What should a director do if she senses smoke

15th March 2019 BUSINESS STANDARD On 20th January 2019, Los Angeles Times carried a report about the allegedly toxic leadership style and adverse impact on colleagues of an important public figure, the Chancellor of the University of California.


R. Gopalakrishnan*

*The writer is an author, corporate advisor and Distinguished Professor of IIT Kharagpur. During his professional career, he has served as Vice Chairman of Hindustan Unilever and Director, Tata Sons). Email: rgopal@themindworks.me

On 20th January 2019, Los Angeles Times carried a report about the allegedly toxic leadership style and adverse impact on colleagues of an important public figure, the Chancellor of the University of California. I don’t know the person or the facts, but the report was an investigative response after sensing smoke. There is great awareness about toxic leaders, and the possibility of creating autocratic CEOs nowadays. When sensed, boards can no more turn a blind eye. They have to respond with action just as they would if they sensed a burning smell in their residential building.

The board member of a reputed Trust recently asked, “We hear about domination by our CEO, who happens to be delivering. Even if slightly questioned, he becomes defensive and touchy, giving the impression of his way or the highway. As a board member, what should I do?” He could sense smoke but could not see any fire.

The short answer is sniff deeply, keep sniffing, be concerned, act, and don’t look helpless. The outside perception of a CEO is often better than the internal perception, which serves as a prodromal signal. Experience has taught me that the leadership behavior of a leader offers clues, better than the classical ‘rational man’ theories. There are four symptoms that strongly suggest that a leader may be heading into toxicity.

First, a huge concentration of power. People in the organization demonstrate a fear of speaking up. Such a leader is often surrounded by a tale-bearing coterie. Think of the hush-hush behavior these days among senior Delhi officers, or managers in some promoter-dominated companies. This is a worry signal.

Second, the leader is considered to do no wrong, he or she is deified. There is heavy image promotion by Corporate Communications. Think of Mallya, Kapoor and Singh brothers. Think of the blusteringly ridiculous claims of Patanjali Ayurved and Baba Ramdev.

Third, when the leader constantly refers to a hidden threat, a ‘competitive and devious industrialist’. Managers are expected to stop questioning things, and just close ranks against this enemy. Think of Swiss bank account-holding promoters, who paint every MNC as a profit-seeking, forex-repatriating devil.

Fourth and last, there is visible degradation of long-standing attributes that the organization has been known for. It could be leverage on the balance sheet, Rambo pledging of stocks, decline in product quality rankings, employee attrition and frequent departure of senior managers. There is a general air of hubris. Beware of CEOs, who drop names, seek visibility, behave arrogantly, and talk smoothly. When the company does well, they imply that it is their vision and strategy. When the company runs into problems, they blame demonetization, Brexit, China, and what have you.

My naval friend says that he judges the stability and balance of a ship by ‘the wake of the ship’—the symmetrical patterns remaining in the water after the ship has sailed through. If the CEO leaves a poor wake on his people, a director must do something, that is for sure. But what?

Albert Hirschman, a political economist and intellectual, wrote a book (Exit, Voice and Loyalty, 1970) about the two ways of reacting: quitting (exit) or speaking up (voice). Institutional loyalty influences the manner of exit—low loyalty results in a quiet exit, high loyalty leads to a visible exit. An unemotional relationship with the institution will almost always lead to a quiet exit.

Former White House Counsel, John Dean wrote recently about his 1973 testimony to Congress in the matter of the criminal conduct of President Richard Nixon (New York Times, 1st March 2019). It was only after John Dean’s testimony that the secret recordings emerged, leading to the exit of Nixon. The contemporary White House counsel, Michael Cohen, has testified about Trump in terms similar to the testimony about Nixon—smoke was sensed and the fire is being verified.

Quiet exits should cause discomfort. Mint reported (19th Dec 2018) that 743 independent directors had vacated their position before the end of their tenure on listed company boards, but 561 did so without adequate reasons. However, the law requires a reason; a common bluster is about ‘personal reasons and preoccupation.’ There are exceptions, for example, a couple of directors of YES Bank and JM Financial Asset Reconstruction Company stated that there was inadequate governance while stepping down.

You may well have a dangerous situation. Act, talk, share, counsel, but don’t sit around and keep thinking