The role of a Board of Directors is to guide the company as trustees on behalf of shareholders bit also to keep in check the ambitions of some dominant executive board members.
Charismatic, bullying or domineering board leaders will often get away with decisions that in hindsight should have been challenged by independent minded board members, but to their eternal regret, they allowed these decisions to pass with disastrous consequences.
Sometimes board members ignorance of the details on hand ensures that they fail to deal with toxic board members leadership styles but this is not an excuse especially in an age where board members are personally and collectively held liable for financial misconduct.
Having in place liability insurance is not a remedy to allow board member charmers to dominate decisions whereby boards then provides the environment in which such charmers and bullies decisions turn to fraud.
Appointing a new chief executive officer is one of the board’s most important tasks but how does one go about it? Board members are a blend of character traits and competent boards understand that while technical and financial competencies determine what chief executives do, character, together with their environment, strongly influences what they will do.
Board members have no way of knowing how the chief executive will act, unless he has a past history and believe that characteristics such as drive, enthusiasm, self- confidence and charisma are very attractive but could turn out to be double –edged. To assess such traits requires skill, knowledge, experience and psychology.
Modern corporations thrive on image and senior level charismatic leadership, as they are often both the spokespersons to the wider public and the financial analysts, as well as the marketing face of the company.
Competent boards understand that while technical and financial competencies determine what chief executives do, character, together with their environment, strongly influences what they will doDr. Mohamed Ramady
The Zuckerberg episode
When things go wrong, government regulators want to see the face that represents the company, and it is often the charismatic leader that talks that role as the recent Facebook episode demonstrated with founder Mark Zukerberg forced to appear in front of the US’s Congressional Committee but has refused to do the same in front of a UK Parliamentary enquiry in the affair.
Other high profile cases of chief executives with abundant charisma as well as bullying tactics illustrate how the biggest of companies can be affected.
One such case was Polly Peck International (PPI), which was a small British textile company but which expanded rapidly in the 1980s and became a constituent of the blue chip UK FTSE 100 company index before collapsing in 1991 with debts of £1.3 billion, eventually leading to the flight of its CEO Asil Nadir, in 1993.
Polly Peck was one of several corporate scandals that led to the reform of the UK’s company law resulting in the early versions of the UK Corporate Governance Code. By the time Polly Peck folded, it had acquired interests in brands like Sansui, Del Monte fruit and Santana Inc. in the USA.
What is or relevance here is the way the rest of the board acted with Nadir and his ambitious expansion plans and conceal the large amount of funds to privately held companies.
In 1990, Polly Peck’s board became so worried about the money transferred into Northern Cyprus that it confronted Nadir and asked him to return it. He refused. He did so because he could bully some and charm others like he did with his creditors. Trading in the company’s shares was suspended in 1990 with over £100 million in short-term lines of credit.
Other cases nearer to date were the so called ‘ponzi’ schemes of Bernard Madoff in the USA and the earlier Egyptian Al Rayan and Al Saad Company and the Saudi Eid and Juma’ in the region which recycled previous investors money to new investors as returns, and hoped that not many would cash in at the same time and bring down crashing the illusion of a pyramid scheme of high return.
Another is the ongoing bankruptcy case of the Saudi based Maan al-Sanae group with around $ 10 billion in debt. But these cases were effectively run by loners without boards to keep them in check, unlike the astonishing demise of one of the UK’s reputable financial institutions- The Royal Bank of Scotland (RBS) -under the stewardship of CEO Fred Goodwin in 2001.
Nicknamed “Fred the Shred”, Goodwin became involved in selecting the non-executive directors whose role was to challenge him, and to as such, he manipulated the board to minimise opportunities for challenge through a combination of bullying and charm.
In 2007, during the height of the last global financial crisis, the RBS failed and the government had to bail it out. Had the RBS board, especially the independent members, understood and managed the risks inherent in ‘Fred the Shred’s’ character and pulled up courage to provide a robust challenge he needed, the British public would have been spared additional national debt.
The message is simple to all independent board members out there – don’t be taken in by a cheesy charm or bullying tactics of a Chairman or CEO and stand up for your opinions. That is why you were appointed in the first place.
Dr. Mohamed Ramady is an energy economist and geo-political expert on the GCC and former Professor at King Fahd University of Petroleum and Minerals, Dhahran, Saudi Arabia and co-author of ‘OPEC in a Post-shale world – where to next?’. His latest book is on ‘Saudi Aramco 2030: Post IPO challenges’.