possibly act.
Bearing in mind that the chairman runs the board and CEO runs the company, we are looking at the
interaction of these two individuals: is there clarity regarding their roles, are there expressions of
honesty, mutual trust and self-confidence? This translates into open, effective communication, which
should minimise risk by encouraging discussion of emerging problems - being risk aware and risk
ready, rather than reactive and in crisis mode (think BP and the Deepwater Horizon disaster - billions
of dollars paid or set aside for fines and payments). Does vigorous debate exist; is there respect for
the abilities of others? Are the other members of the board fully informed of the current issues, briefed
for discussion, and certainly briefed on the implications arising from a major change of corporate
direction? (Imagine our ‘integrated individual’ being told that the FT 100 company is moving out of
telecoms equipment manufacturing and into software development, or moving from oil exploration to
commodity trading without any prior information, and told ‘you are new - you don’t really need to
concern yourself with this’ - it has happened!) Proper preparation and distribution of management
information encourages the best people to join, stay, participate professionally and absorb the ethos
of good governance. This reduces the risk attendant with a weak atmosphere which reflects weak
values, or ‘values’ which are not conceived with the best interests of all stakeholders in mind. Think
Enron - a disappearing entity, fines and jail-time for some at the top. Where was the trust, the serious
debate? Was it fear and greed that governed?
Implicit in our discussion is that Tone at the Top, and a very professional approach to recruitment and
promotion, should enhance the objective of some transitions. Think GE under Jack Welch, one of the
great ‘preparers’. Possible successors were subject to vigorous operational, staff, and geographical
challenges for years before a successor was appointed. This did not mean a ‘cookie cutter’
procedure, nor did it envision the production of a ‘plain vanilla’ cast of characters, but rather a very
explicit goal of risk awareness and risk readiness, including preparation for the unthinkable. Those
who were not successful moved on, did very well elsewhere and brought with them the rigorous
attitudes to proper corporate governance, having participated in a very demanding succession
planning exercise - not the knee-jerk reaction seen in media converge when a lack of risk awareness
has led to a state of crisis management, attendant departures and the elevation of compromise and
surprise.
Where do we see this?
A strong-minded chairman with a weaker chief executive can lead to an assumption that the chairman
will make all the important decisions, and that the CEO is just a rubber stamp, and thus is less
important; when or if the chairman leaves, the team left behind could be weak, with low credibility
down and an increased risk of damage to the entity.
A strong CEO and a weak chairman could mean that the board simply does not function adequately; it
becomes the fiefdom of the CEO and his inner team, and possible problems will be buried because
there is not practical mechanism for visibility. If something goes wrong, it may be a surprise because
dissenting views may not be visible, or, if they are, disfunctionality joins the party.
Of course, a weak chairman combined with a weak CEO is likely to be disastrous. Risk, apparent or
otherwise, will be rampant. The potential star will not show up, or will disappear and the risk of
endemic weak management will be high. This is often manifested in an ‘it will be all right on the night’
attitude, an unknown, unexpected accident waiting to happen.
The other possibility is a strong chairman and a strong CEO who are able, confident, and
knowledgeable, and communicate with trust ‘ahead of the curve’. One would like to think that such a
team would reflect the best values, by implicitly, and hopefully explicitly, setting the proper tone at the
top, and disseminating proper corporate believes and values. By following the path outlined above, it
should be possible to create an environment of pride and respect together with professionalism and
effectiveness, which does become the magnet for the best people available.
Reflecting on what we have addressed in this chapter, let us hope for the best result as we consider a
final scenario which may occur more often than we would like.
6. Mr Pandora and his briefcase
Mr Pandora parked his modest car at the far end of the spaces allotted for the State Licensing
Authority. He had worked for many years for a large multinational energy company in various
somewhat menial positions, and had agreed the day before to drop off the comprehensive, bulky
drilling application for permission to extend the company’s search for additional gas reserves on its
leased property. Tucked inside this jacket pocket was a bank draft made out to the SLA for £500,000
to cover the filing fees, research, investigation and review, and hopefully approval, of the application.
As he approached the door to the SLA offices, he remembered that his driver’s licence had just
expired, and decided to try to get that renewed at the same time.
After waiting a few minutes, he was shown into a small conference room where he was soon joined by
Mr Smiley, a representative of the SLA, who closed the door, seated himself and noted that he was
briefed on the reason for Mr Pandora’s visit. The latter placed the application file on the table, together
with the bank draft, confirmed that everything should be in order and that he had been told by his
manager that, assuming all was well, approval to proceed would be forthcoming very soon.
Mr Smiley pulled the file and bank draft towards himself and said in a pleasant manner that while
processing normally took two to three months, they were very busy at the SLA and somewhat under-
staffed, and so the company might have to wait for eight to ten months for a response, unless an
additional payment of £250,000 was made to Mr Smiley - in cash. Mr Pandora had never been faced
with a situation like this before, and was completely at a loss as to how he should respond.
Stalling for time, he mentioned that, by the way, his driver’s licence had expired, and could the SLA
issue him with a renewal? Mr Smiley responded that this was certainly the case; the fee was £25 and
it would normally take six weeks to process. However, if Mr Pandora provided an addition £20 to Mr
Smiley with his renewal application, in cash, the licence would be issued while he waited.
Mr Pandora asked for some to consider what had transpired, and said he would return after some
reflection.
Mr Smiley reminded him that the SLA would be closing early that day in preparation for the long
weekend holiday, so Mr Pandora should not delay for long. He also told him not to use his car without
his new driver’s licence as there would be increased police presence in the next few days due to the
expected arrival of an increased number of visitors from out of state.
Mr Pandora picked up the drilling application and banker’s draft, put them in his briefcase, politely
excused himself and left the office. He returned to his car, rolled down the window and began to think
about what had just happened, his career and how to get home.
He remembered, vaguely, something about corporate governance. There had been some
presentations on the subject, he had taken a sort of online course and a test which he guessed
everyone eventually passed, and occasionally an email would show up. It was all about how to react
to situations like those he was facing - or perhaps there was more to it. Seems to have been the result
of widespread panic in the energy world, and elsewhere following the collapse of a big company -
couldn’t remember the name - lots of people lost their jobs, and some went to jail.
In his company, there was talk of ‘tone at the top’, leadership talking about everyone behaving
properly and being a representative of the company, together with a message that doing what the
CEO and the board said was the answer. But he wondered - after a while messages seemed to arrive
less frequently and stories still floated around about extravagant entertainment and doing business in
other countries ‘in a different way’. Did anyone really care? Was he in a lose-lose situation?
He could pay ‘extra’ to get his driver’s licence renewed, but was it right to do so? Was it any different
from the ‘other’ payment? Was one a ‘facility payment’ and the other a ‘bribe’?
Who should he speak to for advice? His boss? Not sure about that; he would say sort your driver’s
licence out yourself, that is a private matter - “you could always take a bus” - although that was not
really true. Was his job was on the line if the drilling license just didn’t come in on schedule and
various costs went up? What if his bonus was cut because targets were not reached? Maybe there is
extra money around to deal with things like this - call it consulting fees; maybe there was a way.
He could always speak to the company’s whistle-blower, although he did not know much about this.
Would his identity be protected? Would he be in trouble with the government if he did not say anything
to anyone, and they later found out? Maybe he was already in trouble because he did not say no to
Mr Smiley!
Maybe someone in the family, a friend … Would just mentioning the situation get them into possible
trouble?
What should he feel? What should he think? Who cares?
What happens next?

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Peter Giblin - Tone at the Top

  • 1. ‘Tone at the top’ and corporate governance Peter Giblin Cass Business School 1. Introduction Proper corporate governance is about the standards set by those who are in a position to establish and enforce those standards. It is about leaders who know what appropriate attitudes and systems are required and how to deliver the message from positions of power. Much is written and spoken about crisis management and risk management, but too little attention is paid to risk awareness and risk readiness. This whole area is a continuum, a reflection of problematic evolution, so let us start at the beginning. Everyone faces risks every day; everyone makes a decision explicitly/implicitly to accept risks, addressing and accepting cost/benefit or risk/reward. Driving a car to work is a risk - the car might break down, run out of petrol or an accident could incur. There is no realistic travel alternative, so the risk is accepted by millions, because it is minimal, and more than counterbalanced by financial gain, job satisfaction or prestige. The same can be said for thousands of other decisions made by billions every day, affecting health, safety and a myriad of other concerns. In this chapter we will focus on this phenomenon as it affects senior level decision-makers in a wide range of institutions, private and public, and consider how these leaders address the simple challenge outlined above in much more complex circumstances. The issue at its core can be reduced to the question: what is the probability of something happening and, if it does, what is the impact? The goal is to calculate exactly what it costs to be ‘ahead’ at all times. On a personal level, taking out a 20-year life insurance policy seems to have been a significant waste of money after 21 years, but death in year two seems to be an excellent financial return for the estate. The policies are sold, because the insured/beneficiaries believe the comfort level benefits outweigh the cost. In a corporate environment the issues are more complex, nuanced and ambiguous, and may involve huge numbers from a financial perspective, and a potentially catastrophic impact on reputations - individual and entity - if things go wrong. Every day the media has coverage of someone, or group of people, who got it ‘wrong’ by failing to get the risk/reward ratio properly balanced - accidentally or deliberately - and may or will pay the price, corporately or personally or both. What happened to Enron, WorldCom, Arthur Andersen, Siemens, aspects of the British banking sector and certain members of their respective senior management? What will happen to Wal-Mart, and how long will the Libor scandal continue? In all cases, risks were taken, and for certain individuals the rewards were high, at least temporarily, but the probability of something going wrong was underestimated, and the impact in every case was very large. This chapter is about the positive aspects of corporate governance, assessment of values and attitudes, and behaviour that drives people and institutions towards an atmosphere that recognises the omnipresence of risks, boundaries that will not be crossed, and focuses on those who lead in this constantly evolving world of complexity. We will look at corporate cultures - where do they come from, what drives them; is there a difference between old and new, public and private? Are ‘old values’ less relevant as the speed and access to information changes? Who decides? Who holds the keys to the kingdom? Even if there is a ‘message’ from the top, how does it get disseminated? How do we know that all our people will do the right thing? As this focus turns to specific individuals, how do we determine that this person is the right one at the right time? Many institutions get it wrong because they underestimate the risks of making ill-informed decisions, and they underestimate the potential damage that an ill-informed decision may cause.
  • 2. This is about having a culture, a view, values, foresight, as well as hindsight, and a base line that puts shareholders, as well as other stakeholders, in the forefront. Assuming that we can get to this stage with a sense of comfort, how does a senior leader function in the boardroom with conflicting objectives (and perhaps conflicting personal values)? For example, what if the chairman and the chief executive officer (CEO) do not like each other, do not trust each other, do not share information and have different personal objectives. How does this impact on the drive for proper corporate governance? 2. Tone at the top When people speak of ‘tone at the top’ they are normally referring to a perception of appearance or behaviour that delivers a message of some sort, directly or indirectly. It is sometimes thought of as an impression that others have, such as “she makes a good first impression”. We are concerned with the depth that actually supports that impression, and the impact it makes on the supporting cast, and the stakeholder community. It is quite clear that ‘tone’ reflects a ‘talk the talk’ and ‘walk the walk’ approach, and that any disconnect is evident to those affected. The relevance is particularly important when distinguishing between corporate governance and compliance. The latter may form a piece of the former in certain circumstances, particularly in highly legalistic environments, but proper corporate governance, or the lack thereof, is much more pervasive. It exists in any circumstance where an individual or small group has an impact on a larger body. If the CEO of a large multinational organisation, public, private or not-for-profit, makes a statement or initiates a practice, he or she will or will not be taken seriously depending on the attendant behaviour. For example, suppose a message from the top is issued that, “The Anti-Bribery Act has just been passed, and what follows is what you can and cannot do, and we always act responsibly to our staff, customers, etc, and obey the law”, and a copy or version of this message is sent to all staff, and that is it! This feels like compliance - “I told everyone, that’s what I was required to do, my job is done”. There is no sense of serious concern or commitment, and others will know that, and, perhaps, act accordingly. On the other hand, if the message is more comprehensive and includes a series of steps that will be implemented over an extended period of time, the impact will be much more significant. Such a message might announce an information dissemination, training and tracking programme, and the establishment of a whistle-blowing hotline, as well as clear guidelines for reporting and protection. The purpose of this programme is to ensure that anyone potentially affected by such legislation knows what it is about, how it impacts them, and the penalties to personal and employer reputation, as well as possible job loss, fines and jail. Imagine the power a message has internally and externally if it is: We take this very seriously, and we are instituting a series of explanatory sessions with all relevant staff, and have arranged for an online training programme, linked with a short quiz to ensure that we are all comfortable knowing what to do when. We will be able to track when you received the case studies pack, and quiz, when you opened it, when you took the quiz, how long it took, and what your answers were. We will periodically update the entire process, and encourage you to ask questions of your manager on any points at any time to ensure full understanding and compliance [that word again!]. Suppose you are a regulator with full powers to investigate and penalise, and you have suspicions and information indicating that an entity has breached the provisions of the Bribery Act 2010 in a very serious manner. You are presented with the two written messages, as outlined above. Both may claim to be doing what is required, but how will the regulator react? Will he or she see or feel the difference in the ‘tone at the top’? Probably. Assuming that an infringement did take place, it is entirely possible that the penalty in the first case will be imposed in full, and lead to a search for further breaches. In the second case, the reaction could well be, “they have taken this seriously, done what they could reasonably be expected to, and put procedures in place to deliver and track the message”. Result? Perhaps a lesser penalty, and an earlier closure to the investigation. The author recently engaged with the CEO and director of human resources of a 200-year-old Swiss company to consider initiating a programme along the lines of the second alternative above. The company, although not a household name, is the world leader in the manufacture of certain types of components, and has 40,000 employees in many countries. For the first 90 minutes of the two-hour
  • 3. meeting, the CEO spoke of the history of the company, the brand, the reputation, the absolute necessity of delivering clear behavioural messages to all staff and his strong concern not to breach any transnational laws and guidelines. Only then did he actually ask for details of our firm’s services. The Tone at the Top was very clear. It was also clear that he believed what he said, and that he expected others to believe and act accordingly. He would do his very best to deliver his values and message to all of his staff and use the latest methods to ensure this was effected. This leads to a result which may be underused by even the most effective leaders - the effective use of the internal audit function. Historically, the internal audit function has been used to ensure the cohesion, honesty and financial integrity of an entity, by collecting a ‘picture’ of what is happening throughout the organisation on a selective ‘snapshot’ basis. At its most basic, it periodically visits all departments/divisions of the entity, probes to check for veracity of the facts, as well as compliance with standards systems and procedures, and makes suggestions for improvements based on, for example, what other parts of the organisation may be doing or contemplating. It will then issue a management letter to the auditee in draft form, highlighting findings, and asking for a response and a plan of action; but it does not make management decisions. Once completed, the report goes to the CEO and the chairperson of the board audit committee for review, comments and action if required. (An entity’s audit charter must provide for independence of thought as well as of action, and as such it exists in an ambiguous environment. The head of the audit department must report functionally to the chair of the board audit committee, as well as administratively to someone within the organisation - the CEO or a delegate therefrom.) Regretfully, while it is clear that the audit function has a unique brief to visit any part of the entity at any time, and a broad knowledge of the daily functioning of the entity, it is generally underused as a communicator of risk challenges and concerns. This is not to suggest that such function should have line management authority for making risk-related decisions, but rather as it perpetually moves around performing its audit function, it should keep its risk register up to date, and make suggestions that may be of value to the auditee, and perhaps to the entity as a whole. The effective master of the Tone at the Top understands the value of the audit function, and supports its independence implicitly and explicitly, and uses its structure, brief and power to help address the key challenge of risk awareness and risk readiness, so as to minimise the need for risk management and crisis management. 3. Why will all of our people do the right thing? So who are these people, and who pays attention to them? They are effective leaders who set the right tone at the top. They are credible, respected and appear to do what say they will do. That leads us to an examination of what these people are. They are resourceful, astute, compatible and knowledgeable. Resourcefulness indicates action-oriented drive, with a will to accomplish and eagerness to be involved, with an ability to innovate, to seek new and better ways, to champion original ideas. It reflects intellectual curiosity, a willingness to improve, and a propensity for mobility and challenges, and a fear of the ‘comfort zone’. It also reflects speed of thought, although not always speed of response, stamina, willpower, and tenacity, and an ability to act, while rejecting gratuitous perfectionism. Astuteness indicates an innate knowledge of when and how to act, a sense of timing and limits, good judgement, as well as a commercial, technical or financial understanding. This often shows as a ‘feeling’, and ability to be ‘to the point’, to channel time and energy on key issues; in essence a focus on quality not quantity. It also indicates a long-term vision, and ability to keep sight of goals, a clear view of future objectives. This is balanced by flexibility in execution, and a balance between acting directly and delegating responsibilities. An ability to adapt to circumstances is prevalent, a practical and political common sense, with an innate recognition of the need to plan for contingencies. It also demonstrates an ease with ambiguity, an instinct for addressing real problems, and understanding covert messages and paradoxical information.
  • 4. Compatibility indicates skills in dealing with others, and the ability to use people effectively; empathy, and open-mindedness - hearing what is said and, most importantly, what is not said. It means effectiveness as a communicator, convincing, adept salesmanship, coupled with a sense of when to accept disagreement and rejection. This is often demonstrated as diplomatic skills, tact and a respect for others - an ability to see others’ possibilities and to develop their potential, and a sense of team spirit and how to develop the interpersonal skills of others. This is closely related to negotiating skills, as well as psychological and emotional intelligence. In essence, an ability to inspire others, to motivate and to communicate a ‘can do’ attitude. Knowledge is intellectual prowess, demonstrated reliability, a presence of know-how, a projection of being ‘on top of’ any specific problem of relevance. This is often accompanied by excellent analytical skills, the ability to dissect a problem to detect relationships and consequences. It also reflects an ability to be abstract, to be comfortable tackling complex problems with a clear mind, which demonstrates logical thinking and the skill to rehearse the sequence of future events. This is about the ability to integrate all facets of a problem, to sort out relevant details, to summarise and synthesise, and requires an excellent memory, as well as accumulated experience or competence. Organisational skills are essential; being effective, practical and capable of finding concrete solutions. In summary, always having or finding the time, at ease under pressure, and in complete self-control. An individual who is seen by others as being particularly resourceful, generally astute in his or her decision-making, compatible with most of those with whom she comes into contact and knowledgeable in the area of focus is likely to be regarded as a leader. If such an individual expects to be considered a true leader, he or she will have been resourceful in defining his or her objectives, while separating the means from the end, astute in recognising various priorities, will have made an effort to be compatible with the target group, and will know what is required. The leader with the right tone at the top, and with the most effective combination of attributes outlined above, now has an obligation to ensure that the people in their organisation know what is expected of them, understand what this means to them personally, and to the organisation as a whole, and believe in the message and course of action, and will be capable of doing what is expected of them. 4. So who is this person? We now have a sense of what a proper tone at the top is, who can set this tone and what leadership looks like. That is fine up to a point, but now we have to find out who that person is, and how to assist him or her in being effective to a maximum extent. Whether the individual is new to the position, internally or externally, or is involved in a periodic performance review, it is essential to focus on what is expected from the ‘decision-makers’. For sake of this discussion, let us assume that the board of directors of a corporate entity has decided to change the international strategy of the organisation, and need to be confident that the chief executive, who has been in place for a relatively short time, not only ‘knows’ what is expected of her, but also genuinely ‘understands’, and ‘believes’, and has the ‘capability’ to do what is necessary. The exercise should include not only the formulation of a clear goal, together with rationale, strategy and tactics, but also a realistic, cogent job description for the incumbent, and a professional approach to review and assessment, particularly given the change of direction. The proper management of this process is extremely important so that the perceived need is clear, and the appropriateness and interest of the incumbent is assessed, That can be addressed by a series of interviews, which may be sufficient, but the inclusion of a properly presented, explained and executed psychometric questionnaire may be very valuable, particularly one that focuses on real needs and interests. Psychometric testing continues to evolve, in part influenced by the proliferation of the internet and online assessment tools. Some are very good, some are out of date and some are irrelevant. The very best can be a major contributor to assessing and minimising risk when selecting or assessing senior executives; and the standard bearer for this purpose will focus on personal preferences rather than abilities. This is because those who work in areas and on matters that are of interest tend to spend more time on them and become more knowledgeable; the task becomes the vocation. By definition, one cannot be interested in everything, and most effective in all areas. So let us examine the possibilities, and draw some conclusions. First, how does a key person deal with challenges, problems? Can she properly evaluate them, using credible methods and tools of analysis? Can she then investigate emergent issues with purpose and intent to ensure that available
  • 5. resources are brought to bear on what matters. Can she then foster an environment which encourages open debate, and possible innovation in dealing with these problems - that is, find the solutions and implement them? Second, how effective is she influencing people? Can she build effective relationships with the necessary team or followers, or other stakeholders? Generally, it is not too difficult to work with someone who shares the same ideas, philosophy and objectives; it is not so easy to work with someone who does not. How does she work with the latter? How does leadership emerge in these circumstances, and how does one accept that it exists? Pearson CEO Marjorie Scardino, the late Steve Jobs of Apple or Virgin’s founder, Richard Branson, clearly are people of influence but their vision, styles and focus have been different. Third, how effective is the leader when faced with serious roadblocks? Can she adapt her approach to new circumstances? Is there resilience when faced with technical, regulatory or competitive issues? Who takes the next step? Having demonstrated resilience, does she have the ability to change direction, without losing the followers, who expect decisiveness from their leader? How about giving support to those in need? This requires an ability to explain and motivate at the same time as saying: ‘We value your efforts and commitment, but we are obliged to go in a different direction for the following reasons …’ Fourth, it is all about delivering results. Does she know enough about the essence, the details of the challenge, to be confident of making the right decision and bringing the stakeholders behind her? Has she ensured that the tasks required to reach the agreed goals are clear, and that the attendant authority and resources are available? The Wave questionnaire, created and developed by Saville Consulting,1 is the leading provider of answers to these crucial questions. It is able to link ipsative and normative evaluations within a single instrument in a unique manner and accordingly its conclusions are valid and highly credible. Certain other observations emerge from an examination of the results from this questionnaire across a wide variety of organisations. Those who succeed or excel at the top clearly demonstrate leadership for the entity in question, show resilience and can adjust to change. They are also effective in communicating information, building relations and encouraging innovation (not necessarily new products, but new ways to approach issues), and are driven by achieving ‘success’, however that may be defined. Nevertheless, perhaps surprisingly, such people tend not to evaluate difficult situations or investigate issues personally - how often have we hear the expression ‘don’t bring me problems, bring me solutions’? They are less likely to be involved in processing details or structuring specific tasks. A clear explanation of the purpose for taking the questionnaire, coupled with proper administration and professionally provided feedback, should reduce the risk of hiring or promoting inappropriate individuals into positions to which they aspire but which require skills, interests or attitudes which they do not have. No person is omni-skilled or omni-interested in everything. It is not possible to spend all day thinking of the next product, and reading documents, and speaking to key colleagues, and visiting essential customers, and meeting with regulators to discuss or influence impending legislation. What we are seeking to do to is clarify what the position requires, to determine who is this person in front of us, and thus minimise the risk of permitting or encouraging enterprise damage. 5. Into the boardroom The chapter began with some comments on risk, highlighting the crucial need to be aware of enterprise risk in all stages of life, and at all levels; to maximise risk awareness and risk readiness, so there should be less reliance on risk management and crisis management. We are well aware that organisations are run by people, and that the more effective leaders must be identified - internally or externally - attracted or retained, and certainly developed, properly managed and promoted, in the broadest sense of the word. We have considered the need to have a proper corporate culture with a clear and well-understood ‘Tone at the Top’, which should have the effect of a strong magnet - attracting and holding the best talent. We have considered what attributes successful leaders should possess and demonstrate, and outlined a way to determine what is necessary about specific individuals. Now we are going to incorporate this into an individual who has recently joined the board of a large enterprise. For the purposes of the argument, we will not categorise the individual as chairman, CEO, 1 http://www.savilleconsulting.com/products/wave.aspx.
  • 6. an internal director or non-executive director, but rather call them an ‘integrated individual’. We will not address the issue of whether this person is an internal promotion or external hire, because we want to place the person, as the ‘right’ type (for whatever position) based on what we are hoping for, in an environment with personal and professional conflict to observe, think, reflect and possibly act. Bearing in mind that the chairman runs the board and CEO runs the company, we are looking at the interaction of these two individuals: is there clarity regarding their roles, are there expressions of honesty, mutual trust and self-confidence? This translates into open, effective communication, which should minimise risk by encouraging discussion of emerging problems - being risk aware and risk ready, rather than reactive and in crisis mode (think BP and the Deepwater Horizon disaster - billions of dollars paid or set aside for fines and payments). Does vigorous debate exist; is there respect for the abilities of others? Are the other members of the board fully informed of the current issues, briefed for discussion, and certainly briefed on the implications arising from a major change of corporate direction? (Imagine our ‘integrated individual’ being told that the FT 100 company is moving out of telecoms equipment manufacturing and into software development, or moving from oil exploration to commodity trading without any prior information, and told ‘you are new - you don’t really need to concern yourself with this’ - it has happened!) Proper preparation and distribution of management information encourages the best people to join, stay, participate professionally and absorb the ethos of good governance. This reduces the risk attendant with a weak atmosphere which reflects weak values, or ‘values’ which are not conceived with the best interests of all stakeholders in mind. Think Enron - a disappearing entity, fines and jail-time for some at the top. Where was the trust, the serious debate? Was it fear and greed that governed? Implicit in our discussion is that Tone at the Top, and a very professional approach to recruitment and promotion, should enhance the objective of some transitions. Think GE under Jack Welch, one of the great ‘preparers’. Possible successors were subject to vigorous operational, staff, and geographical challenges for years before a successor was appointed. This did not mean a ‘cookie cutter’ procedure, nor did it envision the production of a ‘plain vanilla’ cast of characters, but rather a very explicit goal of risk awareness and risk readiness, including preparation for the unthinkable. Those who were not successful moved on, did very well elsewhere and brought with them the rigorous attitudes to proper corporate governance, having participated in a very demanding succession planning exercise - not the knee-jerk reaction seen in media converge when a lack of risk awareness has led to a state of crisis management, attendant departures and the elevation of compromise and surprise. Where do we see this? A strong-minded chairman with a weaker chief executive can lead to an assumption that the chairman will make all the important decisions, and that the CEO is just a rubber stamp, and thus is less important; when or if the chairman leaves, the team left behind could be weak, with low credibility down and an increased risk of damage to the entity. A strong CEO and a weak chairman could mean that the board simply does not function adequately; it becomes the fiefdom of the CEO and his inner team, and possible problems will be buried because there is not practical mechanism for visibility. If something goes wrong, it may be a surprise because dissenting views may not be visible, or, if they are, disfunctionality joins the party. Of course, a weak chairman combined with a weak CEO is likely to be disastrous. Risk, apparent or otherwise, will be rampant. The potential star will not show up, or will disappear and the risk of endemic weak management will be high. This is often manifested in an ‘it will be all right on the night’ attitude, an unknown, unexpected accident waiting to happen. The other possibility is a strong chairman and a strong CEO who are able, confident, and knowledgeable, and communicate with trust ‘ahead of the curve’. One would like to think that such a team would reflect the best values, by implicitly, and hopefully explicitly, setting the proper tone at the top, and disseminating proper corporate believes and values. By following the path outlined above, it should be possible to create an environment of pride and respect together with professionalism and effectiveness, which does become the magnet for the best people available. Reflecting on what we have addressed in this chapter, let us hope for the best result as we consider a final scenario which may occur more often than we would like.
  • 7. 6. Mr Pandora and his briefcase Mr Pandora parked his modest car at the far end of the spaces allotted for the State Licensing Authority. He had worked for many years for a large multinational energy company in various somewhat menial positions, and had agreed the day before to drop off the comprehensive, bulky drilling application for permission to extend the company’s search for additional gas reserves on its leased property. Tucked inside this jacket pocket was a bank draft made out to the SLA for £500,000 to cover the filing fees, research, investigation and review, and hopefully approval, of the application. As he approached the door to the SLA offices, he remembered that his driver’s licence had just expired, and decided to try to get that renewed at the same time. After waiting a few minutes, he was shown into a small conference room where he was soon joined by Mr Smiley, a representative of the SLA, who closed the door, seated himself and noted that he was briefed on the reason for Mr Pandora’s visit. The latter placed the application file on the table, together with the bank draft, confirmed that everything should be in order and that he had been told by his manager that, assuming all was well, approval to proceed would be forthcoming very soon. Mr Smiley pulled the file and bank draft towards himself and said in a pleasant manner that while processing normally took two to three months, they were very busy at the SLA and somewhat under- staffed, and so the company might have to wait for eight to ten months for a response, unless an additional payment of £250,000 was made to Mr Smiley - in cash. Mr Pandora had never been faced with a situation like this before, and was completely at a loss as to how he should respond. Stalling for time, he mentioned that, by the way, his driver’s licence had expired, and could the SLA issue him with a renewal? Mr Smiley responded that this was certainly the case; the fee was £25 and it would normally take six weeks to process. However, if Mr Pandora provided an addition £20 to Mr Smiley with his renewal application, in cash, the licence would be issued while he waited. Mr Pandora asked for some to consider what had transpired, and said he would return after some reflection. Mr Smiley reminded him that the SLA would be closing early that day in preparation for the long weekend holiday, so Mr Pandora should not delay for long. He also told him not to use his car without his new driver’s licence as there would be increased police presence in the next few days due to the expected arrival of an increased number of visitors from out of state. Mr Pandora picked up the drilling application and banker’s draft, put them in his briefcase, politely excused himself and left the office. He returned to his car, rolled down the window and began to think about what had just happened, his career and how to get home. He remembered, vaguely, something about corporate governance. There had been some presentations on the subject, he had taken a sort of online course and a test which he guessed everyone eventually passed, and occasionally an email would show up. It was all about how to react to situations like those he was facing - or perhaps there was more to it. Seems to have been the result of widespread panic in the energy world, and elsewhere following the collapse of a big company - couldn’t remember the name - lots of people lost their jobs, and some went to jail. In his company, there was talk of ‘tone at the top’, leadership talking about everyone behaving properly and being a representative of the company, together with a message that doing what the CEO and the board said was the answer. But he wondered - after a while messages seemed to arrive less frequently and stories still floated around about extravagant entertainment and doing business in other countries ‘in a different way’. Did anyone really care? Was he in a lose-lose situation? He could pay ‘extra’ to get his driver’s licence renewed, but was it right to do so? Was it any different from the ‘other’ payment? Was one a ‘facility payment’ and the other a ‘bribe’? Who should he speak to for advice? His boss? Not sure about that; he would say sort your driver’s licence out yourself, that is a private matter - “you could always take a bus” - although that was not really true. Was his job was on the line if the drilling license just didn’t come in on schedule and various costs went up? What if his bonus was cut because targets were not reached? Maybe there is extra money around to deal with things like this - call it consulting fees; maybe there was a way. He could always speak to the company’s whistle-blower, although he did not know much about this. Would his identity be protected? Would he be in trouble with the government if he did not say anything
  • 8. to anyone, and they later found out? Maybe he was already in trouble because he did not say no to Mr Smiley! Maybe someone in the family, a friend … Would just mentioning the situation get them into possible trouble? What should he feel? What should he think? Who cares? What happens next?