CEO Hubris and Compliance Catastrophes

What is the common denominator of every corporate catastrophe that you have heard about? Reporter Lucy Kellaway, in a Financial Times (FT) article entitled “Road test CEO’s to avoid corporate car crashes”, says that it is the “hubristic CEO”. I thought about that line as I sat at Minute Maid Park last weekend and watched the Houston Astros all but knock out the Philadelphia Phillies from the National League (NL) Wild Card hunt by winning 3 of the 4 games. The Astros then, of course, began their next series with a more routine loss to the St. Louis Cardinals; thus allowing the Astros to reach the rarified triple digit ignominy of 100 losses for a second consecutive season. But do not be disheartened, there are still 14 games left so the Astros could blow through last season’s record of ‘only’ 106 losses. Think that might qualify as a ‘catastrophe’?

Apparently not according to Astros owner Jim Crane, who once again shows that I am unsophisticated because I measure the success of a baseball team by that outdated metric of wins and losses. But what I did not realize about Mr. Crane is that he fervently believes that baseball is not simply a game. He once again pointed out my lack of foresight in an Op-Ed piece for the Houston Chronicle, “Building a baseball team and a city-together”, where he said “Baseball is a singular life experience that brings communities together, develops youthful confidence and strong values, shapes destinies and builds city spirit. Important life lessons are learned on the baseball field.” He then went on to note that the team’s “ultimate goal is not only a better team, but a better city.” How is he going to accomplish this rather lofty goal? Believe it or not, it all starts with the public presentation of the Astros new uniforms that he has been secretly working on all year. He actually ended this Op-Ed piece with the following line, “The first big step is only a few weeks away, on Friday, Nov. 2, at 5 p.m. at Minute Maid Park, when we reveal our striking new logo and uniforms reflecting the fresh start we will all make together next season. We hope every Astros fan will be there, as excited and fired up as we are about the bold new experiences ahead.”

Be still my heart. He is actually planning to make the City of Houston a better place by introducing new uniforms. I am sure the Mayor of Houston is thrilled with this assistance. Unfortunately I cannot find a public comment she has made on the subject to report to you. I suppose any long suffering Red Sox (think Jay Rosen) or Cubs fan would tell me wait until your team has a bad century and then you have the right to sound off as, after all the Astros were in the World Series in 2005 but Mr. Crane, really new uniforms, how about some old fashioned wins?

Kellaway’s piece asks that even in this age of documenting, checking, measuring, stress testing and reassessing with remedial actions of every conceivable type of risk, what is the one which is never tested? She believes that the answer is “the chief executive gets so high on power that he or she losses the plot.” Kellaway’s idea to help remedy this situation is amazingly simply. She argues that the idea is “to force all top executives to take an annual hubris test modelled on the MOT (UK Ministry of Transportation) test for cars.” She acknowledges that she poached this idea, from Chris Wiscarson, the head of Equitable Life. Kellaway’s contribution is to have the test administered by a company’s Board of Directors. The test itself would consist of simple questions presented to a Chief Executive Officer (CEO) such as:

•           How would you rate your own arrogance? (Rate from one to five)

•           Has it increased recently?

•           Have you changed your mind on anything substantively in the past year?

•           Have you done anything “slightly dodgy”?

She believes that “In answering these questions, spineless non-executive directors would be discouraged from fudging answers by the promise of a prison sentence should they fail to be candid.” In addition to this annual test, Kellaway believes that if a CEO makes some type of extraordinary statement of “exceptional hubris” this would cause an “immediate MOT failure.” She gives the example of the now former head of Barclay’s Bob Diamond who told the UK Parliament “a year ago that the time for bankers to apologise was past” he would have been “instantly out”.

The British Press seems to be leading quite a bit of soul searching these days about the trouble City banks and other companies have gotten themselves into recently. I found Kellaway’s piece interesting because she appears to realize not only how important “tone-at-the-top” is to set an ethical standard for a company; but more importantly she is engaging in the conversation of how to address this issue. If your corporate culture is simply to either make your numbers every quarter or ‘resign to pursue other opportunities” this may speak of a hubris which leads to a compliance catastrophe like the one Wal-Mart faced on April 21, 2012 when the story broke on the front page of the New York Times (NYT). But the Board of Directors must be prepared to lead this effort, in other words, a Board must actually govern. So maybe when the FCPA Professor characterizes the Wal-Mart Foreign Corrupt Practices Act (FCPA) scandal failure of corporate governance, he is on to something.

On the other hand, if you are Jim Crane, apparently if you get some snazzy new uniforms, you not only make your baseball team better but the entire City of Houston.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2012

Staying Connected and Engaged: What HR Professionals Didn’t Necessarily Learn in an MBA Program

Ed. Note-as readers of this blog know, I am a huge fan of HR as an integral part of a best practices compliance program. What many reader may not know is that I have a Master’s degree from Michigan State University from the School now named Human Resources and Labor Relations. With that background I was interested when I was contacted by Julianna Davies, who is a writer and researcher for MBA Online, a website that provides up-to-date information about MBA career opportunities and different college programs. I asked her if she could discuss the findings of the recent Kenexa study that outlines the ways in which human resource departments are out of touch with their employees and this will have a detrimental effect on companies until the problem can be corrected. The following is her guest post. 

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Managing an effective human resources department is usually a factor of two interrelated elements: professionals who understand the newest HR trends and regulations, and who know how to read and engage with the employees under their care. Too often, companies lean primarily on the first requirement, assuming that engagement and good communication will just come with time or, in some cases, will simply be intuitive.

However, as a new study from HR consulting and recruiting service Kenexa reveals, this strategy is not working. More HR professionals than ever before are out of touch with their company’s workforce, the study said. More and more HR teams are looking to bridge this growing gap, and a handful of startups have emerged devoted solely to HR improvement.

A Problem Around the Water Cooler

The Kenexa report, titled “Employee Attitudes and Engagement,” compiled results from surveys the consulting firm conducted in the first part of 2012. Researchers asked a fixed set of questions to employees, then posed those same queries to HR departments. The results, Kenexa said, were “disconcerting.”

For instance, only 34% of polled employees reported that they felt “engaged” with their jobs and companies. HR professionals anticipated much more generosity when they put that number at a nearly doubled 69 percent. Similarly, only 38 percent of employees said they would recommend their company to a friend, which was far lower than the whopping 81 percent HR executives projected. This pattern held true across the board, whether detailing benefits evaluation, feelings about pay grade fairness, or overall job satisfaction and anticipated job retention.

A Forbes magazine article summarizing the report called the findings “a damn shame,” and said that the disconnect may be emblematic of a larger problem in modern industry. “In an ideal world HR should be your team that is completely focused on maximizing talent,” the article said. “They can only maximize talent if they understand the current situation.”

Part of the problem may be related to the increasingly diverse workloads HR personnel handle. They process benefits paperwork and negotiate new hire packages; they watch market trends and handle personnel disputes. “To deliver more value, the human resources function needs to spend more time accelerating operational improvement and less time on its traditional administrative and compliance activities,” Brad Power, a veteran Human Resources consultant, wrote in a recent Harvard Business Review blog post. Revamping goals and focus can be somewhat daunting, however, which is where an emerging sector of next-generation HR consultants and start-up companies come in.

Opportunities & Solutions

Expensify, a San Francisco-based startup, is one example. It offers a computer platform for HR departments that streamlines employee expenses, receipts, and reports. The goal is to save personnel from sorting through stacks of paperwork—ideally so they can spend more time actually getting to know their employees and identifying more pressing personnel issues.

TribeHR also provides a template for financial tracking as a part of a much larger HR program “revamp package.” Enrolled companies can manage all HR functions from one common docket: tracking new hires and recruitment efforts, monitoring employee progress, and keeping track of calendars is all part of the deal.

When it comes specifically to improving company-employee communication and interaction, Rypple, also based in San Francisco, may offer a good solution. The Rypple program works something like an internal social network for companies. It gives managers, staff, and executive leaders a place to share and collaborate, as well as give feedback.

Effective HR management is as much about knowledge as it is about adaptability. Understanding the technical processes is an important piece, but the puzzle is incomplete without strong channels of communication and an accurate read of corporate culture and sentiment. With the right direction, technology, and advice, even the most out-of-touch organizations can come back on course—provided, of course, they first recognize the problem.

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This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication.