Understanding and auditing leadership
Standing at the helm of many organisations which have either fallen into serious difficulties or met sticky ends, have been charismatic, highly driven and ambitious leaders, lauded for their apparent success. Their subsequent failures highlight the vital importance of effective auditing of leadership.
There are many examples of larger-than-life individuals that have led their organisations into disaster or disrepute but media mogul and fraudster, Robert Maxwell, may well head the list. Similarly charismatic and driven leaders often have their time as darlings of the business press but there are inherent dangers in focusing on the “personalities” in the driving seat of organisations.
Speaking at the recent ACCA virtual Internal Audit Week, Tim Le Mare, Regional Sales Director, Integrated Risk, Workiva, pointed out that sometimes the glossy exterior of an organisation hid what was going on inside. Recalling the fates of Enron, BHS and others, he questioned what, in these cases, the Board was doing as the fortunes of these companies began to falter: “And were non-executives discharging their obligations?” he asked.
"Was Internal Audit doing its job in signalling and sending messages about emerging problems?"
It is evident that some driven and charismatic leaders use their status in organisations to get what they want, turning a deaf ear to what it doesn't suit them to hear. Tim cited the Space Shuttle Challenger tragedy as an example. On January 28, 1986, the Space Shuttle Challenger broke apart 73 seconds into its flight, killing all seven crew members aboard. “There were engineers that watched the launch of the shuttle and knew it was going to explode,” Tim said. “They had signalled this to NASA leadership, but the flight had already been delayed on a number of occasions and there was mounting pressure to deliver.”
Time pressures often a present problems for leadership but issues such as the need to meet heightened shareholder expectations, reluctance to see the objectives of an organisation challenged, and desperation to maintain current success are others. All of these can be seen to have driven leaders, operating in a variety of business areas, to go against approved ethics and behaviours.
So how does Internal Audit understand the pressures, challenges and environment that create some of the risks that it needs to be aware of from an assurance third line perspective? How does it pick up both the blatant and subtle signs that something is amiss? “It is so important to pull these issues together to gain a clear picture of the state of an organisation because its failures can impact on millions of people,” Tim stressed.
In every type of organisation, Internal Audit’s role in auditing leadership comes up on a regular basis. It raises some difficult questions, including whether internal auditors are always the right people to carry out this function. It could be tricky, Tim acknowledged. Sometimes, it might be more appropriate for outside legal counsel to audit a particular leadership issue, for example. However, whatever route an organisations decides on, Internal Audit should be aware of what is happening and have a voice in the debates surrounding the decisions made about the involvement of third parties.
Considerable regulatory activity has taken place in recent years to address some of the environmental factors that can lead to poor leadership. Among them are the UK Corporate Governance Code; Wates Corporate Governance Principles for Large Private Companies; and the Bribery Act 2010. However, it was the BEIS White Paper Restoring Trust and Transparency, with its aim of making the leadership of organisations truly accountable for whatever happens within them, which Tim strongly recommended his audience to study.
He also challenged internal auditors to consider how they are using some of the current models, such as the COSO framework, in risk control, not just in terms of creating an audit plan, but as a way of having conversations across the organisation. Some leadership behaviours take place behind closed doors, he pointed out, so building strong working partnerships and trust with functions and individuals, such as the Audit Committee Chair, HR, the Renumeration Committee and Non-Executives, would help give a better overall picture of the business.
"Make sure you are having regular meetings with the Audit Committee Chair and are not just talking about the hard controls in the organisation but showing interest in the internal dynamics and politics of the organisation. Learn about the personalities around the board table, what the meetings are like and who dominates them. And recognise that you may be moving away from your comfort zone, from auditing hard evidence to auditing more subjective areas."
Is it time for Internal Audit to move itself up in the organisation so that Internal Auditors are perceived as people that have “skin in the game” when it comes to assuring leadership? Tim thinks so: “Not all managements will feel comfortable reaching out to Internal Audit for this, perceiving its job as to audit the hard controls and not necessarily believing in its capability to audit the softer skills - openness, shared values, clarity, competence and communication - that are vital to successful leadership. Be mindful of how your audit approach might need to change as you do more of this softer control work."
Governance audits, Board evaluation, and Culture audits all appear in the leadership audit tool kit. However, Internal Audit also has a role in looking further afield to tools such as people surveys, where they can usefully monitor whether responses are converted into action and by whom. HR audits offer a rounded view of recruitment and highlight the churn rate of employees which, in turn, can offer insights into the health of various parts of the organisation. Auditing gifts and hospitality, travel expenses, remuneration and KPIs also provide different lenses to help provide internal auditors form a rounded view of leadership.
"It can be difficult to form a view of leadership in isolation. There is rarely one magic silver bullet which allows you to say: ‘I have audited leadership and this is my view.’ You need to come at it from many different angles."