Passing the buck seems to be top CEO duty

NEW YORK — Maybe Kenneth Lay was truly unaware of the vast misdeeds that transpired under his watch as chairman and chief executive of Enron Corp. Maybe the same holds for Bernie Ebbers at WorldCom.

If so, was that any way to run a company?

Lay, charged with fraud by federal prosecutors on Thursday, has maintained he didn’t know Enron’s finances were largely a mirage as they began to unravel nearly three years ago. This view, he says, was based on the trusted word of senior managers such as chief financial officer Andrew Fastow, who has pleaded guilty and is expected to testify against Lay.

Ebbers, indicted in March, has also asserted that he was deceived by subordinates who concocted the accounting scandal that nearly destroyed WorldCom.

To borrow some words popularized by the Iran-Contra scandal, if the deniability of these two executives is so plausible, Lay and Ebbers seem to be saying that a CEO’s responsibility to oversee a company’s operations can be satisfied by occasionally asking a top deputy how everything’s going.

What, then, is a CEO supposed to be doing on an average work day?

You don’t want a company’s leader signing every purchase order for paper clips. Spend too much time reading expense reports and then there’s no time to survey the big picture or plot strategy. (Actually, as Ebbers was known for questioning employee receipts, perhaps he was too distracted to notice the vast fraud unfolding around him.)

It’s also accepted wisdom among researchers and consultants that delegation of authority is not only healthy, but that micromanagement is a sure way to snuff out the flexibility that makes a business entrepreneurial and innovative. A CEO also needs to delegate so there’s time to meet with investors and analysts, or lobby for the company’s interests with politicians and regulators.

But at some point, the benefits that come with delegating authority stray into negligence and dysfunction.

At the very least, the defense offered by Lay and Ebbers would seem to be a breach of what’s known as the “duty of care,” a legal responsibility to shareholders to make a good-faith effort to monitor what’s going on below.

Federal regulators went further Thursday in condemning Lay’s job performance. The Securities and Exchange Commission filed a $90 million civil suit accusing him of fraud, insider trading and other breaches of his fiduciary duties as a steward of shareholder interests. Similar charges have not been filed against Ebbers, though the SEC investigation in that scandal is ongoing.

Still, the question is whether it is ever adequate or appropriate for a CEO to rely so heavily on trust rather than getting messy with the details of a more rigorous system of checks and balances.

On one hand, it is reasonable to expect that an executive who ascends to a key position like CFO managed to climb that high with at least some reputation for virtue. Often enough, that reputation will have been earned as a trusted colleague of the CEO’s when both served at lower levels of the organization.

But given the propensity for ethics to stray, CEOs cannot fulfill their duty of care based on trust, said Eric Abrahamson, a professor at Columbia Business School and author of the book “Challenging Traditional Change Management Practices.”

“The CFO in particular (needs to be monitored), because they can wreak so much damage,” he said. “The reason you’re getting the big bucks is to take responsibility. Delegation of authority means delegation of authority, not responsibility. That means you’re responsible for picking trustworthy people and having sufficient controls on them so they can’t create major accidents or run away with the bank. That’s why delegation is difficult.”

Regardless of whether there’s an alleged crime involved, it’s not unusual to see a CEO blame troubles on circumstances beyond their control.

In an oft-cited study published in 1976, Edward H. Bowman found that in the food industry, annual reports from struggling companies repeatedly complained about the weather. Among food companies with strong results, executives rarely noted the role of weather in their performance, pointing instead to strategies and execution. Bowman reported a similar trend in making references to government price controls after a bad year.

But if blame can be deflected to subordinates rather than external factors, it’s hard not to wonder what worthwhile purpose the CEO is supposed to serve.

The buck needs to stop somewhere. If a CEO isn’t sweating the details, he or she needs to be looking over the shoulder of the trusted lieutenant who is. That’s part of the job description.