In the past few years, CEOs have become substantially more likely to be removed from their positions due to ethical misconduct or scandals, even though the number of CEOs dismissed for such reasons remains quite low overall, according to a new study by Per-Ola Karlsson, DeAnne Aguirre, and Kristin Rivera of PwC/Strategy&. At Strategy+Business, the authors lay out their findings and discuss their implications:
Globally, dismissals for ethical lapses rose from 3.9 percent of all successions in 2007–11 to 5.3 percent in 2012–16, a 36 percent increase. The increase was more dramatic in North America and Western Europe. In our sample of successions at the largest companies there (those in the top quartile by market capitalization globally), dismissals for ethical lapses rose from 4.6 percent of all successions in 2007–11 to 7.8 percent in 2012–16, a 68 percent increase.
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. In fact, our data shows that companies are continuing to improve both their processes for choosing and replacing CEOs and their leadership governance practices — especially in developed countries.
Instead, Karlsson, Aguirre, and Rivera suspect this increase to be related to changes in the business environment that make unethical behavior at the top of the corporate pyramid more likely to come to light and amplify its reputational risk. They identify five specific trends driving this change:
First, the public has become more suspicious, more critical, and less forgiving of corporate misbehavior. Second, governance and regulation in many countries has become both more proactive and more punitive. Third, more companies are pursuing growth in emerging markets where ethical risks are heightened, and relying on extended global supply chains that increase counterparty risks. Fourth, the rise of digital communications has exposed companies and the executives who oversee them to more risk than ever before. Finally, the 24/7 news cycle and the proliferation of media in the 21st century publicizes and amplifies negative information in real time.
On the other hand, the ethical behavior of CEOs can change from one generation to the next, as Emily C. Bianchi and Aharon Mohliver found in another study of CEO ethics, which they discuss at the Harvard Business Review. Their study looked at the prevalence of suspected stock option backdating between 1996 and 2005 and found that those CEOs who began their careers during economic boom times were significantly more likely to engage in this unethical practice:
Backdating was a fairly common unethical, and almost always illegal, practice during this time period. Backdating is very difficult to prove beyond a reasonable doubt, because there is always a chance that a CEO was simply extremely lucky. This is why so few executives were criminally convicted of backdating. But it is possible to identify CEOs who were repeatedly, suspiciously lucky. …
We then gathered information on the educational history of each CEO in our sample. We compiled information about where each CEO went to school, what degrees they earned, and the year they graduated (primarily in the 1960s, 1970s, and 1980s). We then examined whether CEOs who earned their highest degrees in best economic times, when the unemployment rate was particularly low, were more likely to backdate their stock options. They were. Even after adjusting for firm size, industry, number of options granted, and other factors, we found that CEOs who graduated in the best economic times were approximately 30% more likely to falsify the dates of their stock option grants than CEOs who graduated in the worst economic times. Quite simply, CEOs who began their careers in a boom were more likely to cheat.