The world faces serious leadership crisis in both the corporate and political worlds. Incompetency is not the issue. Rather, it is that those at the top of the organisational feeding chain are too often morally bankrupt.
Greedy and unprincipled corporate governance may have caused the world’s financial and economic chaos, but its impacts are now compounded by equally inept political governance, according to London-based corporate philosopher professor Roger Steare.
Steare is corporate philosopher in residence and professor of organisational ethics at London’s Cass Business School. He visited New Zealand last month as keynote speaker at the Human Resources Institute conference in Wellington. And some of the world’s largest and most successful organisations take his message seriously and employ him as consultant, banks like HSBC and global accountants PricewaterhouseCoopers.
Steare doesn’t think the governance model is exactly flawed. “It is only flawed if we see it as system that will deliver the answers to our challenges,” he says. “Corporate governance without sense of moral leadership is, on the other hand, deeply flawed. If we can combine governance and moral leadership I think we will be okay.”
There are, he says, many businesses which are well led and where the governance model is identical to that of organisations that are badly led. It all boils down to the ethical standards and moral responsibility of their directors and executives.
According to Steare, process and structure are important to organisational success, but unless those at the top “set the right tone, then agonising over the minutiae of processes, structure and other organisational detail, won’t make much difference”, he says.
Standards are set at the top. But Steare also believes that, good governance and moral leadership is the joint responsibility of the board and the executive. They need to keep each other “honest”.
“It’s about openness, accountability and good relationships,” he says. And he promotes the value of non-executive and independent directors. “Effective oversight comes from combination of good support and, like good friend, having someone who will challenge you with the truth. Unfortunately, this is not combination we see often enough at board level.”
Steare believes there is fundamental misunderstanding of the purpose of corporations. “It is not just about profits. The fundamental purpose of any enterprise is to deliver the goods and services its sells. If it does that well, then profits are an outcome. But they are not its purpose,” he says.
He holds “the slavery of 90-day reporting regimes” responsible for much of the organisational breakdown between boards, management and investors. That kind of short-term thinking is, he says, incompatible with building sustainable business model and focusing on long-term value creation.
The global banking crisis and even the BP oil disaster illustrate the consequences of what he calls “a childish focus on sweeties today” rather than trying to build and create something “which has an enduring purpose”.
The real problem, Steare says, is to counter our “greatest human vices of arrogance and greed” which he has been tracking as part of his research into moral character and leadership. “Both traits give rise to short-termism,” he adds. “Men are motivated more by things which give them status in the short term.
“Executives who make lot of money are less motivated by the quantum increase in bonus or options or whatever, than by the status the increase gives them. The psychology of it is quite clear. Men worry about their status compared with their peers.
“The drive of envy or competition is much more powerful than the drive to acquire resources amongst men. Females tend to be driven more by the need for security and, therefore, tend to be greedier.”
Steare’s research also shows that directors and executives become “less obedient” the higher up the organisational ladder they climb. “The more senior they become, the less individuals feel obliged to subject themselves to external control,” he adds. “They effectively outgrow the organisational structure or culture.”
These findings parallel his other research on how moral conscience develops with age. “There is an inverse correlation between the ethic of obedience and the ethic of reason,” he says. In other words, senior business leaders are arrogant, to some extent greedy, lack empathy, are wilful and disobedient.
So to be effective any system of oversight, governance or regulation must recognise these psychological truths. For these reasons, Steare believes peer supervision delivers better and more professional behaviour. “The governance of doctors, lawyers and accountants, for example, is peer-reviewed. If they breach their governance standards they can be disbarred for life,” he adds.
Directors and senior executives should, therefore, have professional status from which they can be disbarred. “But the profession must set the standards and not an external authority,” says Steare.
He concedes there is increasing pressure to change the governance model but, he warns, that will not fix the problem.
“Attitudes must change. We need sensible dialogue between boards, executives and institutional investors who, frankly, take their stewardship responsibilities very lightly. The owners of organisational risk equity need to step up to the plate.” The problem, he says, is that “equity investors don’t see any moral hazard”.
“Look at the way the global banks were bailed out by citizen tax payers. The institutional investors looked around and saw no moral hazard to trip over. Not only do we need dialogue about what constitutes good leadership behaviour and what good tone from the top looks like, but we must also bring investors into this dialogue and ask them about their stewardship of the risk capital.”
So what are the chances of any such dialogue ever taking place when the beneficiaries of current practices are so firmly entrenched?
Steare concedes the difficulty. The winners of corporate destruction are, after all, those with elaborate golden parachute contracts. At US investment bank Lehman Brothers chairman Dick Fuld walked away with more than $US300 million despite the fact the collapse was one of the principal catalysts for the global banking crisis.
“That is something we have to fix. People must be made accountable for their actions and face the consequences,” adds Steare.
The dialogue should, he says, take place at effective annual general meetings and in board meetings.
“AGMs are,” he concedes, “too often farce. They are invariably pre-planned, showcase events and there’s no real
dialogue. People know which way the institutional investors will vote and there is no meaningful discussion. Most board meetings could be characterised similarly.”
Building stakeholder trust
But meaningful and honest dialogue builds organisational trust, according to Steare. “And trust is the most important asset any corporation has. You won’t see it in the balance sheet. It is never measured, except in terms of market share price movements. Take look at BP’s current share price. That’s the market telling them they don’t trust them as much as they used to.”
Boards should focus on building stakeholder trust. “But actions and strategies that build trust are, ironically, an inverse of what organisations do to fulfil their 90-day reporting measures,” says Steare.
Despite the banking crisis and increasing evidence of global resource and environmental destruction, Steare sees little evidence that boards and senior executives accept the need for new governance or leadership imperative. Political leaders appear similarly entrenched in their tacit rejection of any ur