Tone at the top

Written to commemorate /February 16 2007

Every time the story of an audacious fraud makes its way to the media –the law –makers think of new legislation, regulators scramble to toughen rules and Boards evaluate the state of their governance.

Enron, Worldcom, Tyco and a series of corporate frauds triggered the enactment in June of 2002 of the Public Company Accounting Reform and Investor Protection Act in the US (more commonly known as “Sarbanes-Oxley” after Senator Sarbanes and Representative Oxley who initiated the legislation).

With the economic outlook turning gloomy from the last quarter of 2008, more chickens are coming home to roost. The audacious $50 billion Ponzi scheme of Bernie Madoff -which apparently went on undetected for years --makes other daring and crude swindles look like a Teddy Bear’s picnic.

The rules of the road are necessary. The cops must enforce the law. But in all our anxiety to bolt the barn doors ever more securely, we should not lose sight of the behavior of the horse. To plagiarize Omar Khayyam : “The greedy hand steals; and, having stolen, moves on: nor all thy piety nor rules shall lure it back to return half a dime, nor all thy laws bring back a dollar of it “.

Amidst the maze of legislations, ethics manuals, hotlines, tick-boxes, checklists, governance codes and board room rules- massive frauds are still happening. Are we taking our eyes off something very important? What about the tone at the top?

What was the tone at the top at Tyco?

Jurors in the fraud trial of former Tyco International Ltd. Chief Executive L. Dennis Kozlowski were shown a multi-million dollar birthday bash in the Italian island of Sardinia that Dennis threw for his sweetheart .A censored version of the party video depicted Kozlowski as a CEO exploiting a public company for his own benefit. Kozlowski is later seen in the video posing on June 14, the day of the party, with two women in skimpy, Roman-style dresses. “ Sometimes pictures are worth a thousand words,” the judge said.

Use of corporate jets and yachts for personal use, lavish weddings, blatant misuse of corporate assets and indeed plain thinking and high living at the top are tell-tale signs that something is “rotten in the state of Denmark”. Very seldom do these stories reveal themselves in the media until a crisis develops or a salacious story is leaked. A CEO’s attempt to elevate his mistress and bring her from the bedroom to the boardroom hits the media not because of governance concerns. The hint of a scandal attracts eyeballs.

It is sad that the people with spines who can stand up to their bosses are becoming an endangered species. The acid-test of good governance is whether a person who stands up and blows the whistle is worshipped in the company as a hero or remembered as a martyr. Are there adequate independent safeguards to protect those who stand up against the bending of laws or the cutting of corners in ethics? More attention to issues like the tolerance of dissent and the protection of whistle-blowing may actually reduce the incidence of frauds. The tick-boxes and checklists often do not show up the malaise because meek and spineless “subordinates” and external accomplices are deployed to cover the tracks.

Apart from corrupt and unethical practices –another aspect of the tone at the top should raise red flags: autocratic and rogue behavior in the corner office. A “one-man show” style of leadership is more likely to embrace the flouting of regulations. A corporate leader once boasted to me: “Have you ever seen oil paintings or statutes of the board of directors? All successful companies are driven by outstanding CEOs”.

Strong and decisive leaders are assets to any nation and organization. But great leaders know the value of team work. Poor leaders cut corners, flout rules and terrorize people into submission. I once knew a “leader” of a global organization who had ordered hundreds of designer bobble-head dolls which were crafted in his own image!!!! He took pleasure in personally presenting the dolls to his own team and to his country CEOs. While he was in power, people displayed these funny dolls on their tables. When the time came for his untimely ride into the sunset–the very same people celebrated and the dolls were consigned to the trash cans.

Finally a word about independent directors. As a long-term safeguard for good governance, we must develop a large pool of competent outside directors who are truly independent. It must be acknowledged that most independent directors do a fantastic job of keeping companies on their tracks. They are often most unfairly criticized.

There is a need, however, to ensure that they are truly independent. Sometimes they are not. Here is an example: in theory most accounting firms have rules that require the partner of a firm not to accept board appointments in their client companies where they were personally involved in client service immediately prior to retirement. Some, however, have not only joined the board of their own clients as “independent” directors-they have even become Chairmen of the Audit Committees. I believe the SEBI and ICAI should evaluate this perceived independence conflict at least for listed companies and frame some sensible standstill norms.

The pendulum of governance, in my view, has swung too far on the side of rules and regulations. It is time it swung back to the basics and focused on the softer aspects of leadership behavior and governance: the tone at the top. We must develop in our society zero tolerance for bad corporate behavior .And unless we reverse the extinction of the species that can stand up and say,” The Emperor wears no clothes” –we will not be able to save our rich Empires from rogue Emperors .