In the age of superstar CEOs who command media attention and excessive compensation packages, a company’s performance can often boil down to the relationship between the Board and the CEO.
Corporate governance can succeed or fail based on the CEO’s performance. Numerous studies have focused on the personality types of CEOs. In a recent article, a British study found that CEOs are four times as likely to be psychopaths as the general population (incidence rate of 4 percent versus 1 percent). That is an extreme example of personality research which has little relevance to day-to-day corporate operations.
Assuming that the Board has exercised care in the selection of its CEO to screen out the personality outliers, there are important ways to focus the Board-CEO relationship to improve compliance.
The Board, senior management and the chief compliance and ethics officer have important roles and responsibilities in carrying out the compliance program. In carrying out their respective duties, the board has to ensure that incentives are aligned to accomplish meaningful compliance.
Most CEOs spend little time on compliance. They often speak about the importance of ethics and the commitment to lawful and ethical conduct. CEOs are not naturally committed to learning the nuances to legal and policy issues – they rely on others for that. Understandably, CEOs focus on different concerns – financial performance, hitting incentive targets and other business issues.
The challenge for the Board and the CCO is to give the CEO specific directions and tasks to make sure that compliance is on the CEO’s radar. The Board needs to send a message to the CEO and the CCO by defining the scope of the compliance and ethics program, reviewing key policies and procedures, and requiring periodic, substantive reports. Specifically, the Board needs to emphasize to the CEO that it is the CEO’s responsibility to ensure that an effective compliance program is implemented and that management has the tools and resources to carry out this priority.
To underscore this point, the Board has to ensure that the CEO’s (and senior managers) compensation is linked, in part, to overall performance of the compliance program. CEOs and other senior managers respond to financial incentives and the possibility of financial rewards. Specific and measurable objectives should be identified by the Board and included in any compensation package for the CEO and other senior managers.
The Board sets incentives and measures for the CEO’s performance. The CEO, in turn, directs the performance of senior managers. The CEO’s goal should be to instill in management throughout the organization a priority attention to compliance. From senior managers in the C-Suite to “shop” managers in the lower levels of the company, compliance has to be identified as a priority and reinforced through financial incentives. Building a compliance framework with this basic tool is essential to an “effective” compliance program.