Real Estate

Not governance but director conduct determines an organization's success

June 18, 2014

Governance is unable to correct the perverse drives and motives of corporate leaders. The extreme financial incentives, personal traits and family backgrounds of CEOs have a negative impact on the success of a company. Humility and truth-telling (the Greek parrhêsia) are 2 crucial factors that can help strengthen the behavioral factors affecting the effectiveness of boards. This is the conclusion reached by Prof. Kees Cools and Prof. Erik van de Loo in a double lecture on Friday, June 20.

Image: © Nationale Beeldbank

Cools analyzed the difference between two groups of banks: the banks that require government support or have even become bankrupt and the banks that have survived the crisis on their own. For the sake of convenience, he names them good and bad banks in his lecture. "The state of the financial incentives and personal characteristics of the CEOs at the failing banks were not good. Their cash bonuses were twice as high as those of their "good" colleagues and 10 times higher than their fixed annual salaries.

Their narcissism scores were also twice as high." In his research, Cools found that the CEOs of the failing banks proved to be relatively vain. "They have an overly strong ego, feel themselves to be more important than the bank that they must serve and likely had an excessive need for power, prestige and glamor." A unique part of the study also revealed that the CEOs of bad banks came, to a significant extent, from low social economic backgrounds. "Low origins turns out to be a risk factor, " notes Cools. Finally, six years after the crisis, the returns on equity of bad banks remain beyond recovery, which contrasts with the situation at good banks. The bad banks were intrinsically unhealthy, or so it seems.

These naked facts help us to better understand the causes of failing boards, says Cools. He accordingly offers guidelines for more effective boards. We must realize that paper tigers, such as governance codes, regulations and laws, will not clean up the work for us. "Reality compels us to recognize that a director is not naturally beneficent, on the contrary. We are a bunch of well-meaning but aggressive, dishonest and threatening primates. Good management is counter to nature."

These risk factors must be acknowledged and counteracted. This has been difficult enough to do for hundreds of years, adds Van de Loo. "Healthy management is more than the omission and prevention of such developments." In selecting leaders, we can certainly take behavioral factors into account. Van de Loo argues for board member selection based on such criteria as humility and parrhêsia.

"Humility at the top creates a more constructive climate at the top and in the organization," states Van de Loo. The characteristics of humble leaders are: a realistic view of the strengths and limitations of themselves and leadership, the creation of a climate of openness and continuous learning, as well as a concern for the interests of the group, organization and community instead of personal glory. Parrhêsia is the courage to speak the truth. This is also an indispensable condition for good management.

Professor of Corporate finance and governance at TIAS School for Business and Society Kees Cools RA will further exercise his duties by holding a public lecture at 4:15 PM on June 20, 2014 entitled: Gandhi in governance. Professor of Leadership and Conduct at TIAS Erik van de Loo will then also exercise his duties in holding a public lecture at 4:45 PM entitled: Shadows in the board room.

Relevant articles