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Is "CEO" too big a job for one person?

Publication: 
Nigel Morris-Co...
chiefofficersnet

The "did he jump or was he pushed" departure of Brian Hartzer, the CEO of WestPac Banking Corporation in Australia after it became known that it had more than 23 million cases in which it did not act correctly under counter-money laundering laws is the latest example of a CEO going from his job under a cloud. In the past, that's usually been an end to at least some of the discussion. But this time it's different. This time the failures were so big and so fundamental that it calls into question conduct of the entire organisation including the full board and much of the management structure. It also raises something else. In large, complex, highly regulated groups, is the role of CEO too big for one person? As the financial services sector moves inexorably (and I would argue rightly) towards personal responsibility, is it time to review where responsibility lies in relation to specific areas of management.

The next point to consider is who is a director. Just as the word "partner" has become utterly debased to the point where its correct meaning is now often prefaced with a qualifier ("business partner") to differentiate it from e.g. "life partner" or, even worse, business relationships which are not in any way a partnership (company x has partnered with company y to ..") so the word "director has become lost in a fog of uncertainty. Today, that word is often used with a qualifier ("board director") to differentiate it from several decades of dilution of its true meaning.

A company director is a person who directs the company and sits on the board. However, terms such as "Creative Director" and later forms such as "Marketing Director" are senior employees but they are not directors of the company.

However, there is an area where qualifiers are meaningful: that's in relation to Executive Directors and non-Executive Directors. However, there is a slow erosion between the difference when it comes to regulatory and legal affairs such as corporate crime. The reason is this: while for many years, the non-Executive Director function was frequently a way for companies to gain a halo-effect from recruiting some one rich, famous or both and ideally well connected in business and/or politics, increasingly "non-Execs" have been expected to undertake a supervisory role. They are not expected to be hands-on but they are expected to identify matters of concern and to bring them to the attention of the board. Within the past decade or so, an increasingly number of countries have brought the liability of non-Execs more or less in line with those of the board but in what we might see as a derivative fashion. Non-Execs in such countries will be held liable in the same way as a director if failures or losses arise as a result of failure by the board. That is important because the board is liable for failures in the company; non-Execs are not directly liable for those failures but if the board fails to deal with them, the non-Execs are liable for not, in simple terms, policing the board. While the position is different in some countries, those wanting more information on this distinction can read more at the Chartered Governance Institute at https://www.icsa.org.uk/knowle....

This is what the Institute says in its introduction (extract):

This guidance note is designed to help non-executive directors avoid a range of penalties – from fines, through to disqualification and imprisonment – if they fail to carry out their various duties.

Focusing particularly on the duty to exercise reasonable care, skill and diligence, the guidance covers such issues as:

Being prepared to provide independent oversight and constructive challenge
Insisting on receiving high-quality information
Making decisions objectively in the interests of the company
Avoiding conflicts of interest.

Prospective non-executives are also advised to undertake their own due diligence before taking on the role, satisfying themselves that the company is one in which they can have confidence and can make a strong and value added contribution.

It follows, then, that while responsibility and liability can be similar for both Exec and Non-Exec directors, the nature of that responsibility and the way in which liability arises are different.

While dealing with the question of job titles, it is worth mentioning that the designation "Chief" isn't necessarily an indicator that a person sits on the board. The Chief Technical Officer is an example. In certain types of public body, the day to day management is undertaken by an executive team and that would include the Chief Executive. The term has been in use in this context for many years. In such bodies, there is a separation of powers: decision making is in the hands of a committee appointed by (generally) elected politicians. The Chief Executive and his team implement the policies made by that committee.

In relation to public and private limited companies, the CEO function is at the top of the pyramid referred to earlier and that is the function that is most commonly used. He is the leader of the board. The make-up of the board, except where designated functions must be at board level (CFO, COO in the case of public companies, for example). The Chief Compliance Officer in English law firms must be at partner level or equivalent in law corporations or LLPs. However, despite the term having been around for more than ten years, it is rarely to be found on boards, even of financial services businesses. The term came to prominence as a reaction to the USA's Sarbanes-Oxley Act passed in 2002 in a convoluted knee-jerk reaction to the dot com crisis. US companies, in particular, became very worried about the dramatically increased regulatory regime, supervision and potential liability. The Chief Compliance Officer was, largely, a lightning rod for regulatory attention or, at the very least, a principle point of contact. Often, in US public companies, the CCO is primarily there to deal with SarBox matters.

However, in many jurisdictions, especially in financial services, the most senior compliance person in the room, no matter what the job title, is or under pending legislation and regulation will soon be personally responsible for regulatory failures.

In the context of the paper, then, the question is whether that liability should fall on the CCO, the CEO, both of them or the whole board and, potentially, on the non-Execs, too.

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