01 February 2020

Where Was the Board?

"The first principle is that you must not fool yourself and you are the easiest person to fool."

--Richard Feynman, Nobel Prize in Physics (1965)

There were over 1,400 CEOs who left their jobs in the period January through November 2019 according to Challenger, Gray & Christmas.  Just days ago IBM announced Chief Executive Ginni Rometty was leaving.  IBM said she was "stepping down" after eight years in that position.        

A tally of board member departures is harder to find.  

It's safe to say there's more pressure on executive leadership than governance when it comes to performance.   In baseball, owners fire the managers and trade the players.  (Just ask the Houston Astros, Boston Red Sox, and New York Mets.)  

Who evaluates governance and its performance?  

Where boards are falling short

In a survey of 772 directors, "a mere 34% of those responding agreed that the board on which they served fully understood their companies' strategy.  Only 22% said their boards were completely aware of how their firms created value, and just 16% claimed that their boards had a strong understanding of the dynamics of their firms' industries."  (McKinsey & Company, 2013)

Another McKinsey study of 604 C-suite executives and directors worldwide said that the primary source of pressure for short-term performance and underemphasis on long-term value originated in the boardroom.  (McKinsey & Company, 2014)

When things go wrong

The expectations of a director's fiduciary duty in legal terms is "loyalty (placing the organization's interests ahead of one's own) and prudence (applying proper care, skill, and diligence to decisions)."

Here are three examples where an absence of proper oversight and complex working relationships contributed to far-reaching personal and organizational misdeeds:

Case Study:  WorldCom

At one time WorldCom was the second-largest long-distance telephone company in the U.S., after AT & T.  In 1997 WorldCom merged with MCI Communications, a $37 billion deal which was the largest merger to that point.  A proposed merger between MCI and Sprint in 1999 valued at $129 billion was opposed by the U.S. Department of Justice and didn't go through.  

In that same year, with declining stock prices, WorldCom began using fraudulent accounting methods to disguise its decreasing earnings to maintain the price of WorldCom stock.  The fraud was initially estimated at $3.8 billion.  Internal auditors revealed the scandal to the company's audit committee and 11-member board of directors in 2002.  The board immediately removed the executives responsible for the scheme.  

On July 21, 2002, WorldCom filed for Chapter 11 bankruptcy protection.  

On March 15, 2005, Bernard Ebbers, former chairman, and CEO was found guilty of fraud, conspiracy and filing false documents related to the $11 billion accounting scandal. Mr.  Ebbers was sentenced to a prison term of 25 years at the age of 63.  He died February 2, 2020, at the age of 78 after being released from prison for deteriorating health.

The CFO Scott Sullivan and controller, David Meyers, entered guilty pleas to securities fraud and other charges.  

Case Study:  Wells Fargo Bank

Beginning in 2016, Wells Fargo Bank engaged in an account fraud scandal by creating millions of fraudulent checking and savings accounts on behalf of the banks' customers without their consent.

The U.S. Consumer Financial Protection Bureau fined Wells Fargo Bank $185 million as a result of the illegal activity.  Additional civil and criminal suits were nearing $2.7 billion at the end of 2018.  

Approximately 5,300 employees were fired for this cross-selling scheme.  And former CEO, John Stumpf, was barred from the banking industry by the Office of the Comptroller of the Currency and forced to pay $17.5 million in penalties for failing to prevent the creation of fake accounts at Wells Fargo.  

An independent investigation report released in 2017 caused quite a stir.  The Los Angeles Times called the report a "whitewash" for the directors.  The San Franciso Chronicle labeled it "a perfunctory ... legal cover for the directors."    

The U.S. government recently announced that Wells Fargo had agreed to pay $3 billion to settle charges that the bank engaged in fraudulent sales practices for more than a decade.  

Case Study:  Willow Creek Community Church

The nondenominational megachurch located in South Barrington, Illinois (35 miles northwest of downtown Chicago) was founded on October 12, 1975, by Bill and Lynne Hybels also Dave Holmbo.  Additionally, Rev. Hybels created the Willow Creek Association and Global Leadership Summit which have influenced pastors and lay leaders around the world.  

As of December 2018, the church reported weekend average attendance of 24,000 at eight locations in the Chicago area.  

Here's a timeline for Willow Creek's unraveling:  

-March 23, 2018, the Chicago Tribune reports detailed allegations of sexual misconduct by Pastor Hybels.  The Tribune also published that an internal review conducted by the Elders led to no findings of misconduct.  Three leaders of the Willow Creek Association's board resigned over what they believed to be an insufficient inquiry.  Rev. Hybels denied the allegations.

-April 20, 2018, Bill Hybels announces his immediate retirement as lead pastor of Willow Creek Community Church, initially slated for October of the same year.  Steve Gillen, the pastor of the North Shore campus, was named interim senior pastor.*  

-April 21, 2018, the Chicago Tribune and Christianity Today reported more misconduct allegations, not in the original investigation.

-August 5, 2018, The New York Times reported about another victim not included in previous investigations.  Co-lead pastor Steve Carter resigned that same day.

-August 8, 2018, the entire Elder Board and Co-lead pastor, Heather Larson resigned following a joint apology for mishandling the investigation.  

-In September 2018 Willow Creek Community Church and Willow Creek Association announced the formation of an Independent Advisory Group (IAG) to investigate the allegations against founder, Bill Hybels.  

A six-month independent review was conducted by four evangelical leaders--Jo Anne Lyon, general superintendent emerita, The Wesleyan Church; Gary Walter, past president, Evangelical Covenant Church; Margaret Diddams, provost, Wheaton College; and Leith Anderson, president, National Association of Evangelicals.

According to Religious News Service, the report, completed in February 2019, found the accuser's allegations against Rev. Hybels to be credible.  The IAG study also found that the Elders and Willow Creek Association leadership failed to hold him accountable. 

What can we learn?

1. There's immense pressure on leaders in business and the nonprofit sector to succeed.  However, those demands in no way justify illegal or unethical behavior.  

2. Boards impact organizational culture the most by the leadership they put in place.       

3. "Why am I here," and "What difference do I make?" are questions often asked by new board members.  All three case studies needed boards who understood their role as taking care of what belongs to others.  

4. The lessons of a bad experience can evaporate when wholesale personnel changes are made following a crisis.  WorldCom went away.  Wells Fargo Bank and Willow Creek Community Church still exist.  Who is responsible for institutionalizing lessons learned?  

5. Under the right circumstances, anyone can be fooled.  

*The Elders announced on January 30, 2020, that Rev. Steve Gillen, interim senior pastor, is leaving in March of this year.  The search for a permanent senior pastor at Willow Creek continues as the Elders released the two finalists they were considering for the role.  (www.willowcreek.org)


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