Tone at the top is the most important factor in creating an organizational culture of integrity - Nicole Sandford
Without question, reputation risks are every bit as important as strategic, operating, and financial risks. In fact, C-level executives often rate reputation risk as more important than other strategic risks. Their concern is well founded: as we’ve seen again and again, the impact of reputational erosion can be devastating — from a plummeting stock price to a loss of customers.
Guarding against reputational risk begins with setting the proper tone at the top, one that is aligned with organizational values and embraces a culture of integrity. Properly fed and nurtured, it is the foundation upon which the culture of an enterprise — and therefore all the other elements of governance, risk and compliance infrastructure — is built. Ultimately, it is the glue that holds an organization together.
The starting point for setting the tone begins with the organization’s governing authority — most frequently this means the board of directors. The board’s most fundamental tasks would typically include hiring the CEO, approving strategy, monitoring execution of the plan, setting risk appetite, and exercising appropriate oversight regarding risk mitigations, all with the underlying goal of preserving and creating shareholder value.
The board sets the tone of the organization in the way that it executes each of these responsibilities. However, perhaps no single decision drives tone at the top more than the selection of the CEO. That process must necessarily focus on competence, character, and chemistry and raises questions such as the following:
• Does the prospective CEO have the requisite skills and experience to move the organization forward?
• Does the prospective CEO possess the character and moral fiber to model and contribute to the development of a values-centered enterprise and strategy?
• Does the prospective CEO have the chemistry and communication skills necessary to rally others to successfully and consistently deliver on the organization’s value proposition to all stakeholders?
Boards must give appropriate weight to each of these considerations. Too often, the CEO selection process focuses mostly on competence, with less thought given to character and chemistry. The examination of a CEO’s integrity requires a deeper dive into their previous roles, behaviors and decisions. Boards need to be sure they are performing additional diligence to assess these factors, including the use of behavioral interviewing techniques, reference checks with a broad set of people (including previous subordinates) and assessment tools.
Once selected, the board is accountable for monitoring the CEO’s performance based upon appropriate metrics for competence, character, and chemistry. This also requires the adoption of additional techniques, including a look at compliance performance of top executives under the CEO and the organization overall as part of the annual review process. Audit committees in particular should pay close attention to compliance hotline reports and regulatory findings across the organization and be sure the CEO evaluation and compensation committee(s) are informed of concerning trends. There are several examples of recent corporate meltdowns that may have been avoided if senior executives had been evaluated — partially at least — on organizational compliance and integrity.
In summary, the governing authority must ensure that ethical objectives are built into the actions and the strategy of the organization, and that they are not merely a statement of good intentions.
“Sometimes, all it takes is a rumor, a hint of impropriety or malfeasance, or a social media post gone viral, to negatively impact shareholder value and damage — or worse, destroy — corporate and brand reputations in an instant.”
— Nicole Sandford
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