Expert says CEOs should serve time

By Venkat Raman

Friday 19th July 2002

Chief executives and directors must be punished with prison terms if the corporate world is to be cleansed of fraud and unhealthy practices, an international consultant says.

LSI Consultants chairman and managing director Ian Fahy says captains of industry run that risk because of their inability to keep abreast of the developments and partly because of nonchalance powered by ego, according to a study.

"Ego, inability or failure to implement a set strategy and inadequate measurement of capital employed are the three major contributors to a CEO's and subsequently an organisation's poor performance and subsequent demise in shareholder value," he said.

Mr Fahy wanted to find out why some CEOs were flavour of the month one minute and then given the push; why boards of directors could be so poor in selecting their CEOs; and why accountants, auditors and regulators have failed to uncover blatant cases of fraud on a large scale.

The study, undertaken in partnership with an European associate, involved interviews with CEOs in New Zealand, Australia, Europe and the US.

"Having a well balanced management team and board is vital. Enron, HIH, OneTel, WorldCom and Air New Zealand are all examples of the egos of CEO, board, regulators and other professionals going out of control destroying shareholder value. Understanding reasons for the demise of an organisation or its leader is of interest but little has been offered to suggest a fix," he said.

Fixing egos and uncovering fraudulent practices can only be addressed internally. Outsiders such as shareholders always find out too late.

"Until more CEOs and directors end up serving sentences as a consequence of their often fraudulent actions, the issue of corporate governance will be skirted around. Dishonest or incompetent people eventually get caught out but the question remains as to how much shareholder value will they destroy in the meantime," Mr Fahy said.

Poor implementation of strategy cost most CEOs their corporate life, Mr Fahy said. "But what about analysts and advisers who don't see the errors in the performance and blow the whistle when they see things that are so obviously wrong? Surely they are not also drinking from the same trough? Who can you trust? The old caveat emptor still in the end applies," he said.

While inadequate measurement of capital employed is yet another factor for CEO failure, global statutory reporting is based around the recording of financial transactions. These measures are based almost entirely around the easily measured tangible assets and subsequently ignore the critical intangibles, which include the existence or risk of fraud.

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