A Matter of Trust: Boards Must Treat CEO Transgressions Carefully, Study Says

ceoBoards are getting used to dealing with CEO sins that have come pouring out of the past as a result of the #MeToo movement, adding to an ignominious legacy of C-suite betrayal that stretches back to Tyco and Enron.

But directors should handle such transgressions of personal integrity by their CEOs differently than they do mistakes of professional competence, concludes a new study by academics who have been studying corporate “trust repair” for nearly 20 years.

“The key distinction we found is whether people see the CEO’s violation as resulting from a lack of integrity versus a lack of competence,” Cecily Cooper, a business professor at the University of Miami, told Corporate Board Member.

“If it’s an integrity-related issue – such as lying, cheating, stealing or exposing yourself to people – those are incredibly difficult for a CEO to overcome. It’s diagnostic of a person’s character, and they’re not likely to change.

“But if it’s a competence-related issue – the CEO had faltering performance and made some mistakes; you signaled that; and the CEO apologized and accepted responsibility – your constituencies are likely to think the person can overcome that and change, and perform better in the future.”

“The board can send different signals via tactics such as firing the errant CEO or forcing him or her to apologize and pay a personal cost.” – cecily cooper

Cooper and her colleagues surveyed 87 college students in depth to see how they might react to a real-life trust violation by a CEO at a Fortune 500 company, and to how the company’s board handled it. The study assessed how an extrapolation of the surveyed group to the general public might react to two different board-initiated responses to a CEO transgression: dismissing the chief, or keeping the CEO in place while offering an apology and acknowledgement of the wrongdoing.

“The board can send different signals via tactics such as firing the errant CEO or forcing him or her to apologize and pay a personal cost,” Cooper said. “These types of actions are key to repairing trust in the CEO’s associated organization, and even the CEO himself or herself in cases where they stay.”

The strength of the association between the CEO and the company in the public’s mind should be a key determinant to a board’s action, she said.

“Since people tend to view the CEO and organization as being inextricably intertwined, and the chief as the personification of an organization, even if it’s an isolated and personal incident, a transgression of integrity usually reflects on the organization itself and affects trust in it by various stakeholders,” Cooper said.

In either parting with the transgressor or rehabilitating him, Cooper said, boards should consider how to best signal that the guilty CEO is distinct from the rest of the top leadership, which is assumed trustworthy, or that the CEO has learned a lesson from the event and will be a reformed leader in the future.

Both tactics increase trust in the organization, she said, but in different ways. By firing the CEO, the board differentiates itself from the transgressor, leaving the organization’s reputation intact. But in cases where CEOs must stay, a board-requested CEO apology, combined with the CEO’s acknowledgement of wrongdoing, encourages others to see the CEO as a “reformed sinner,” helping to repair trust in the organization.