Personality Risk Trumps Structural Risk

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Context matters as much as, if not more than, structure. Unfortunately, most of our GRC debates focus almost entirely on structural rules and processes.

Innovative thinking is creeping its way into governance, compliance and risk management (GRC) discussions. I say this because arguments supporting some long-held governance principles are crumbling.

Consider the long-standing demand by better-governance advocates for an independent chairman of the board of directors. The arguments in favor of this structural mandate are well known: stronger separation of board and executive management; lower odds that CEOs will take their eye off organizational strategy, operations and culture matters; and the elimination of conflicting interests related to executive compensation and CEO performance evaluations.

But what happens when an independent chairman does not deliver these benefits? Worse, what happens when an independent chairman brings about negative outcomes, such as the removal of a highly effective CEO/chairman, greater difficulty recruiting new chief executives, inefficient strategic decision-making and more?

David Larcker and Brian Taylor of the Stanford University Graduate School of Business raised these questions in their 2011 book Corporate Governance Matters: A Closer Look at Organizational Choices and Their Consequences (FT Press). And the innovative researchers have deepened this line of inquiry with additional research on the “context” of corporate governance. Their point is that context matters as much as, if not more than, structure. Unfortunately, most of our GRC debates focus almost entirely on structure (rules and processes).

Consider the Connecticut Retirement Plans and Trust Funds’ (CRPTF’s) January decision to sponsor a proxy proposal that would require Walt Disney Company to separate its CEO and chairman roles. The backstory is that former CEO Michael Eisner—an outsized CEO personality, to be sure—was forced to relinquish both roles nine years ago. Robert Iger succeeded Eisner as CEO in 2006; last year, Disney bestowed the joint CEO/chair title on Iger, in part due to his highly effective leadership during the previous six years. CRPTF balked and put forth its proxy proposal based on the traditional argument against the joint title.

But Disney shareholders defeated the proposal, and they probably were right to do so, Larcker and Tayan suggest.

Why? Because Iger’s unique personality traits and management style (described in Fortune as modest and “exhibiting grace under fire”) likely will provide more value to the company through the joint role. That was not necessarily the case for Eisner, who was often described as “domineering” and “combative” (as well as “brilliant”). That’s not to cut down Eisner who, like his successor, achieved great things for the company. It is to say that context—in this case, a CEO’s unique personality traits—may be a more important governance consideration than a one-size-fits-all rule or policy.

“A more instructive approach to deciding whether to separate the chairman and CEO roles is to consider the specific individual involved,” Larcker and Tayan write. They summarize a growing body of research that establishes and examines the link between CEO personality traits (e.g., extroversion, agreeableness, narcissism, neuroticism) and a company’s long-term performance.

The science of leadership personality characteristics is not new; leading executive search firms have integrated these considerations into their recruiting activities for years. But these considerations certainly qualify as innovative in the GRC sphere, where too much, and too heated, arguments are devoted to structural levers of governance that—a growing body of research also shows—may not actually move the needle much.

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GRC expert Eric Krell supplies the Business Finance community in-depth articles and commentary examining governance, risk, and compliance.

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