Open Access Research Article
CEO ACCOUNTABILITY AND CORPORATE GOVERNANCE
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CEO
ACCOUNTABILITY AND CORPORATE GOVERNANCE
AUTHORED BY
– MANISHA
INTRODUCTION
Corporate Governance refers to the
system of rules and practices by which a company is controlled and directed. It
serves as the cornerstone of modern business operations. At the heart of
effective corporate governance lies the accountability of key corporate actors
such as Chief Executive Officer (hereinafter referred to as CEO), whose
leadership and decision making significantly impact stakeholders. After major
scandals such as Enron, Wirecard, Lehman Brothers, Satyam etc which have
brought the world economy to its knees, it becomes further imperative to
highlight the accountability of CEOs and other such key corporate actors which
are at the helm of the affairs. It is the duty of the CEO to understand the
difference between company’s assets and personal assets, because when such a
boundary is crossed, a scam is said to have occurred.
CEOs around the world are paid
handsome sums of money, they are at the helm of major corporate decisions. And
therefore, they need to make sure that the company and its directors live up to
a certain standard of care and they act in a manner which is in the best
interest of the stakeholders and not reap any personal benefits. Being a leader
means accepting full responsibility of the organization. therefore, we try to
incorporate a fact that when CEOs are held less accountable for their actions,
corporate scandals are said to have taken place. Accountability is the
cornerstone of effective corporate governance: when it is compromised, the
company’s downfall becomes difficult to avert, regardless of other mitigating
factors at play.
WHO IS A CEO?
The Companies Act[1]
defines a CEO as an officer of the company who has been appointed as such by
the company. However, the act does not specify the qualifications,
experience, terms or conditions for the appointment, nor does it outline the
roles, responsibilities or functions of the CEO. Therefore, it is entirely left
up to the discretion of the company’s management to determine the
qualifications, experience, roles and responsibilities of the CEO. According to
Section 203[2] of the
companies act, a CEO is defined as the Key Managerial Personnel (KMP).
Additionally, the act[3]
mandates that every listed company and every other public company with a
paid-up share capital of ten crore rupees or more are mandates to appoint a
CEO. The Companies Act 2013 and the SEBI (Listing Obligations and Disclosure
Requirements) Regulations, 2015 govern the appointment of CEO.[4]
The CEO holds the top executive
position within a company. their key duties encompass significant
decision-making, steering the company’s personnel and assets towards strategic
objectives and serving as the primary liaison between the board of directors
and operational functions.[5] However,
within organizations characterized by effective corporate governance, the CEO
doesn’t wield absolute power or unilateral decision-making authority.
Appointment of the CEO involves election by both the board and the shareholders,
with reporting responsibilities to the board chair and members, designated by
the shareholders.[6]
The responsibilities of a CEO can
differ significantly based on factors such as the company’s size, culture and
organizational framework. Within larger corporations, CEOs primarily focus on
high-level strategic decisions that shape the company’s overall trajectory and
development. For instance, they may concentrate on formulating strategies,
refining organizational structures, and nurturing corporate culture. Specifically,
they might assess the allocation of capital throughout the organization or
devise strategies for assembling successful teams.
ROLES AND
RESPONSIBILITIES OF CEO
The CEO of a company executes various
roles and responsibilities. Some of them include, setting and executing
organisational strategy, representation of the company, building senior
leadership team, management of finances and operations of the company, setting
vision, values and corporate culture, communicating effectively with all
stakeholders and maintain accountability with the board. To elucidate further,
the CEO is responsible for making decisions regarding various aspects such as
launching new product lines, maintain competitive advantage, exploring
potential markets etc. while the CEO relies on substantial data and input from
senior leaders, as well as guidance from the board of directors, they
ultimately have operational control over the strategy and execution within the
organization.[7] The CEO
is the public representative of the company, they serve as the main contact for
investors, customers and other stakeholders.[8]
They act as the face of the company and they articulate the company’s vision
and strategy and cultivate robust relationships with key stakeholders.
Competent CEOs possess the ability to
attract and retain top-tier talent to their organizations. Although they do not
handle hiring and firing of every employee, yet they are accountable for constructing
and supervising the executive leadership team.[9] Additionally,
the CEOs are tasked with crafting and overseeing budgets, tracking performance,
and making financial judgements. They further are entrusted with ensuring
company’s adherence to all legal and regulatory standards. The CEOS
furthermore, supervise the activities of other executives, such as the CFO and
the COO, along with managing the company’s workforce. They are held accountable
for the overall administration of the company.
It is the responsibility of the CEO
to craft and instil the mission, vision and values of the company. the CEO must
maintain acute awareness of their demeanour, conduct and every action or
inaction they undertake, since the entire organization observes them. The CEO serves
as the face of the organization, often representing the firm in various
settings such as with the general public, media, government officials,
employees, customers and other stakeholders. The CEO is always essentially in
the spotlight – there’s someone always observing or listening. Last but not the
least, it is crucial for the CEO to prioritize the growth and advancement of
the company. it becomes imperative for the CEO, not only to ensure that short
term goals of the company are met but that such decisions are taken that
ensures the longevity of the company and that there is sustainable growth of
the company. a CEO must adopt forward looking perspective and strive to
establish a sustainable and lucrative business model.[10]
CEO
NARCISSISM AND CORPORATE MISGOVERNANCE
The American Psychiatric
Association’s Diagnostic and Statistical Manual for Mental Disorders[11] defines
narcissism as a “multifaceted personality trait that combines grandiosity,
attention seeking, an unrealistically inflated self-view, a need for that
self-view to be continuously reinforced through self-regulation, and a general
lack of regard for others.” As such narcissistic CEOs give precedence to their
own needs and desires over the well-being of their firm and its stakeholders.[12]
Such narcissistic tendencies of CEOs often translate into misgovernance in the
company in various forms such as lack of accountability, risk taking behaviour,
short term focus, overly aggressive strategies, ethical concerns etc. when one
makes a cursory read of corporate scandals around the world, one cannot help
but notice that narcissistic CEOs have been inclined to take excessive risks.
Often in the corporate world, it is said, higher the risk, higher the reward
and CEOs who chase personal glory tend to take such excessive risks to cater to
their own personal narcissistic needs.
Narcissistic CEOs tend to resist
oversight and shirk accountability. When a CEO does that, that means there is a
lack of checks and balances and transparency in the company. decisions taken
without consultation with others may often mean unethical and illegal solutions
which may in the long run harm the company and all its stakeholders. Such CEOs
with a narcissistic outlook, furthermore tend to focus on short term goals such
s raising the stock prices to enhance their own remuneration and recognition
without taking into consideration the overall impact it will have on the
company and its reputation. The Enron scandal was a lesson in corporate
governance to all. Here also, the CEO and the CFO wanted to boost the stock
prices because it would reflect in a higher pay for them.
However, narcissistic CEOs can be
kept in check through a manner of checks and balances which can often include
board oversight, diverse leadership team, regular performance reviews,
shareholder activism etc. A diverse leadership team can provide a comprehensive
viewpoint and perhaps balance the CEOs proclivities. Furthermore, an active,
independent and involved board of directors can restrain and put in check any
narcissistic CEOs rash decisions. The board’s compositions should be such that
individuals are willing to challenge the CEO when necessary. Enabling an open
360-degree open feedback by employees, peers and subordinates on CEOs
leadership style can help make the CEO become more aware and open to change.
Shareholders should actively take part in the major decision-making process at
the company. in extreme circumstances, shareholders may exercise their rights
to influence CEO behaviour through voting or activism, though this should be
judiciously used. An organization which promotes transparency and open
communication helps ensure that unethical or self-serving behaviour does not go
unnoticed.
Furthermore, regulatory and policy
interventions such as enforcing strict corporate governance standards, CEO pay
ratio disclosure, limiting executive compensation, whistleblower protection,
enforcing a code of conduct for top executives etc can help mitigate CEO
narcissism. When protections and incentives are enhanced within an
organization, it becomes easier for whistleblowers to report unethical
behaviour, thereby enabling them to safely voice their concerns about the CEO.
A clear and precise code of conduct should be developed and enforced for top
executives. The code of conduct should clearly outline expectations regarding
ethical behaviour and leadership qualities. Last but not the least options
should be explored where CEOs should face legal consequences when they engage
in unethical or narcissistic behaviour. Personal liability both financial and
criminal should be imposed on them for any damage done to the organization.
CASE
STUDIES
1. ENRON: THE FALL OF A WALLSTREET
DARLING
In 1985, Kenneth Lay merged Houston
Natural Gas and InterNorth to form an American energy, commodities and services
company called Enron based in Houston, Texas. Lay hired Jefferey Skilling and
they both assembled a group of executives who were able to conceal billions of
dollars in debt from botched transactions, accounting loopholes, the misuse of
mark-to-market accounting, special purpose entities and poor financial
reporting.[13] Andrew
Fastow, the CFO and other executives, misled Enron’s board of directors and the
audit committee and put pressure on the external audit firm Arthur Anderson to
overlook the problems. Skilling attracted the best candidates from MBA
programmes throughout the country and created
a highly competitive work atmosphere, where the primary objective became
executing numerous cash-generating trades in the shortest possible time-frame.[14]
The bull market of 1990s provided significant momentum to Enron’s aspirations
and contributed substantially to its rapid expansion. There were abundant
opportunities for deals and the company was positioned to create markets for
almost anything that could find a buyer.[15]
Like all things come to an end, Enron’s profits fell sharply as the boom years
came to an end and the energy trading sector became more competitive. The
company officials tried to hide the financial difficulties by using dubious
accounting techniques such as “mark to market accounting”, in response from the
mounting pressure faced from the shareholders. This accounting approach enabled
Enron to record anticipated future gains from certain trading contracts as
current income, thus creating the illusion of inflated current profits. Soon
the web of lies woven at Enron came to the forefront when the accounting fraud
surfaced. The company’s stock price fell from a peak of $90 per share in
mid-2000 to less than $12 by early November 2001.[16]
The fatal flaw at Enron was pride,
arrogance, intolerance and greed. It just got hungrier and hungrier. It was a
house of cards built over a pool of gasoline.[17]
People think that it’s a story about numbers, but in reality, it’s a story
about people, its about human tragedy. Kenneth Lay and Jefferey Skilling were
called the smartest guys in the room, captains of a ship too powerful to go
down. In Titanic, the captain went down with the ship, in Enron’s case, the
captain first gave himself and his executives a hefty bonus then lowered
himself and the top folks down in the lifeboat and then hollered up and left
and said “everything is going to be just fine”.[18]
Kenneth Lay was a Baptist preacher’s
son, he spent most of his life in poverty working small jobs and wanted things
to be better. Even as a child he aspired to make huge wealth for himself. He
got a Ph.D. in economics and was a visionary. He liked people with big ideas
and Skilling was the person with the biggest idea of all. Both Lay and Skilling
would often push their employees to a standard that was continuously being
raised and the only thing that mattered was adding value.[19]
Employees were often found to be compelled to bend the rules until the
boundaries of ethical behaviour became blurred in the pursuit of next major
achievement. Initially the culture of cleverness at Enron began as a pursuit of
excellence, but gradually the top brass at Enron concentrated on coming up with
shrewd plans to uphold Enron’s seemingly flawless image of success.[20]
The company’s culture characterised
by individualism, innovation and aggressive cleverness lacked compassionate and
responsible leadership.[21]
The Board of Directors at Enron hesitated to intervene and address the vacuum,
leading for the first time, for individual employees to face the consequences
of a culture where leaders disregard ethical boundaries.[22]
The top management at Enron asked their employees to make profits anyhow,
“there were no rules for people, even in our personal lives. Everything was
about the company and everything was supposed to be on the edge, which led to
ethical degeneration at the company”.[23]
2. VIJAY MALLYA: THE KING OF GOOD TIMES
Vijay Mallya, better known to Indians
as the “King of Good Times”, was a man with a Midas touch. Born to business
tycoon Vittal Mallya, the chairman of United Brewery, Vijay Mallya never
experienced the struggles of middle class or the hunger pangs of the lower
class. Spoiled at a very young age with expensive toys and an indulgent
lifestyle, Mallya was always destined to view life with an arrogant
nonchalance. In his early 20s, Mallya led an exuberant life, racing motor cars
and winning his first Grand Prix. But at the age of 28, life changed for Mallya
when he had to take over his father’s empire following his death.
When Vijay Mallya took over the reins
of his father’s business empire, he wanted nothing more than to prove that he
could make it bigger and better. It was a challenge he took upon himself, that
he would do justice to his father’s legacy.[24]
Mallya was the first to recognise the potential of Bangalore as a social hub
and therefore, launched his beer Kingfisher, in pubs around Bangalore. The beer
was a smashing success for Mallya, so much so that beer itself became
synonymous with Kingfisher and people started asking for Kingfisher and not
just beer. Despite the success and the mountain of wealth that came with it,
Mallya was not satisfied. His motto in life was “bigger and bigger”, a motto
that he brought into his business as well. He did not merely want wealth, he
wanted to be known, he wanted to be recognised and he wanted to be acknowledged
in life.[25]
It would come as no surprise that the
man known as the King of Good Times, was flamboyance personified. He was known
for his eccentric sense of fashion, the jewellery he always adorned and the
lavish parties he threw. Mallya exuded an arrogance to things even as dire as a
helicopter crash and even brushed off his survival as a proof that “god needs
me”. It was his belief that he could do no wrong.
This exorbitant success in the beer
market led to the birth of Mallya’s dream project: The Kingfisher Airlines.
Initially, it started as a low-cost airline: it was a short distance, short
time, low-cost airline whose main selling point was that it brought luxury and
sophistication to the middle class at prices they could afford. Mallya’s dream
of “bigger and bigger” transferred into the airlines business as well. The
airline went from having no business class and flying short distances to having
a first class and flying abroad. Mallya bought airbuses and airplanes but at
the cost of taxpayer’s money. Mallya’s dreams for Kingfisher airlines led to a corresponding
increase in the airlines’ debt obligation. Even then he did not stop the
expansion, he saw opportunities of business everywhere, he bought a Formula One
racing team and a team in IPL, both personal hobbies which became huge
businesses.[26]
Like all good things come to an end,
so did Mallya’s fall from greatness began with the recession in the United
States of America. While Mallya’s earlier philosophy of bigger and bigger had
worked quite well in other businesses, it did not work with Kingfisher airlines.
A bigger fleet of aeroplanes meant more fuel, more staff and more overhead
costs. Being a low-cost airline with luxury beyond pricing meant that the
company lost more money than it made each month. The costs of running far
exceeded the revenue received. However, for Mallya cutting cost was
unthinkable. And therefore, to save the sinking ship he resorted to taking huge
loans from nationalised banks. By 2011, there was no money left to run the
airline anymore; the bills of fuel were pending and the catering to the
airlines had stopped because of lack of funding.
Mallya’s extravagant 60th
birthday party was the final nail in the coffin for many. Mallya’s denial to
pay the loans from his personal wealth, his belief that he had done nothing
wrong and that rules did not apply to him, and his diversion of money from
Kingfisher’s account to fund his obsession with F1 and IPL were aggravating
instances that turned the public image against him.[27]
In the end, despite his efforts to
disapprove the narrative that he had stolen the nation’s money through these
nationalised banks, he was charged under conspiracy, cheating and money
laundering. Despite owing the country over $2 Billion[28],
his ego and his preoccupation with himself and his image has blinded Mallya from
taking accountability for his mistakes and taking the right decisions at the
right time. In the end, the conclusion is clear, the only difference between
Vijay Mallya and a petty thief is that Mallya wears expensive suits, throws
lavish parties and escaped the country without a sliver of remorse or taking
accountability.[29]
3. WIRECARD
Wirecard was a German payment
processor and financial services provider headquartered in Munich, Germany.
They made sure that when one bought something, the money got from the
customer’s credit card to the online retailer. According to its CEO Markus
Braun, “we are a software group, an
internet company, with a bank as a daughter and not the other way round”.[30]
The company had a strong business model
– it used to handle payments for online businesses in pornography and online
gambling, but it was not illegal.
The US poker market was about 50% of
the global poker market. But everything changed when in 2006, a new law made it
illegal to handle payments for US citizens playing poker. So Wirecard lost a
major source of income. Despite this, the company’s profits continue to rise
expeditiously. But the company did not grow by adding new customers like
Spotify does, it grew by buying local businesses and most of them in Asia. From
the outside it looked like a legitimate enterprise with 6000 employees
worldwide, global, large and profitable. However, in reality, it was actually a
robbery. Wirecard was laundering money for various businesses. It set up a UK
based company called Bluetool which would act as a front for Wirecard’s illicit
transactions. What Wirecard would do was if say it was a contentious
transaction say like gambling or porn, it would misquote the transaction to say
for example – a florist. And it would get away by taking advantage of all the
little weaknesses in the system.[31]
Zatarra, a US financial investigative
firm issued a negative report on Wirecard in 2016 where it alleged negative
financial activity at the firm. The report accused the top management at the
firm in engaging in fraudulent behaviour and money laundering.[32]
In 2019, Financial Times journalist, Dan McCrum discovered the scam and
published a number of pieces in which he claimed accounting irregularities at
Wirecard’s Asian units. In June 2020, the company admitted to EY, its auditor
that $2.1 billion in cash they were meant to hold in two Philippine accounts
likely did not exist or was missing.[33]
With the advent of this news Wirecard’s share price plummeted by 99% and it
became the first DAX company to file for bankruptcy, owing creditors to lose
close to $5 billion.[34]
At the head of the scandal were two
people involved – CEO Markus Braun and the COO Jan Marsalek, both Austrian
nationals. The company CEO used to present himself as a visionary always
dressing up in turtlenecks and formals – sort of portraying himself as “Steve
Jobs of the Alps”. Braun was the German heartthrob; he took advantage of the
German desire to have their own latest technology giants like the German Google
or the German Facebook. He used to make statements that used to appeal to the
general public’s ears such as – “it’s about making the cake much bigger”.[35]
While Braun always had this quite stressed look on his face, his prodigy
Marsalek was quite the opposite. He was a great communicator, extremely
charming, very approachable, very sharp, well-travelled and very careful in
what he said. He would always assure his subordinates who sought a minute of
his time with “For you, always!” but he would say that to almost everyone.[36]
Every time Wirecard was criticized,
Braun would come up with statements such as – “we don’t get distracted by the
noise”[37]
or “we firmly reject these serious allegations, we think these allegations are
mainly market speculations”.[38]
Both Braun and Marsalek repeatedly denied allegations of any wrongdoing, it was
only when the final nail in the coffin was placed that they accepted that
around $2.1 billion were missing, yet none of them took responsibility for
their actions. Braun has been in custody since 2020, while Marsalek ran away
and still remains a fugitive.[39]
While Braun claims to be innocent, it was his duty to know what Marsalek, his
metaphorical prodigal son was up to. Lawmakers have criticised Germany’s
deficient handling of the scandal and lack of regulatory oversight over the
company.[40]
The Wirecard scandal brought to light
the importance of CEO accountability and corporate governance. It raised
questions about the effectiveness of regulatory oversight and the
responsibilities of corporate leaders to ensure transparency and integrity in
financial reporting. The case also underlines how important it is for the
investors to conduct thorough due diligence and scrutinize companies’ financial
statements, especially in high-growth industries like fintech.
4. FACEBOOK – CAMBRIDGE ANALYTICA
In 2018, Facebook CEO, Mark
Zuckerberg, issued an apology acknowledging the company’s failure to protect
user data and promising to implement strict measures to prevent similar
incidents in the future.[41] A
political consulting and strategic communication firm known as Cambridge
Analytica created a personality test application that improperly collected
personal information not only from its
users but also from their friends on Facebook, ultimately gathering data from
close to around 87 million people. This was facilitated through a partnership
with Facebook, leading to allegations of mishandling user data against the
social media platform.[42]
Both the CEO and the COO, Sheryl
Sandberg took responsibility of the data breach.
“We
have a responsibility to protect your data, and if we can’t then we don’t
deserve to serve you,”[43]
“I’ve
been working to understand exactly what happened and how to make sure this
doesn’t happen again, I started Facebook, and at the end of the day I’m
responsible for what happens on our platform. I’m serious about doing what it
takes to protect our community.”[44]
-Mark
Zuckerberg, CEO Facebook
Zuckerberg acknowledged that there
was a breach of trust between Facebook and its users who entrust their data to
the platform with the expectation of protection. In a bid for redemption the
tech-giant then outlined several measures that the company intends to take
which the company intends to take in response to the unauthorized collection of
extensive Facebook user data by Cambridge Analytica, which occurred without
user consent.[45]
Facebook,
furthermore, agreed to pay a fine of $643,000[46]
fine to the U.K.’s Information Commissioner’s Office for its role in the
Cambridge Analytica scandal. After over a year of legal proceedings and
negotiations between the regulatory body and the tech company, Facebook
eventually agreed to pay the fine.
However,
lawmakers filed a case against Zuckerberg, for the CEO to be held personally
liable for the company’s use of customer data and data breach. Connecticut
Democratic Senator Richard Blumenthal while blaming the CEO of the tech giant
said that:
“Zuckerberg
and Facebook are one entity— like two sides of the same coin, they are joined
at the hip, head and heart. He is the founder, CEO, controlling shareholder,
and face of the company. Thanks to recent reports, it’s never been clearer: He
wasn’t just aware of Facebook’s invasion of consumer privacy, he signed off on
it and publicly downplayed legitimate concerns.”[47]
The
scandal highlighted the need for accountability from major tech companies and
their CEOs in instances of significant data breaches. In the 21st century, data
has become comparable to oil in terms of its value, and breaches of this
magnitude underscore the importance of holding top management accountable. Mark
Zuckerberg, being synonymous with Facebook as its founder and public face,
faced calls from lawmakers to be personally accountable. With the rise of
technology, there's an expectation that CEOs should bear responsibility,
serving as a deterrent against future incidents.
Ultimately,
the Cambridge Analytica scandal served as a wake-up call for both Facebook and
the tech industry as a whole, prompting greater awareness of the need to
protect user data and address broader ethical and societal implications of
social media platforms. It also sparked discussions about corporate
responsibility and the role of CEOs in ensuring the integrity and
accountability of their companies.
5.
BINANCE
Binance
is a multinational corporation that runs the largest cryptocurrency exchange globally,
based on a daily trading volume. Changpeng Zhao, known for creating high
frequency trading software, established Binance in 2017 in China. However, it
relocated to Japan owing to some regulatory issues, before finally setting up
in China. In November 2023, the company admitted to being guilty of various
charges including money laundering, operating without licenses, and violating
sanctions in a U.S. federal court.
The
cryptocurrency exchange has been the focus of investigations since at least
2018, with federal prosecutors seeking access to internal documents, data
related to anti-money laundering efforts etc. In March 2023, the Commodities
Future Trading Commission (CFTC) initiated civil proceedings against Binance,
alleging that the company failed to implement adequate money laundering
programmes, due to which illegal activities such as financial terrorism and
drug sales were facilitated. Additionally, the CFTC claimed that the top
executives and employees were aware of the platform’s illegal activities and
refused to do anything to remedy the same.[48]
The
Department of Justice (DoJ) investigated Binance in 2023 accusing the company
of having insufficient anti-money laundering measures in place, enabling its
customers to use the platform for illicit activities, including laundering
proceeds from darknet market transactions, hacks, ransomware and scams.[49]
The charges asserted that Binance prioritized growth, market share and profits
over compliance with U.S. laws, contributing to its status as the world’s
largest cryptocurrency exchange.[50]
Prosecutors further claimed that Binance lacked “know-your customer
requirements”, violating U.S. money laundering laws. The company provided
services to U.S. users that required compliance with U.S. regulations despite
having no physical presence in the U.S.[51]
“Using
new technology to break the law does not make you a disruptor, it makes you a
criminal,”
said
U.S. Attorney General Merrick Garland, who called the settlement one of the
largest corporate penalties in the nation's history.[52]
“Binance
turned a blind eye to its legal obligations in the pursuit of profit. Its
wilful failures allowed money to flow to terrorists, cybercriminals, and child
abusers through its platform,”
Janet
Yellen, Secretary of the Treasury, U.S.
Binance,
therefore, agreed to pay $4.3 billion in fine for money laundering violations
to U.S. law enforcement agencies.[53]
Furthermore, along with reaching a settlement, Changpeng Zhao, the CEO of
Binance, admitted to multiple charges in federal court in Seattle. Zhao
announced his resignation as CEO on social media, and U.S. Justice Department
representatives revealed during a press conference that his departure was
stipulated in their arrangement with the company.[54]
As
per a digital information source, Binance experienced a decline in market share
from 70% to 45% following the scandal.[55]
The money laundering controversy surrounding Binance has brought CEO
accountability of private companies into focus for regulatory authorities and
the public alike. Despite the absence of direct financial losses to the general
public, the illicit money laundering actions have adverse effects on society.
Hence, the imposed penalty on both the company and its CEO is deemed
appropriate and necessary to serve as a deterrent.
REGULATORY AND POLICY FRAMEWORK TO HOLD CEOs ACCOUNTABLE
It
can therefore, be established that CEOs need to be held accountable for their
actions. Hence, regulatory and policy interventions are needed to hold CEOs
accountable and they can take various forms ranging from corporate governance
reforms to specific regulations targeting executive behaviour.
1.
CORPORATE GOVERNANCE REFORMS: When
majority of board members consist independent directors, they are free from the
internal politics of the company. they can thus ensure an effective and
independent board oversight, thereby constraining the CEOs actions to the
benefit of the company and its shareholders. Balance of power is maintained
when the roles of CEO and Chairman are separated, thereby reducing the risk of
CEO dominance over the board. Additionally, criteria for independent directors
need to be set to prevent conflict of interest with the board.
2.
EXECUTIVE COMPENSATION REGULATIONS: Clawback
provisions including allowing the companies to reclaim bonuses or other
incentives when any financial misconduct or scandal comes to limelight.
Regulations that would require a significant portion of the compensation paid
to CEO to be tied to company performance can help align CEO interests with
shareholder value creation. Transparency and Accountability can also be
enhanced when executive compensation packages require periodic shareholder review
or voting. This can help put enormous pay cheques in check.
3.
DISCLOSURE AND TRANSPARENCY
REQUIREMENTS: When companies are required to disclose CEO
pay ratio to average employee, it allows stakeholders to assess compensation
fairness and thereby enhance transparency. Furthermore, CEO conflicts of
interest should be mandatorily disclosed, such as financial interests in
related entities which help prevent unethical behaviour and ensure
transparency. Ethical guidelines for CEO behaviour and requiring adherence to
these guidelines promotes responsible leadership.
4.
REGULATORY ENFORCEMENT AND LEGAL
REMEDIES: Regulatory agencies such as SEBI, IRDAI, RBI etc can
investigate and prosecute CEOs for violation of security laws, such as insider
trading or misleading financial disclosures. CEOs need to be held accountable
for breach of fiduciary duties whenever they do not act in the best interests
of the company and shareholders through legal remedies or regulatory actions.
Shareholders should be allowed to file civil and criminal lawsuits against CEOs
for damages resulting from negligence, misconduct or breach of duty.
5.
WHISTLEBLOWER PROTECTION: Employees
should be free to report misconduct or unethical behaviour on part of the CEO
without fear of retaliation. Therefore, adequate whistleblower protection
programme needs to be implemented to ensure early detection and intervention.
Anonymous reporting mechanisms of CEO misconduct can be put in place which
provide for protection of the whistleblower’s identity as well.
6.
STAKEHOLDER ENGAGEMENT AND
ACCOUNTABILITY: Shareholders rights can be strengthened such
as the ability to nominate directors or approve executive compensation
packages, such measures can empower shareholders to hold CEO accountable.
Mandatory Corporate Social Responsibility (CSR) reporting mechanisms can help
ensure that the CEOs are held accountable for environmental, social and
governance (ESG) performance.
CONCLUSION
Therefore, it can be concluded that where CEOs face lower levels of
accountability, there is a propensity for significant scandals to occur,
impacting not only the shareholders but the society at large. There seems to be
a shared understanding among policymakers, the judiciary, and various
stakeholders that CEOs bear responsibility and must be held accountable for
their actions or inactions concerning the ethical and legal conduct of the
company. In the contemporary corporate environment, CEOs are expected to be
answerable not solely to shareholders but to a wider array of stakeholders,
including employees, customers, communities, and the environment. A
conscientious CEO understands the profound implications of their decisions and
conducts themselves accordingly. The role of a CEO has expanded beyond mere
profit generation. Today, CEOs are pivotal in both corporate governance and
societal influence. Embracing ethics and accountability isn’t merely a moral
obligation; it serves as a strategic asset that can drive enduring success. By
leading with integrity and considering the broader societal ramifications of
their actions, CEOs can navigate their companies toward a more promising and
sustainable future.
India, characterized by its diverse and rapidly evolving economy,
presents a unique case study in corporate governance. While regulatory
frameworks such as the Companies Act and SEBI guidelines aim to enhance
transparency and accountability, implementation challenges persist. Cultural
factors such as the prevalence of family-owned businesses and complex social
hierarchies pose challenges to effective governance practices. However, recent
initiatives such as the Insolvency and Bankruptcy Code signal a commitment to
strengthening corporate governance standards.
Moving forward, it is imperative to recognize the interconnectedness of
cultural, legal, and institutional factors in shaping corporate governance
practices and CEO accountability. Effective governance requires a multifaceted
approach that integrates regulatory reforms, institutional mechanisms, and
cultural sensitivities to promote transparency, integrity, and trust within the
corporate sector. By fostering a culture of accountability and ethical
leadership, policymakers, corporate leaders, and stakeholders can work together
to ensure the integrity and sustainability of corporate governance systems
across diverse cultural contexts.
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Article Information
CEO ACCOUNTABILITY AND CORPORATE GOVERNANCE
Authors: MANISHA
- Journal IJLRA
- ISSN 2582-6433
- Published 2025/03/25
- Issue 7
About Journal
International Journal for Legal Research and Analysis
- Abbreviation IJLRA
- ISSN 2582-6433
- Access Open Access
- License CC 4.0
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