When CEOs Fall

The recent imbroglio over Sunil Alagh’s sacking brings to the fore a few issues. When a larger-than-life CEO is fired, one hears all kinds of comments. “He had it coming!”, “But he did a lot for the company!”, “Why was he allowed to get away with it for a such a long time?”, “What was the management doing?”, etc. Let us look at four issues that need to be addressed (there may be many more). These are the role of the board; the role of senior managers; the role of auditors; and systemic weaknesses.

In ancient times, wise kings used to roam around their kingdoms in disguise to check on the welfare of the people. They did not rely on partisan reports, PowerPoint presentations, committee meetings, media and sycophants. A wise king always had his finger on the pulse of the populace.

Today, when a mighty CEO is felled, it is usually after things have gone too far. Can we say with conviction that boards are not party to the deeds or misdeeds of the CEO? In most companies, board behaviour does not show that they do believe in the old adage: ‘a stitch in time saves nine’. What prevents a board from taking swift and early action? Is it because the CEO is ‘indispensable’? Or has the CEO ingratiated himself so much with so many of the board members that they are not ready to stand up and be counted? Or is it the ostrich approach: hoping the problem will go away on its own? In each one of the celebrated cases — Darbari Seth, Krishan Chugh, Ajit Kerkar and Alagh — no one would believe that one fine day, the board suddenly discovered the misdeeds of the man and gave him his marching orders. It would be naïve to believe that there were no warning signals. But for reasons of expediency or complicity, the boards often prefer to remain silent until the problem grows too big! The question then is that while the CEO is sacked, how is the board held accountable? I cannot recall any instance of the other board members also being held accountable for what was happening on their turf. If the board says it did not know what was happening, then what were they doing? If they knew and did nothing, they are obviously accomplices.

When doubtful deeds are being perpetrated, usually the senior management is sharply divided into two camps. One that aids and abets the goings on. The second of managers who are concerned, but do not know what to do or whom to turn to. There is no amnesty for those who blow the whistle. At such times, the atmosphere is charged with politics, and insecurities run so high that the conscientious managers do not even know which colleague is trustworthy. Also, much of what floats around as ‘reliable information’ is something that managers cannot prove without access to hard data. And in most organisations, there is no mechanism that allows a manager to air his suspicions and doubts without running a risk of reprisal. When secrets are exchanged and fears aired, the advice is: “Keep your mouth shut!” There is not enough transparency and access to information, nor is there a court of appeal that right-thinking people can turn to. Who is responsible for that? The board of directors?

And then there are auditors. The audit firm is responsible for reporting anything that is questionable. Most large companies also have an internal audit department and an audit committee. Is one to believe that in all of the companies that had a problem with the CEO’s behaviour, the facts about questionable practices were completely unknown to the auditors? Or that no audit report or comment was submitted to the audit committee or any other committee of the directors? If, indeed, the auditors did not pick up information, then we need to question their calibre. If some report was indeed filed, then what did the directors do about it? We need to remember that the audit firm is, in fact, paid by the company and the boss of the company is the CEO. And you certainly don’t want to bite the hand that feeds you!

An organisation is as good as its systems and people. In systems, I include culture and discipline. All firms have a culture; some have discipline. But very few firms have a culture of discipline. If they did, such problems would not arise. Annual reports are full of statistics and facts that purport to prove that the company is practising the highest standards of corporate governance. I cannot remember any annual reports referring to a code of ethics (except for ethics concerning insider trading). CEOs’ wives become extra-constitutional authorities, their businesses flourish with company patronage, the man himself supports a lifestyle that could be the envy of any Hollywood celebrity and yet there is nothing that a manager can show when he blows the whistle! And who should be responsible for ensuring that there is a code of ethics and transparency?

I think I have just blown any chance of ever being invited to be an independent director on any company’s board!

Nripjit Singh (Noni) Chawla

This article originally appeared in Business World - 14 July 2003