Masterclass Company Secretaries: Excesses, Misconduct and Holding Difficult Conversations
Nowadays, examples of sensitive issues in the boardroom – and of judgement within society about how directors handle them – are many and various. A typical example was the scorn that ensued after Talpa’s CEO, John de Mol, stated that ‘women should speak up’ following revelations of misconduct within the production of TV show The Voice. The news that the recently dismissed Ajax director, Marc Overmars, had committed sexually transgressive behavior in the workplace also proved explosive. ‘It seems nowadays that boards are having to deal with sensitive topics more often than they did in the past,’ observes Joyce Leemrijse, partner at Allen & Overy. And it certainly is not just about Me Too situations. During a masterclass organized by Allen & Overy and Mgmt. Scope for company secretaries of listed companies, Leemrijse identified a number of issues that arise on corporate and individual levels. One of the dilemmas currently facing corporate organizations is the war in Ukraine. ‘Is it acceptable for a company to continue its activities in Russia, especially if it also operates branches in Ukraine? Another question companies can equally ask themselves is whether it is fair to leave Russia, given the problems this would cause its employees and their families in that country. Environmental, Social and Governance (ESG) objectives can also give rise to potential stumbling blocks. One example of this would be the way Shell handled the court judgment that ordered the company to reduce its CO2 emissions.
Other than Me Too situations, the types of situations that can arise on a personal level also include other abuses of power, the payment (or receiving) of bribes, fraud, a dysfunctional board that holds the workforce in its grip and so on. Leemrijse continues: ‘Like a spider in its web, the company secretary often knows what’s going on before the directors or members of the supervisory bodies find out about it. For this reason, they also play an important role when it comes to bringing internal and external risks up for discussion.’
Irregularities and inappropriate behavior will always occur
For company secretaries, the challenge is to make sure that any signs of misconduct are directed into the correct channels and are brought to the attention of the right people in an appropriate way. As the experts who spoke at the masterclass all confirmed, things are going to happen sooner or later in any organization. ‘We do our best to regulate and control as many things as we can, but complexity theory teaches us that control is an illusion,’ says Leen Paape, Professor of Corporate Governance at Nyenrode Business University. ‘You should therefore assume that things will go off track on a fairly regular basis.’
‘Think the unthinkable’ is also the approach recommended by Paul Stamsnijder, the founder and partner of the corporate dialogue consultancy De Reputatiegroep. ‘Even though you may doubt whether a report or a sign is genuine, do not reject it out of hand because you simply can’t imagine that something like that could happen. After all, humans are fallible and because the organization consists of a group of humans, organizations are fallible too. Desire in the workplace, abuses of power, suicides..., these things happen, and we need to learn how to handle them. So we definitely need to think the unthinkable.’
More importantly though and according to Leen Paape, ignoring signs is an almost cast-iron guarantee that the problem will become larger than it needs to. ‘Within organizations, things rarely happen completely out of the blue or can be thought to have done so. For example, people may actually report something, but their message doesn’t reach the right people, is not taken seriously, or is ignored, trivialized or even hushed up. Problems don’t start out as major problems. They only become major problems if you fail to take action in time.’
If anyone wants to gain an insight into the mechanism involved, Paape recommends watching the recent Netflix documentary, Downfall: The Case Against Boeing. ‘It’s a story about how two aircraft crashed in short succession, even though the company had already been aware of the safety issues involved for a long time.’
A lack of psychological safety
When something goes wrong within a company, says Paape, it’s often due to a lack of psychological safety. ‘Many organizations completely fail to provide a safe environment. People don’t feel free to speak out or to ask critical questions, because if they do, they are met with responses such as: “Let me tell you once more how things are” or “I really don’t want to know”. Responses like that are certainly not ideal if what you’re trying to create is a feeling of mutual trust.’ Paape also questions something else that directors often say, namely that ‘their door is always open’. ‘Whenever I hear that, the thought going through my head is “you may well be saying that, but no-one will actually step through the door”. After all, employees may find it difficult to report irregularities if they think that board members are likely to turn an unsympathetic ear.’
In other words, directors often believe that the working atmosphere in their company is more positive than it actually is. The company secretaries who signed up for the masterclass also confirmed this. One of the participants pointed to the small number of reports from whistleblowers within his organization. ‘We’ve had almost none, though we know that isn’t realistic for a company the size of ours. According to the benchmark, around 3 percent of employees ought to be submitting reports. After we discussed this at a meeting of the Supervisory Board, the Board of Directors was tasked with making reporting irregularities or inappropriate behavior more accessible.’ Another participant added that it can be helpful to frame that type of report in a different way. ‘For example, you can emphasize the fact that people must report incidents and you can also invite them to discuss the situation if they have any doubts or questions. That makes the whole process much more accessible.’
One of the other observations during the masterclass was that ensuring greater diversity in the boardroom will almost certainly lead to a corporate culture that is healthier and more open. Another observation was that if directors were to serve no more than two periods of office like their colleagues on the Supervisory Board, it is more likely that an open and safe working environment will come into being within the organization. Or, as one of the participants put it: ‘New directors arrive with the very best of intentions. Their aim is to ensure that a new wind blows within the organization, to get people on side and to relegate those who oppose them to the sidelines. That way, the group of supporters that surround them gradually becomes bigger, until it reaches the point when the new policy has become gospel and different messages are no longer allowed. Once that happens, there is a major risk that problems will only reach the ears of the Board when reported via outside channels.
Not only is presumed misconduct ignored, but the opposite is also true, in that organizations sometimes resort to a kneejerk reaction. Arnold Keizer, a lawyer and partner at Allen & Overy, calls this the illusion of action. ‘When a report of a sensitive matter reaches the boardroom, directors are sometimes under enormous pressure to implement measures quickly. That pressure is also all the greater if the rumor mill is already starting to turn or if the topic has received some publicity, possibly as a result of a whistleblower contacting the media.’
Keizer’s recommendation is to avoid taking steps too quickly. ‘For example, in the case of accusations arising from the Me Too campaign, a Board of Directors can often be inclined to take some sort of action within the company itself, but that’s where things often go wrong. Using suspension as a sanction during the early stages will cast a long shadow into the future and may quickly affect the degree of care with which the rest of the process is conducted. Unless being used as a measure to maintain order, suspending a person does little to uphold the presumption of innocence and will harm a person’s reputation. In the case of board members, that reputation also exists in the public domain, as it can be viewed by referring to the company’s registration at the Chamber of Commerce. When that happens, your reputation becomes tarnished, introducing the possibility of further allegations and the case then quickly descends into a matter of principle for the person concerned, given that there’s no longer very much to lose. Before you know it, you’re involved in court proceedings that will drag on for years and will also harm the company’s reputation.’
The core elements of an effective procedure are proportionality, a careful and impartial investigation, a reserved approach in terms of communication and the knowledge that it will be necessary to be accountable for all steps taken. For the same reasons, Keizer recommends that while carrying out an investigation to ascertain the facts, the circle of people involved should be kept as small as possible and that the amount of information communicated kept to the minimum, insofar as that is possible and permissible. Leemrijse continues: ‘If the complaint relates to one of the directors, that information may be affect the share price and the company may be obliged to notify the markets right away. But at what stage of the investigation must you do that? It’s quite a difficult question.’
After all, there is a considerable risk of whistleblowers communicating the information to the press and that risk is only set to increase as a result of the new whistleblowers’ regulations currently under discussion in the House of Representatives of the Dutch Parliament. The new regulations provide whistleblowers with greater scope to have direct recourse to the media. Partly in light of that, it is a case of carrying out the investigation thoroughly and promptly and to continue updating whistleblowers about how it is going. Keizer: ‘It’s important to realize that whistleblowers are emotionally involved and that in their own perception at least, they are running a certain degree of risk. Effective feedback and follow-up are therefore extremely important.’
Reputational loss as a result of a mismatch
Once the media get wind of the crisis, you are no longer in control of the situation as a company and the company’s reputation will be harmed, whatever happens. Stamsnijder: ‘The most important cause of a loss of reputation is the mismatch between what shareholders expect from an organization, brand or person and the conduct that they observe. In such cases, they will seek to identify the person responsible. Why did it happen? How could someone have taken a decision like that? What a dreadful man he is! It’s not the arguments that have the upper hand, but the feelings. In my experience, organizations are very poor when it comes to admitting guilt, partly due to the fear of a lawsuit. Still, it’s better to acknowledge errors, as only then is it possible to hold an effective discussion about how they can be resolved.’
Another lesson that companies ought to take seriously is not to have the matter investigated by their own people. Make sure that an independent investigation is carried out by external consultants and be sure to hire a different law firm than the company’s usual firm of attorneys, to avoid any suggestion that the findings are tainted. After every incident, Paape also recommends that companies should evaluate and learn the lessons that need to be learned. On a fairly regular basis, he receives visits from journalists seeking his opinion regarding sensitive dossiers they have managed to get hold of. ‘In certain contracts, the corruption jumps out at me and is plain to see. The scope of those contracts is often so great that the director must have signed it and it must also have been signed off by the Supervisory Board. If I can see the red flags at first glance, I do then wonder whether the company secretary shouldn’t have asked a few searching questions when putting the contracts on the agenda for discussion. Maybe it’s a question of loyalty towards the organization, but also of course towards the directors and members of the supervisory board with whom the company secretary works closely and has forged a connection.’
Matters that need to be escalated
The company secretaries in the room acknowledged that it is sometimes difficult to wear multiple hats and serve several masters. At the same time, they emphasized that this actually puts them in an ideal position to operate at a level that transcends the interests of individuals and to take the interests of all stakeholders into account. Nevertheless, they feel a sense of conflict on a regular basis. Transparency is of paramount importance, but it is in their nature to try and resolve matters discreetly. As one of them put it: ‘Not everything needs to become known to the world. We have nothing to hide, but lots to protect.’
Another difficult situation arises when a director overrules the company secretary to prevent a sensitive topic being placed on the agenda of the Supervisory Board. ‘If that happens, both the secretary and the Supervisory Board have a massive problem,’ says Paape. He therefore also advises Supervisory Boards to proactively draw up a list of matters to be escalated and of information they always wish to receive. ‘A list of that type can include everything that may affect the company’s reputation, such as a critical report from a supervisory body or regulator. Then, if one of the directors tries to prevent a matter being referred to the Supervisory Board, the secretary can refer the director to the list, stating that notifying the Supervisory Board is compulsory. While it’s true that putting together a list of that type won’t necessarily cover all difficult situations, it will certainly help as a means of avoiding discussions about whether to put an item on the agenda or not.
It goes without saying that directors won’t exactly be grateful if a company secretary forwards information to the Supervisory Board against their wishes. That is why a better approach in all cases is for sensitive topics to be discussed in the boardroom as a regular agenda item, so that whenever such topics are discussed, it isn’t regarded as ‘hanging out the dirty laundry’. That is perhaps the most important conclusion from the masterclass, said Leemrijse. ‘We need to become better at recognizing that excesses do take place within organizations, and we must have the courage to discuss them, however difficult that may be. So it can be extremely valuable if the company secretary is able to play a leading and agenda-setting role in that regard and is not merely expected to follow the lead of others.
This article was published in Management Scope 07 2022.