CEO Hubris, Fraud & How to Prevent It

Posted on | August 28, 2009 | 4 Comments

CEO Hubris Kills Companies According to a new study by researchers from three Canadian universities, the biggest red flag for a potential accounting fraud is a CEO with a truly oversized ego.

Can anything be done to guard against this? Yes, here is my recipe for how to better prevent it.

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Over-the-top CEO hubris is like an iceberg: it looks small and not so worrisome to those who see it from afar, but to those who have to live with it every day or those who bump into it, it’s huge, chilling and a real killer of careers and companies. This problem has sunk many more innocents than went down with the Titanic.

I know because I have lead 5 turnarounds as VP & Treasurer, CFO twice and CEO twice. As a result, I’ve seen up front-and-personal more than my fair share of corporate messes caused by others. In two of these cases, I saw excessive CEO hubris three times. In one situation, both the CEO who got the company into trouble and the CEO who was charged with trying to rescue it each misrepresented the company’s circumstances, and each time they caused avoidable pain for lenders, suppliers, employees and holders of publicly-traded securities alike. That is why I think the idea of looking for ‘red flags’, telltale warning signs or trying to do more intensive external audits is substantially a waste of time.

The fastest and easiest way to significantly cut down on CEO-hubris-induced corporate fraud is to change the power hierarchy in companies by cutting the dictatorial powers of the CEO down to size. This can be quickly and cleanly done by removing their ability to arbitrarily fire any of the top executives that report directly to them. Boards can do this by requiring all ‘C-Level’ executives, especially the CFO, to report to both the CEO and the Board, and make it a company by-law that all ‘C-Level’ executives can only be let go if the board passed a motion to terminate them.

This would provide a reasonable and simple check-and-balance against the excesses of CEO ego and CEO power. It would also give the Board independent access to those both best positioned to see and feel excessive CEO hubris and ‘raise a red flag’ when it is getting out of hand.

What better way could there be to protect the Company from needless severance pay, fraud losses, and significant undue risk?

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The above comment was posted in response to the August 26, 2009 ‘Ego and the CEO‘ article by Janet McFarland published in The Globe and Mail newspaper [link is > http://bit.ly/3NExJd/]

– by Tony Johnston
Compass North Inc.

Comments

4 Responses to “CEO Hubris, Fraud & How to Prevent It”

bizsugar.com
August 28th, 2009 @ 6:50 pm

CEO Hubris, Fraud & How to Prevent It | Biz Money Matters |…

According to a new study by researchers from three Canadian universities, the biggest red flag for a potential accounting fraud is a CEO with a truly oversized ego. Here is a recipe for how to better prevent it….
Anita Campbell
September 1st, 2009 @ 11:26 pm

Big egos, huh? Yep, based on my experience, I can believe ego would cause someone to go over to the dark side.

But I wonder if that’s something that can be detected through a personality assessment by a trained professional? Then the Board’s HR committee could require such an assessment before hiring or later on ….
Tony Johnston
September 2nd, 2009 @ 9:21 am

I don’t think assessments or testing is the answer even though you raise a very fair question Anita. Several issues make it so in my opinion:

- testing criteria: how should we define what’s a pathological ego when there are those who would argue til they are blue in the face that ‘big egos’ are just part of the armor for CEOs?
- testing accuracy: how can we be confident any test or test results adjudicator can determine when a CEO’s ego is pathological without having too many false positives or too many false negatives?
- test timing: as we don’t always know when a CEO will ‘go over to the dark side’, how can we be sure the testing and results reporting will be timely?

As you can gauge from the above, my focus is more post the ‘new hire / new promotion’ decision. Certainly it would be very good to have a trusted industrial psychologist check out the new candidate to make sure their ego is in proper check before they take over the top job. However, it is better I think to set up a structure where a key number of semi-independent but capable, knowledgeable and motivated humans are constantly monitoring the CEO’s ego state and able to raise the ‘red flag’ in organizationally acceptable, board-confidential ways when things are reaching a danger zone. That way, even it the Board made a mistake on their new hire, at least they would have an opportunity to correct it if the CEO got their ego into the ‘bad pathology’ range.

Tony Johnston
Compass North Inc.
Corporate Boards: 14 Questions for You | Biz Money Matters
October 19th, 2009 @ 8:55 am

[...] I covered in the following previous blog articles: Don’t Lead Your Company into Trouble; CEO Hubris, Fraud & How to Prevent It; Why CEO’s Are Blind To Trouble!; and Lehman Bros: What Failure Felt [...]

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Tony Johnston
President
Compass North Inc.

Tony provides executive management and advisory services that help companies get MORE !!

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Tony delivers the leadership or leadership support needed that can make remarkably outstanding results happen operationally, economically, financially and in the eyes of customers, lenders & transaction counterparties.

If you are a decision maker in a company that wants MORE, give him a call at 416-342-5652 or check out the Compass North Inc website [click here].

Tony's ability to help companies achieve important/challenging goals is well demonstrated by his long record of success, which includes:
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