Bad leadership is clearly expensive. Fraud resulting from mismanagement at Wells Fargo, for example, has already cost the bank about US$300 million in fines and pre-settlement investigative costs while wiping out something like US$6 billion in shareholder value. Ex-employees, meanwhile, are seeking at least US$2.6 billion in a class-action lawsuit related to the Wells Fargo corporate culture that rewarded employees who created multiple accounts for customers without permission.
The Wells Fargo fiasco, of course, took place under the watch of CEO John Stumpf, who ironically insists on the bank’s website that integrity “is not a commodity. It’s the most rare and precious of personal attributes. It is the core of a person’s — and a company’s — reputation.” So let’s not forget the extra millions lost from the hit to Wells Fargo’s brand value, which was listed at US$30 billion before suffering from criminal behaviour that enriched the stock holdings of executives, but decimated public trust, while generating minimal revenue for the company.
These numbers are shocking, but not as shocking as the leadership that set the stage for employee misbehaviour and then failed to do anything about it for years. As a result, U.S. Senator Elizabeth Warren was justified when scolding Stumpf during government hearings on the bank’s account-opening practices, noting “you squeezed your employees to the breaking point so they would cheat customers and you could drive up the value of your stock and put hundreds of millions of dollars in your own pocket. And when it all blew up, you kept your job, you kept your multi-million-dollar bonuses and you went on television to blame thousands of $12-an-hour employees who were just trying to meet cross-sell quotas that made you rich. This is about accountability. You should resign.”
Even some ethical and caring employees appear to have checked their character at the door under Stumpf’s leadership (or lack thereof). As one bank worker told a Missouri court during a 2015 foreclosure case: “I’m not here as a human being. I’m here as a representative of Wells Fargo.”
It has been less than ten years since banking-sector leadership and governance failures almost toppled the global financial system, but the expensive lessons embedded in the 2008 financial crisis already appear forgotten as high-profile cases of appalling corporate behaviour continue to undermine capitalism. And the costs are unsustainable. As pointed out by former BMO Capital Markets head Eric Tripp, in a call to action aimed at the financial sector, the combined cost of character flaws in the banking industry alone over the last decade is estimated to be about US$8 trillion if you include lost economic growth. That’s more than US$1,000 for every person on the planet.
It is no secret that good leadership requires commitment to doing the hard work it takes to look out for all of an organization’s stakeholders, along with the intellect and competencies required to compete in today’s disruptive and uncertain times. But as research into the global financial crisis has made clear, good leadership further requires a balance of identifiable character dimensions. The importance of assessing character is now widely accepted. An Ivey Business School survey of directors and senior executives from for-profit and not-for-profit organizations, for example, found 86 per cent of respondents agreeing, or strongly agreeing, that boards should assess and evaluate CEO character. Furthermore, 60 per cent of survey participants agreed, or strongly agreed, that character strengths and deficits can be assessed through good interviewing, not to mention extensive and intensive reference-checking.
And yet, many organizations still fail to take steps to make sure this final pillar of good leadership is in place when making executive appointments. We unfortunately see examples of this paradox in the newspapers almost every day. Take the case of pharmaceutical firm Mylan, where the U.S. price of a two-pack EpiPen kit has jumped from about US$100 to more than US$600 since the company acquired rights to the life-saving product in 2007. Instead of being led by a CEO who would have recognized that price gouging allergy-prone families was not good business, the company has Heather Bresch at the helm. And when addressing the legitimate concerns of her company’s critics, she further enraged customers (while showing a total lack of awareness of the corporate social responsibility movement at the same time) by bluntly stating, “I am running a business to make money.”
Bresch’s lack of empathy as a leader is reminiscent of former British Petroleum CEO Tony Hayward during the catastrophic Gulf of Mexico oil spill, when he infamously complained about how his enjoyment of life was being disrupted. “There’s no one who wants this thing over more than I do, I’d like my life back,” he said. Public outrage later forced an apology to the 11 families who had lost someone in the accident.
No corporation should be ashamed about wanting to make profits. But as Bill George, former head of Medtronic, pointed out in a blog on Bresch’s testimony, when George Merck ran a pharmaceutical company, he had the character to lead his business with the following understanding: “Medicine is for the people. It is not for the profits. The profits follow.” At Mylan, however, pricing policy was tainted by greed. And shareholders are paying the price. “We continue to believe the EpiPen situation is far from over with Mylan and represents a risk to the shares,” Wall Street market watcher David Maris recently warned investors. And hey, he clearly knows about the costs associated with reputational damage. After all, Maris is a Wells Fargo analyst.
When recruiting leaders and directors, organizations have long invested time and money to ensure they are managed and governed by people with appropriate levels of experience and competencies. But all that time and money can be wasted when leadership character isn’t also given the attention it deserves because costly failures in decision making can often be traced back to character-based issues such as closed-mindedness, impatience, and lack of accountability, empathy, humility, and courage.
The good news is that character failures can be avoided. Based on research conducted at Ivey, proactive companies are now deploying tools specifically designed to assess leader character when recruiting, onboarding, promoting, and developing people.
The costs associated with bad leadership do not have to continue to escalate. More organizations simply need to recognize the importance of assessing and developing leadership character. The issue of leadership character can be ignored, but the price of doing so can’t be when paying for this neglect.
ABOUT THE AUTHOR: Gerard Seijts is a Professor of Organizational Behaviour, holds the Ian O. Ihnatowycz Chair in Leadership, and is Executive Director of the Ian O. Ihnatowycz Institute of Leadership at the Ivey Business School at Western University in London, Ontario. He can be reached at email@example.com.
Originally published in the Ivey Business Journal.