Why CEOs misbehave

Thursday 18th March 2021 Penny Pryor

Boards need to consider giving chief executive officers and senior management more criteria around how they can meet their company’s espoused values if they want them to avoid questionable practices that harm the community and customers, according to Barry Rafe, principal at Rafe Consulting.

Rafe has recently completed a research paper for the Actuaries Institute exploring why CEOs fail to adhere to their organisation’s espoused values.

Saying one thing but doing another

Rafe found that, in contrast to some other studies, it wasn’t board negligence, rather it was how decisions made at an executive level within a company on a day-to-day basis failed to operationalise a company’s declared values.

Using data from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, Rafe was able to explore, in granular detail, how particular decisions were made by CEOs around practices that may have improved company profits, but which potentially exploited individuals.

“The feedback from ASIC is that boards seem to be serious about this stuff…the problem is when you come to the management team, the management team don’t use the espoused values,” he told Industry Moves.

“My working assumption is that everybody is a good person, so I know a lot of people in banks are not crooks, they try and do the right thing.”

“When you come to the executive scene who make decisions day in and day out, they just can’t operationalise the trade-offs between the espoused values.”

Rafe attributes the paradox – between boards behaving themselves but senior management sometimes having difficulties adhering to the values – to the values being set at too high a level and being too difficult to operationalise.

More criteria

He suggests boards be given insights into how senior management make decisions – particularly around decisions where profit is sought at the expense of customer or community welfare - by sitting in on decision-making meetings. Then once they have those insights, they would be better able to set criteria around espoused values that would assist CEOs and senior management in operationalising them.

Such criteria could include the necessity for stress testing around whether or not vulnerable people are being exploited.

“A good set of criteria would be - profit is good but not if it is creating a problem for someone,” Rafe explains.

Remuneration structure

Of course, for real change at an executive level remuneration needs to be linked to these criteria and not just to boosting profit (at the expense of all else).

“If people are remunerated primarily on profit, and I know that’s changing but if they are, then you shouldn’t be surprised that that’s where they are going to bias their decision making,” Rafe says.

“Remunerating on behavioural issues is quite a hard thing to do, it’s not as objective. We are quite advanced on that but I think there is just something missing there.”

In the paper he also suggests designing remuneration systems that “penalise senior executives for practising values that do not align with the organisations espoused values”.

The outlook

Rafe speaks regularly with company directors and is optimistic they would be on board with assisting senior management through more operational criteria around espoused values. He also believes that management would like such criteria to be able to measure the trade-offs between espoused values.

The regulators are also considering the disconnect between company values and company behaviour.

“The regulators are very hands on these days so APRA and ASIC now they go into board rooms and they look at how stuff is done and they are becoming more interested in organisational culture.”

“They are looking at this stuff because they are also puzzled at how it can happen. And the problem for them is it is happening on their watch.”

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