How Boards Can Reduce Corporate Misbehavior

Constance E. Bagley, Bruno CovaLee, and Lee D. Augsburger write:

One defining feature of 2017 has been seeing corporate directors and officers being held personally responsible for illegal behavior at their companies. For example, after Wells Fargo Bank paid more than $300 million in penalties for creating over 3 million sham customer accounts, Judge Jon Tigar of the U.S. District Court in San Francisco refused to dismiss claims against the fifteen members of the Wells Fargo board. And Oliver Schmidt, the highest ranking Volkswagen officer residing in the United States, was sentenced to seven years in prison and ordered to pay $400,000 for his role in the VW diesel emissions scandal.

As the ultimate guardians of the firm’s financial, human, and reputational capital, corporate boards need to set their bar higher, and replace reactive approaches to misbehavior with a proactive approach to winning with integrity. Instead of assuming everything is fine unless they hear otherwise, directors need to be more probing.

They recommend: Creation of a board ethics committee, appointment of a high-ranking officer with ethics responsibility, publication of ethics standards, and clear escalation of claims of ethics violations. And “do not create misaligned incentives.” We’d put it in positive terms — create incentives for ethical behavior as an element of risk management.

Source: How Boards Can Reduce Corporate Misbehavior

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