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McDonald’s upheaval is a stern reminder to CEOs about ethics

By Hugh Arnold

McDonald's sign

The board of directors of McDonald’s recently announced it was terminating the employment of CEO Steve Easterbrook because he “demonstrated poor judgment” involving a consensual relationship with another company employee.

The process followed by the board in arriving at their decision appears impeccable. Once made aware of the situation by their general counsel, a highly reputable outside law firm was retained to investigate.

The process followed by the board in arriving at their decision appears impeccable

Following a three-week investigation, the board held what are described as “lengthy discussions and meetings” to consider the independent inquiry and ultimately voted unanimously to remove the CEO.

The factors underlying the board’s decision were described as a combination of a violation of a longstanding company policy forbidding employees having relationships with direct or indirect reports at all levels, as well as concerns that the CEO had demonstrated poor judgment regarding personal affairs and corporate conduct.

Following his termination, Easterbrook stated in an email to employees: “Given the values of the company, I agree with the board that it is time for me to move on.”

CEOs are powerful

The role of CEO is very powerful, and it should be. The CEO is expected to articulate strategic direction, build a strong leadership team, manage significant risks and deliver results that fulfil the expectations of many powerful stakeholders, including investors, customers, employees, communities and regulators.

The CEO only possesses authority and influence to the extent that these have been delegated by the board

The job of a CEO at a major corporation like McDonald’s is extraordinarily demanding—few people have the combination of intelligence, insight, leadership skills and stamina to fulfil it effectively.

At the same time, the CEO only possesses authority and influence to the extent that these have been delegated by the board. For corporations in both Canada and the United States, the authority to “manage the affairs of the corporation” is legally invested in the board.

Many corporate governance experts view the most important task of the board as the selection and oversight of the CEO. Boards that get that right are highly likely to be successful. Those that get it wrong are usually doomed to substandard performance if not outright failure.

‘Imperial’ CEOs

There always is, and always has been, a risk of the board allowing and enabling the emergence of an “imperial” CEO. The risk of this occurring was greater in the past, when the norm was for the roles of CEO and board chair to be filled by the same person.

Today in Canada, that practice is virtually extinct among major publicly traded corporations. Interestingly, the transition away from the practice has been notably slower in the US, where 47% of S&P 500 companies still have a joint CEO/board chair.

However, that can’t explain the situation at McDonald’s, where the roles have been separated for some time.

The policy forbidding personal relationships with direct or indirect employees at any level has a sound rationale

The McDonald’s policy forbidding personal relationships with direct or indirect employees at any level has a very sound rationale (and for the CEO, that means all employees).

When one party to a relationship is in a position of direct or indirect authority over the other, it’s impossible to know with certainty the extent to which the subordinate engaging in the relationship is either consciously or unconsciously acting out of deference or fear. And what if the subordinate partner in the relationship begins getting preferential treatment at work?

There are also many examples of situations where people in positions of authority have used the power and authority of their positions to coerce subordinates into sexual relationships.

That does not appear to be an issue in this case, where both parties described the relationship as consensual. There have been no allegations of sexual harassment.

A question of judgment

And that brings us back to the issue of judgment. Easterbrook should have known better. As CEO, he was the embodiment of the corporation to all stakeholders, including employees. As such he was the most potent role model for the values of the organisation and the person whose actions had the greatest impact on the culture of the organisation.

The attitudes and behaviour of employees are impacted much more strongly by the actions of their bosses than by their words. And the CEO is the most visible and powerful role model of all.

CEOs are the literal and symbolic heads of their organisations. They are the ambassador for the values their organisations espouse and view as fundamental to their success.

They cannot afford to jeopardise their ability to fulfil the trust placed in them by the many stakeholders impacted by their behaviour and performance by engaging in activities inconsistent with those values.

Hugh Arnold is adjunct professor of organizational behaviour at the University of Toronto.

This article is republished from The Conversation under a Creative Commons licence. Read the original article.

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‘Missing’ cherry picker the least damning finding in scathing report on council

By Leonie Thorne And Rebekah Lowe

Staff on a Victorian council sold off municipal property, worked other jobs while on the clock and made hundreds of thousands of dollars loaning their own equipment to council, according to a new report.

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How Westpac’s LitePay service inadvertently helped Australian paedophiles abuse Filipino children

By Michael Janda

The most shocking revelation in AUSTRAC’s case against Westpac is how the bank negligently facilitated thousands of payments from Australian paedophiles to child abusers in the Philippines.

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Companies need to grow the pie, not worry about how to split it

By Alex Edmans

slice of the pie

Business has lost the public’s trust. CEO pay and profits are soaring, while ordinary incomes have stagnated but global temperatures have not. As a result, while politicians used to campaign on health and education policy, the real vote-winner these days is promises to crack down on business.

So it’s urgent that boards take action. If they don’t, not only may customers and workers walk away, but also politicians may pass regulations that overturn capitalism as we know it. For example, Labour’s proposal to confiscate 10% of company shares would be the biggest expropriation of private property in the UK’s recent history.

But some of the actions that the public are proposing may not actually be in the best interest of society. Many are based on the pie-splitting mentality. They see the value that a company creates as a fixed pie. Thus, the only way to increase the slice enjoyed by society is to reduce the slice that goes to business—slash CEO pay, restrict dividends and share buybacks, and donate profits to eye-catching corporate social responsibility (CSR) initiatives. Indeed, any reforms that downplay investors or reduce their rights are wildly applauded. In contrast, high profits are shamed, as if being successful is something to be embarrassed about.

Splitting the pie: who gets the bigger slice?

Business and society

But viewing the relationship between business and society as a fight between “them” and “us” is deeply flawed. For example, investors are not nameless, faceless capitalists but include ordinary citizens saving for retirement, or mutual funds or pension funds investing on their behalf. They are not “them”, they are “us”. So while it’s critical for companies to take very seriously their responsibility to society, this shouldn’t be a licence to cheerfully ignore investors.

The primary way to reform business is to positively create value for society, rather than to sacrifice profits

That’s the power of a different approach to business—the pie-growing mentality. This mentality stresses that the pie is not fixed. Under this approach, a company’s primary responsibility is to grow the pie—to create value for society. Critically, doing so increases profits as a by-product, so profits aren’t evil value extraction but instead a result of serving a social need. A company may develop a new drug to solve a public health crisis, without considering whether those affected are able to pay for it, yet end up successfully commercialising it.

Importantly, the idea that both business and society can simultaneously benefit is not a too-good-to-be-true pipe dream, but one backed up by rigorous evidence. One of my own studies shows that companies with high employee satisfaction outperformed their peers by 2.3–3.8% per year over a 28-year period—that’s 89–184% compounded. Further tests suggest that it’s employee satisfaction that leads to good performance, rather than the reverse. A pie-growing company improves working conditions out of genuine concern for its employees, yet these employees become more motivated and productive, ultimately benefiting investors.

pie chart 2

Growing the pie: a shift in thinking

What does this mean for boards? The primary way to reform business is to positively create value for society, rather than to sacrifice profits. As an example of how this shifts our thinking, Vodafone was the first telecoms company to launch a tax transparency report on how much they were paying to governments worldwide out of profits. Being a responsible taxpayer is certainly important. But paying tax is the primary way a company serves society. Instead, Vodafone made a far greater contribution by launching the mobile money service M-Pesa, providing banking to the unbanked and lifting 200,000 Kenyans out of poverty. The role of boards isn’t just to ensure companies pay fair tax, or even fair wages, but that they innovate and create products that transform customers’ lives for the better.

Purpose shapes decisions

Central to the pie-growing mentality is for companies to be driven by purpose. Purpose is why a company exists, its reason for being, and the role it plays in the world. It answers the question “how is the world a better place by your company being here?” Purpose is fundamental to a company’s core business, unlike CSR which often involves non-core, profit-sacrificing activities to apologise for the harm created by its central activities.

But almost all companies have a purpose statement. How do boards ensure it’s put into practice? I’ll offer three suggestions. The first is to ensure that purpose shapes decisions—that executives take different actions than they would have without a purpose. For example, CVS didn’t just define their purpose statement as “helping people on their path to better health”, but stopped selling cigarettes in 2014 even though they generated $2 billion in sales. CVS’s sales rose from $139 billion in 2014 to $185 billion three years later, so this decision wasn’t at the expense of profits. Relatedly, the board shouldn’t allow executives to propose an M&A deal, strategic initiative or major capital expenditure without explaining how it’s consistent with the firm’s purpose.

An effective purpose highlights which stakeholders are first among equals

The second is to ensure that purpose is targeted. A purpose statement can’t be all things to all people. One that aims “to serve customers, colleagues, suppliers, the environment, and communities while generating returns to investors” sounds inspiring. But it ignores the reality of trade-offs, instead sweeping them under the carpet, and thus provides no practical guidance on how to navigate them. If shutting down a coal-fired power station helps the environment but hurts workers, does it further the above purpose statement? It’s not clear. Instead, an effective purpose highlights which stakeholders are first among equals. Energy company Engie closed down Hazelwood, the most polluting plant in Australia, even though doing so made 750 workers redundant, because it had decided to prioritise transitioning to low-carbon energy. After taking this decision, it then endeavoured to find these workers other jobs. But its purpose had made it clear what it had to do.

The third is to ensure that purpose is monitored. This involves setting relevant targets, such as Marks & Spencer’s 150 “Plan A” goals, and holding executives accountable for progress. But monitoring shouldn’t just be quantitative. Many of the key issues that affect stakeholders—and thus ultimately benefit investors—are qualitative, which is why purpose should be “monitored”, not “measured”. Fair pay is certainly critical to workers, but so are meaningful work, skills development, and the freedom to speak up. Directors should ensure they are sufficiently informed on these issues—by walking the shop floor first-hand, hearing the insights of stakeholder panels, or challenging executives. Doing will keep them informed on not just what can be measured in an organisation, but also what matters.

Alex Edmans is professor of finance at London Business School. His new book Grow The Pie: How Great Companies Deliver Both Purpose and Profit is currently available for pre-order.

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Board moves: Andrew Coppel named as chair of Arcadia

By Gavin Hinks

Topshop, part of Arcadia Group

Arcadia Group, the retail giant behind high-street brands such as Dorothy Perkins and Burtons, has appointed Andrew Coppel as its new chair.

Coppel will chair Arcadia, Topshop, Topman, and parent company Taveta Investments, all owned by Sir Philip Green.

Former chair Jamie Drummond Smith resigned in September after occupying the role as an interim appointment.

Coppel currently serves as a non-executive at MJ Gleeson, the housebuilder, but has also served as chief executive and chair at Sale Tilney, Queens Moat Houses and most recently at De Vere Group.

Arcadia and Sir Philip are never far from the headlines. Earlier this year it was reported Topshop and Topman suffered a £500m loss for the 12 months to 1 September 2018.

Taveta Investments warned of “material uncertainty” over its future after posting a loss of £177m for the same year.

In June it was reported that Sir Philip had negotiated a deal with creditors to cut stores and reduce rent costs with landlords.

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Board moves: Katrina Cliffe appointed SID at HomeServe

By Gavin Hinks

Katrina Cliffe, Homeserve senior independent director

HomeServe, the £4bn home repairs and improvements business, has appointed Katrina Cliffe as senior independent director.

Cliffe replaces Stella David who reaches the end of her third term as non-executive director at the business this month. David will remain for another term at HomeServe but steps down from the SID position because she would no longer be considered independent.

Cliffe joined the company in 2017 and also serves as chair of the remuneration committee. She is also a non-executive director at Cembra Money Bank, London & Country Mortgages, and Majestic Wine.

This month HomeServe posted interim results showing revenues up 13% to £457.7m for the six months to 30 September. Profits were up 2% to £19.7m.

The company sells some repair insurance and partners with utilities to provide services. It operates in the UK, Spain, France and North America.

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Labour announces plans for UK corporate governance reforms

By Gavin Hinks

John McDonnell, Labour shadow chancellor

The UK’s general election campaign turned its focus on corporate governance this week, as the Labour Party announced its proposals for reform.

Shadow chancellor John McDonnell gave a speech listing a host of governance changes Labour plans if it wins when the nation goes to the polls on 12 December. Some of the policies have already been announced. Others are new and will take the business sector by surprise.

First is a rewrite of the Companies Act 2006 “so that directors have a duty to promote the long-term interests of employees, customers, the environment and the wider public”.

This responds to Labour’s conclusion that the “shareholder” model of governance has run its course and must be reformed.

The party has already announced that a third of board members would be workers, radically extending measures introduced in last year’s review of the UK Corporate Governance Code.

But Labour plans a further step by permitting listed companies to opt for a two-tier board structure, like their counterparts on the continent, with the introduction of supervisory boards.

Labour intends supervisory boards to be made up of “stakeholders such as customers, employees and long term investors”.

The party also plans a look at whether there are ways of encouraging long-term shareholding, such as the extra voting rights permitted in France.

Perhaps the next biggest proposal is a rewrite of the governance code to “set a minimum standard for listing related to evidencing the action being taken to tackle climate change”. Labour promises to delist companies that fail in their climate-related duties.

There will also be an “excessive pay levy” on companies and a new pay ratio limit of 20:1. McDonnell says companies with a lowest paid worker on £16,000 could have a chief executive salary of £350,000.

Auditors are not spared the Labour reform agenda either. The party proposes a new statutory auditor for banks and financial institutions; a five-year moratorium on an audit employee leaving and then joining a client; and auditor rotation every five years, a significant change on the current rule of ten-year rotations.

According to McDonnell: “Labour in government will institute a radical overhaul of UK company law and practice in order to bring about real change in the corporate sector.

“Our comprehensive reform programme will bring greater democracy, justice, and accountability to the world of business.”

He added: “This new architecture of corporate governance and regulation has the potential to lay the foundations of the successful dynamic economy we need, serving our whole community.”

Scope for improvement

At least one business group was underwhelmed by Labour’s proposals. Edwin Morgan, director of policy at the Institute of Directors (IoD), said that while there was scope for improvement, the UK governance system was widely admired around the world already and the Labour Party’s plans “jump to the most prescriptive and cumbersome end of the scale”.

He said a “successful” stakeholder model for business could not be achieved with a “top-down, regulatory approach”.
And he had a warning on tinkering with board structures.

“Some European countries prioritise two-tier boards, but it’s a question of different, not better. Increasing firms’ flexibility to take this approach is a reasonable step, but that doesn’t mean you can import a different business culture wholesale, or that supervisory boards prevent corporate failures.”

The IoD has been busy working up its own proposals for governance reform in the shape of the institute’s own manifesto. A list of ten priorities includes a new “code of conduct” for directors, delivering reform of audit regulation, and the introduction of a new independent governance commission instead go having governance overseen by a regulator looking at other issues.

The IoD also seeks a “consistent” reporting approach for climate-related disclosure.

“The new Commission would work with industry to create greater accountability and transparency of the UK’s corporate governance framework,” the IoD’s report says.

According to Dr Roger Barker, the IoD’s head of corporate governance, the election spotlight is “rightly” on the way companies are run and business leaders should do more to “regain public trust” and take public concerns to heart.

“Too often the debate around capitalism degenerates into simplistic binaries and slogans. We should be more ambitious, and explore new ways to combine the profit motive with social responsibility, to confront the challenges facing the economy, not least climate change,” said Barker.

US reforms

Labour is not the first to tackle governance as an election pledge. Theresa May did likewise when launching her Tory Party leadership campaign in June 2016 and even pledged to introduce workers on boards, though this later became one option among three in the corporate governance code to improve stakeholder representation on boards.

Perhaps more significant is the way Democrat 2020 presidential hopefuls Elizabeth Warren and Bernie Sanders have both placed governance reforms at the heart of their policy offerings.

Warren in particular has made great play of bringing big business under greater control with draft legislation called the Accountable Capitalism Act.

She wants companies with turnovers of $1bn or more to seek a “federal charter” to trade which would involve considering “the interests of all corporate stakeholders, including employees, customers, shareholders and the communities in which the company operations.”

With Labour promising reform, trust in business still a key issue and some business groups believing improvements are possible, the future surely holds more change to the UK’s much vaunted corporate governance.

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South East Coast Ambulance Service (SECAmb) – Independent Non Executive Director

By Debbie Wright

Independent Non Executive Director – South East Coast Ambulance Service (SECAmb) Recruiter: Green Park Location: Greater London, Surrey, Kent and East & West Sussex. Salary: Trust Non-Executives are remunerated at £14,000 per annum. Posted: 18 Nov 2019 Closes: 27 Nov 2019 Ref: 9108 Position/Level: Director Responsibilities: Executive Management, Strategy Sector: Healthcare, Public Sector Contract Type: […]

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Pension Board – Chair/Vice Chair

By Debbie Wright

Chair/Vice Chair – Pension Board Reference: 1724 Remuneration: £232 per day and reimbursement of all reasonable travel and subsistence costs Location: Scottish Borders Closing date: 13 December 2019 at midnight The SPPA is seeking to appoint an independent Chair/Vice Chair to sit on a Public Sector Pension Board: The Scottish Police Pension Board and The […]

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Member Nominated Director – The Co-op

By Debbie Wright

The Co-op – Member Nominated Director Recruiter: The Co-op Location: Nationwide Salary: Not Specified Posted: 17 Nov 2019 Closes: 18 Dec 2019 Job Function: Director Industry: Retail / FMCG Applications for our 2020 Member Nominated Director Elections are now open.​ There are four member nominated directors (MNDs) on the Co-op Board. Each year, one or […]

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