How Can We Ensure Accountability for Senior Managers' Decisions Without Risking Company Stability?

Dear Friends,

Our company is run by a board of directors. Under them, different firms and managers are working. The employment of senior positions like VPs, General Managers, etc., needs authority for decision-making. In case of wrong decisions or loss-making decisions, the directors will be penalized either by financial loss, reputation damage, or any other adverse actions. In case of any recovery to be made, what can be the clause?

Accountability of Top Management

How can we underwrite or agree on the accountability of actions from the top management employees? Do we have any such formats, or any guidance in this regard will help.

Dear Ravina Murali,

Your post has surprised me and shown how anyone's imagination can surpass any level!

Although you have asked for provisions to penalize senior management professionals like Directors or VPs, you have not mentioned whether yours is a public limited company. If it is a public limited company, then the corporate governance rules apply to you. Every public limited company is required to appoint a Company Secretary, and the Company Secretary is expected to frame the rules of corporate governance.

Accountability Through Key Result Areas (KRAs)

One way to make the senior management professionals accountable is to assign them Key Result Areas (KRAs). They can be removed from their jobs if they fail to meet the KRAs. This is a common practice across industries.

Challenges in Penalizing Senior Management

However, penalizing senior management professionals for their wrong decisions is unheard of. A top-notch IT company in India, once considered an IT bellwether, is struggling to compete. It has changed several CEOs in the past fifteen years. Although several CEOs tried, none could turn it around. Nevertheless, they were given handsome severance packages when they were removed from their jobs. There was no penalty for their failure to turn the company around!

The "Carrot or Stick" Theory

In MBA courses, a "carrot or stick" theory is taught while teaching the theories of motivation. Possibly, you wish to implement this theory at the higher management level. But which candidate for these positions will accept this type of condition? This strange condition puts them on par with the workers. So, in the eyes of the ordinary workers, what will be their value, and why will they be respected?

Otherwise, like ordinary employees, the Industrial Standing Orders Act provisions apply to these senior management professionals. Therefore, the company's rights are protected anyway.

My Question to the Board of Directors (BODs)

This brainchild must have come from someone at the board level. So before implementing the "carrot and stick" policy, it is worthwhile for them to come clean and declare what wrong decisions they made in the past, what penalties they paid, to whom they paid, etc. Such open communication will pave the way for their decision!

Anyway, I am bringing to notice this thread to one of the senior members of this forum, Mr. Saswata Banerjee. Let us wait for his comments.

Thanks,

Dinesh Divekar

This is a very interesting post. There is some ambiguity in the post, so I am making assumptions.

1. The company is professionally managed (Board of Directors run the business). There are a number of different subsidiaries. Probably the board has distributed the supervision among themselves. I am confused as to whether the directors are owners or just employee directors. How exactly do they suffer financial loss from wrong decisions? Reputation loss, we understand, but in reality, it does not matter. Even someone like Adam Neumann has many companies wanting to have him head their businesses. Investors are still willing to fund his new ventures (though not as many as before).

2. Now for VP and GM, they make business decisions and you want to a penalty clause for wrong decisions made by them. Exactly how will you define a decision to be wrong? Business is about taking and managing risks. You need to make decisions with partial information. No one has a crystal ball that will give an accurate prediction for the future. No one expected Covid, so if you decided to set up a new plant just before Covid hit and the business makes a massive loss, you want to make the concerned VP bear the cost? Incidentally, how exactly are you rewarding them for the right decisions?

One way is to have variable pay. The fixed component is payable anyway, and the variable component is payable on meeting certain criteria (ensure this is clear and measurable). But variable pay cannot be negative. If your variable pay is too high as a ratio of total, you will find it difficult to get good talent. Most candidates will see the fixed pay and ignore the variable as they do not have any guarantee you will pay it.

For directors, you can have a salary and a commission dependent on the profit the company makes. There are certain rules on it. The maximum, I believe, is 11% for the entire board of directors together. There is also a cap on earnings of boards where the company makes a loss. Only in such cases, the amount already paid can be plowed back.

Some American companies have a plowback clause for bonuses, but that applies only if they find fraud or manipulation in the business, matrix, or evaluation criteria, not otherwise. And that too is difficult to enforce.

For those other than directors, I don't think any court will enforce a suit to recover salary paid due to a so-called wrong decision, unless it was a deliberate sabotage by the concerned employee or involvement in fraud or corruption.

I agree with Dinesh-ji... It is ill-thought-out, and I would also like to know the antecedents of the person who came up with the idea.

Dear Dinesh & Saswata,

I really appreciate your response. Let me clarify the whole picture.

The company is a private limited entity and holds a Board of Directors. Different departments are headed by one of the board members themselves. Mostly, we are engaged in project-based work.

Secondly, the departments have staffing from top designations to the smallest.

What has been observed over time is that the Directors never shared any project budget figures, and no business empowerment was given to the subordinates. They used to work and perform multiple activities under the command of the seniors. Lately, I noticed there was no control over cash inflow and outflow. I also identified that they are not aware of the project expenses and happenings because they were not informed about them. They were given responsibility but not the measures to financially track.

Now, I have suggested to the board that the Project Heads or Department Heads be empowered to be accountable for the profit and loss of the activities they undertake. I believe that by saying, "I have only 100rs, and work needs to be completed within this amount," they will have some framework or action plan to execute work accordingly. Without sharing the project costing, we cannot demand quality production.

In this context, the board is asking me how to make the Department Head accountable. What if they don't adhere to some safety milestones or make wrong decisions, misuse the company name, engage in fraudulent activities, or any legal compliance issues arise, etc., and the directors are legally responsible for all the negative impacts?

I am at the same point: without disclosing the project values, how will they know if their work contributes to a profitable journey or if the project is dragging to a loss?

KRAs will clear the gaps—whether you achieve this or not, you are responsible. Accordingly, performance appraisals can be made, or any other actions can be taken.

On the other side, I understand that the board is asking for some kind of surety, but no one will join firms with such a document in place.

Can we add a variable pay for the senior employees? If so, are there any specific conditions or percentages to follow?

I suggested having an NDA—Non-disclosure agreement for sharing the basic budget details—still, the board seems to be not completely satisfied with that.

As I have not recruited any of the top management employees like CEOs, VPs, etc., your guidance will help me understand how their offer terms will look like. Are there any related points that come up in their interview discussions? How do performance delivery discussions happen at that level?

Thanks for your patience in reading and guiding me to the light.

The picture is clear now. Essentially, you are looking for some sort of performance guarantee for your next board-level appointees, which has both positive and negative outcomes based on the results achieved. I would recommend adopting a Balanced Scorecard (BSC) approach, which is a comprehensive measure. Work out a BSC for all such key position occupants and periodically review (I would suggest quarterly if monthly monitoring is not feasible). You can establish the parameters for each level of performance based on past data and link your incentives with the ultimate credit score. Initially, start at the top level and gradually work downwards to cover all executive positions.