Tuesday, 24 May 2011

The Board Challenge of the Dominique Strauss-Kahn Affair

Newspapers and blogs have been  full of reports on the Dominique Strauss-Kahn affair, but there is an important corporate governance aspect that has hardly been voiced. It has a wider application than this one incident or this one news-story; it is the question of what a board should do about reports of a sex-pest who occupies a senior role in their organisation.

DSK is clearly innocent until the result of his trial is known; but this is a general question. Has the board of the IMF done what it should? What, generally should boards do? They are at risk if they do nothing. They risk damage to their reputation but also possibly financial damage if they owe a duty of care to a complainant who can show that they knew or should have known what was going on and failed to act.

The IMF is a special case, where the Managing Director (DSK) is also chair of the board, reporting to a board of governors comprising nominees from shareholding countries – who do not get involved in detailed oversight of management processes. But what would be the situation in a corporate board? These situations may be rare but are not unknown. It is clear that responsibility falls on the chairman to institute an investigation whenever serious matters regarding the conduct of a director come to light. It is clear that any director who becomes aware of an issue should report it to the chairman. If the subject of concern is the chairman then a senior director should institute an investigation after having obtained the consent of the board. UK public companies have a Senior Independent Director who should perform this role. What should not happen is for these matters to be swept under the carpet. Waiting to see if they come before a court is not a good option.

This week’s reports that Fred Goodwin, late of RBS, had an affair with a senior colleague highlights another aspect of the same issue. Whilst it is common for partners to meet through work, an intimate relationship where one party is the chief executive, particularly in a bank, risks conflicts of interest that may affect financial probity. One is reminded of the affair of Paul Wolfowitz, president of the World Bank, who was accused of impropriety in having a relationship with someone who worked, indirectly, for him. One wonders whether this matter would have been pursued if its subject had not been a controversial figure who pursued controversial policies and had been appointed by an unpopular US president. But at the very least, such a relationship should be reported to the board so that they can monitor behaviour in the knowledge of the relationship. But generally I cannot believe that these work relationships are ever actually a secret – I recall working at a bank and stepping into the lift late one evening. The chief executive was also in the lift, going down to the basement car park with a young female lawyer who worked in the organisation. It may have been entirely innocent but I knew instantly that it wasn't. In reality board members pick up what is happening pretty quickly too but too often choose to ignore it. The likely outcome of doing nothing is not good and, in a world of Twitter and Facebook, will become less and less of a good option.

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