There have been a number of high profile business crises in recent months arising from fraud to mismanagement. The media can be quick to blame failures on a corporate cult of personality, however, from experience, such an issue is rarely identified in isolation.
A ‘corporate cult of personality’ is defined as where an organisation’s brand, achievements, successes are intrinsically linked to their leader and the individual is idolised as a result. This becomes dangerous when leaders with strong, domineering personalities try to deceive or misrepresent information to shareholders, jeopardising the business.
What potential red flags should shareholders look out for?
- Weak governance systems can allow a cult of personality to operate unchecked.
- Does leadership have the appropriate skills, knowledge, experience to understand challenges facing the business and do they take action to address these challenges?
- What level of challenge is provided by non-exec board members to leadership around key decisions?
- Are senior leadership open and transparent and committed to the success of the business?
- Immature control environments are not unusual in entrepreneurial businesses that seek to develop at a fast pace, but can mean warning signs remain undetected until too late.
- Do all levels of governance and management function effectively so that risks or issues relating to the control environment are escalated and resolved in a timely manner?
- Does the business have qualified and sufficient resources to perform independent and robust reviews over the control environment?
- To what extent is fraud considered as part of the overall risk environment and does the organisation have a framework in place to manage fraud risk?
- Poor ‘tone at the top’ can arise when a leader’s behaviours are at odds with the values, policies, expounded by an organisation or where the values themselves are not considered healthy.
- What messaging is provided by management to employees around acting ethically?
- Are employees encouraged to call out and challenge behaviours which are inconsistent with the organisation’s vision and values?
- What formal policies are in place to encourage appropriate behaviours and are these policies followed in practice?
- What are the staff turnover rates within the business?
In today’s business environment the messaging and publicity surrounding the views, decisions and actions of a CEO are a powerful corporate asset. Stakeholders should be on notice that leadership rhetoric should be backed up by objective evidence. Protection starts with asking the right questions and where weaknesses are flagged, taking preventative action.
As we await the imminent BEIS feedback statement following its consultation on audit and corporate governance, it will be interesting to see how BEIS seeks to address some of these areas as part of a wider reform programme.
Ways PwC Can Help
Our team of forensic specialists can help you ask the right questions and support you with red flag assessments as part of an organisation’s corporate compliance, whether diligencing a deal or ESG (emphasis on the G for governance) activities. For more information on enhancing your fraud risk environment refer to our website.
