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Leadership

Boards Must Intervene to End Toxic Behavior in the C-Suite

Destructive leadership extracts organizational costs that boards cannot ignore.

Key points

  • The cost of toxic business leadership to the U.S. economy is up to $550 billion yearly in lost productivity.
  • Toxic behavior in leadership corrodes succession, productivity, and performance of employees.
  • Boards can intervene constructively in line with their duty to shareholders in a few ways, such as reviewing employee feedback.

With a promising strategy for growth and highly differentiated competitive advantage, the board of directors of a spin-off from a highly successful parent company hired a CEO to lead this exciting venture. She was a first-time CEO with impressive domain expertise and an inspiring vision. The legacy team members were also excited about what was possible — a meaningful mission and purpose and the potential of significant financial gain. Yet, within the first three months, the CEO exhibited toxic behaviors. She ignored and even belittled longtime veterans. She lost her temper in large group meetings and dictated decisions that would significantly affect the company’s clients. Many of the company’s most valuable experts were threatening to leave.

Concerned by the destructive behavior of this newly onboarded CEO, the board decided to intervene. This response to toxic C-suite behavior should be a model of best practice for boards, but, in truth, it is all too rare.

There is a real question about how willing boards are to prioritize tackling C-suite behavior over corporate performance. Five years after #MeToo, for example, do boards believe that junior colleagues shoulder the responsibility to confront the egregious attitudes and actions of senior leaders — an asymmetrical power dynamic if ever there was one? The challenge for boards is to understand that the cost of these toxic behaviors is not acceptable collateral damage to offset against whatever shareholder value destructive leaders deliver. This is substantial damage. It runs to billions of dollars in lost talent, succession, organizational productivity, and performance. According to Gallup, the cost of toxic leadership to the U.S. economy is up to $550 billion yearly in lost productivity, while SHRM puts the figure at $230 billion. There is a wide discrepancy between these numbers, but we can agree at least that the damage done is too grave to be ignored. What then should boards do?

As Susan S. Lightle, Joseph Castellano, Bud Baker, and Robert J. Sweeney pointed out in their paper, "The Role of Corporate Boards in Employee Engagement," there is an important distinction between board oversight and management responsibility. In the context of how senior leaders engage employees, the board’s role is to: (a) set management expectations that employee engagement is a strategic priority, (b) ensure management understands measurement is required, (c) periodic monitoring of metrics, (d) evaluation and feedback on performance. As the authors rightly said: “We do not advocate board involvement in ‘managing’ employee engagement. Rather we call for board ‘oversight’ of executive management’s efforts to do so.” The key principle of board intervention is its construction as oversight, not management: the board acting in good faith, executing its duty to shareholders.

The interventions

The intervention question is not about CEO exit. Attentive boards should be alert to signals of destructive CEO behavior by monitoring employee engagement and sentiment. Talent recruitment and retention are strategic concerns in the Great Resignation and Quiet Quitting era. But board members may also be alert to destructive behaviors through less formal observation and engagement with executives and associates at different organizational levels. Board intervention may take several forms:

  1. Board mentoring: There is a distinction between a board’s advisory responsibilities and mentoring. Boards are there to do both but often overlook the latter because it is faster and easier to be an advisor versus a true mentor. Faced with a toxic leader, boards must identify a single member who commits to playing a mentoring role. This involves laying out the CEO’s leadership and personal growth objectives in addition to business objectives.
  2. Board cohesion: Effective governance requires that the board functions as a cohesive entity versus a loosely connected group of experts. Ensure that the board has a regular cadence and a clear set of guiding principles for governing together. Being explicitly aligned around an action plan if an ethical concern arises with the company’s leadership is essential to truly fulfilling board duties. One example of where boards misstep is inconsistent meeting practices and varying levels of relationship with the CEO. This undermines the “leverage” to intervene when bad behavior emerges.
  3. Board independence: Ensure the board is properly weighted with internal and external members. Both serve their essential purpose. Over-preferencing for insiders results in insiders needing to be more forthcoming when a CEO needs to be challenged. Over-preferencing for outsiders results in too many members being too far away from the business to be fully effective.
  4. Board accountabilities: Add employee feedback to the board’s accountabilities. In addition to financial oversight, the board must be provided with regular reports on the state of the culture and the level of employee engagement. Retention/turnover is informative, but surveys provide insight into what drives turnover and/or encourages retention and engagement.

What if the CEO is also Chair of the Board?

When there are strong board members with clear roles, there is no reason the mix of accountability, support, and mentoring remedies cannot work if the CEO is also part of the board team. However, there is a general question about the effectiveness of board governance that has attracted wider debate in recent times where one person occupies two roles, such as CEO and Chair. The issue here is who is working for whom in board governance terms that complicates issues like dealing with toxic leadership (as well as poor strategy and decision-making).

End of looking the other way

That there ever might have been an era when seasoned leaders at the board level looked the other way in the name of shareholder value is awful to articulate but sadly not difficult to imagine. Toxic behavior even by high-performing leaders is corrosive to those around them and extracts a cost from their organizations in lost talent, succession, productivity, and performance in ways that have not been counted effectively. Boards must pay close attention and intervene when necessary. This does matter to shareholder value. They cannot afford to look the other way.

References

The IUP Journal of Corporate Governance, Vol. 10 XIV, No. 4, 2015

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