Tone from the top: when things go wrong

WATCHING the two Murdochs facing a House of Commons committee last month, I was struck by the implicit admission that there had not been an independent enquiry to satisfy the board of News Corp that the “wrongdoing” did not extend into other parts of the empire beyond News of the World.

Rupert Murdoch’s offer to do this “if that was wanted by the committee” seemed to reveal an enormous governance gap. Surely, a board will want to know (or ought to want to know) the scale of the wrongdoing when it becomes aware of one at such a large scale, especially when it threatens reputational damage. Equally important should be the reasons for believing the wrongdoing is limited to where it has been found and not extant elsewhere in the group. Certainly, the potential investors or lenders should want to know the answers to those matters in any group where significant fundraising is imminent. A board should be asking the hard questions about a company’s behaviour well before third parties come in a position to do so.

My second overriding impression was the lack of attention given to so-called tone from the top. Setting corporate culture, and the values by which executives throughout a group will behave, is one of a board’s highest priorities. The importance of the tone from the top – at such infamous examples of value destruction as Enron, BCCCI, Worldcom, Lehman Bros, Northern Rock and, in a different way, BP – has attracted a lot of attention.

Executives can soon learn how bad news is received up the line and how to modify messages accordingly. Dominant personalities, especially those who have built up the businesses from scratch, can easily create an atmosphere where problems are hidden in the hope they can be sorted out before executives have to know about it. This can become quite convenient for bosses who can be very selective as to what they know or remember: what a friend of mine calls corporate mendacity. It is not a question of lying directly, but of lying indirectly and thus kidding oneself.

There is wonderful line in the musical ENRON, where the character of the somewhat patrician chairman, Ken Lay, holds up his hands and decrees that “oh, I don’t think I need to know too much about that”. While he was happy to “push hard” for “results”, the chairman does not want to know the details of the cheating underlying those results, which, the play implies, he either knew about or must have strongly suspected.

Of course, being faced with evidence of corporate wrongdoing somewhere in the group is a dreadful position for a board to find itself in. Establishing the scale of wrongdoing, and, particularly, the extent of it elsewhere in the group, brings with it barrowloads of distrust. This can easily magnify, as a truly independent forensic review questions the innocent and guilty alike. Blame apportionment or avoidance take their toll on previously harmonious relationships.

My experience of this tells me that such a review needs to be very strongly managed by someone on a full-time basis. If none of the executives is considered sufficiently clean to lead the review and its leadership falls to a non-executive, either the NED must become temporarily full-time or the company must employ a full-time outsider to manage the review. Scoping such a review is never easy and will require regular monitoring to ensure that blind alleys are not unduly followed, and that there is neither too much scope creep to enrich the reviewers nor any “capture” of the forensic reviewers by management wanting to close down proper lines of enquiry.

History suggests that it is never the little guys who are to blame and that – whatever a forensic review reveals – ignoring the tone set by the leaders of a business is unlikely to produce a change in corporate behaviour or values.