Oct 21st 2021

Succession: Logan Roy’s hand-picked directors cover up wrongdoing, just like in real life

by Jia Liu, Nader Atawnah and Rashid Zaman

Jia Liu, Professor of Finance, University of Portsmouth

Nader Atawnah, Lecturer in Finance, Edith Cowan University

Rashid Zaman, Lecturer in Accounting, Edith Cowan University

 

Logan Roy, the media titan played by Brian Cox. HBO/BSkyB

 

Will Logan Roy be brought down after his son Kendall publicly blamed him for covering up a litany of rapes and sexual assaults in Waystar Royco’s cruise-ships division? That’s the burning question that will be answered in season 3 of blockbuster business drama Succession, which is finally underway after being delayed by the pandemic.

For the uninitiated, Waystar Royco is a fictional media conglomerate along the lines of Disney or News Corporation. Logan Roy (played by Brian Cox) is its ageing emperor, unwilling to relinquish control and unsure that any of his three children are fit to wear the crown.

Much of the unfolding story in the first two seasons was about the cruise-ships scandal, which took place under the watch of the former head of the division, the late Lester McClintock. Scores of victims of McClintock and his cronies were paid corporate hush money to keep quiet, and the story is now coming out because some of them have been talking to the media.

Waystar board members strategising
Logan Roy has the Waystar board under his thumb. HBO/BSkyB

Logan Roy and the other members of the Waystar board have clearly been aware of the situation for a long time – almost certainly including when it was taking place. Kendall Roy, a board member himself, betrayed his father because he was being lined up as a “blood sacrifice” to take the blame for the scandal.

So much of Succession holds a mirror to real life, and the way that Logan Roy’s hand-picked board members allowed these abuses to continue by turning a blind eye to them is a good example. We have just published research that shows that public companies whose directors are chosen by their CEOs are statistically more likely to be involved in corporate misconduct, along with various other shortcomings. So why does this happen, and what should be done about it?

What the research shows

Warren Buffet put it well when he famously observed that: “When seeking directors, CEOs don’t look for pit bulls. It’s the cocker spaniel that gets taken home.”

Stock exchanges like the NYSE and NASDAQ have rules in place to reduce CEOs’ involvement in nominating new board members, but CEOs still substantially influence these appointments.

It’s a feature of corporate life that we choose to live with, and it comes at a high price: according to one study, total penalties imposed on US-listed companies for corporate misconduct between 2002 and 2015 came in at US$1.1 trillion (£801 billion). In many cases, members of the board who were personally appointed by the CEO may have been choosing to look the other way when the wrongdoing was taking place.

A preponderance of evidence reveals that when directors are appointed by the CEO, they are disinclined to question the managerial status quo. This compromises the board’s monitoring of decision-making, leaving leaders free to pursue their own agendas. And as the proportion of CEO-appointed directors rises, it becomes increasingly unlikely that managers will be held to account for any incompetence.

Our own study, which looked at a large number of US companies over a 15-year period, found that directors who were installed after the CEO was in place contribute less to board agendas, attend fewer board meetings, and receive above-average pay and perks. Most disturbing of all, we found that each such director on a company board increases the likelihood of corporate wrongdoing by over 4%. We found that these outcomes are most pronounced when firms have weak external monitoring and when social ties between CEOs and directors are strong.

The effects

The word “patronage” is relevant here, since the CEO will expect to see wagging tails when holding out a bone in the form of executive remuneration. Besides the heavy fines, such cases of corporate wrongdoing undermine investors’ confidence in the company, damage shareholder value, lead to resources being misallocated, and make financial markets more unstable.

The Volkswagen share price, for example, tumbled 50% in the week after the announcement of its emissions scandal in 2015. The carmaker was found to have fitted 11 million diesel cars with software that made their emissions seem lower than they were.

While former CEO Martin Winterkorn is facing trial over allegations of fraud, which he denies, at least three of the company’s directors were hired during his tenure. They have said they were unaware of any management misconduct, which may turn out to mean they weren’t monitoring the management properly.

Other real-life examples include Nissan and the case involving former chairman and CEO Carlos Ghosn and board member Greg Kelly, whom he chose. The US Securities and Exchange Commission accused Ghosn of concealing over US$140 million of compensation and retirement benefits from Nissan’s investors, and accused Kelly of aiding and abetting him.

Both directors settled without admitting wrongdoing, while respectively paying civil penalties of US$1 million and US$100,000 and accepting lengthy bars to holding directorships. Nissan paid a civil penalty of US$15 million. Kelly is currently being tried over similar charges in Japan, while Ghosn has avoided trial by fleeing to Lebanon in 2019. Both men deny the charges.

In revealing the strong connection between hand-picked directors and corporate misconduct, we’re hopefully exposing a severe threat to corporate governance that tends to be ignored. Scandals emerge periodically, but the corporate sector, aided by lawyers and accountants, always finds ways to put regulators off the scent.

It’s clear the authorities don’t have adequate tools for the job. It’s timely to be reminded of this by the fictional scandal in Succession, but it is not enough for us simply to feel frustrated about it.

What is required is for board independence to include a requirement for directors that have not been hired by the CEO. Those in post already could be more restricted by rules that limit their voting rights. Until governments take this problem seriously, the real-life Logan Roys will find it easier than they should to make their companies do wrong.

Jia Liu, Professor of Finance, University of Portsmouth; Nader Atawnah, Lecturer in Finance, Edith Cowan University, and Rashid Zaman, Lecturer in Accounting, Edith Cowan University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Browse articles by author

More Essays

Jun 26th 2014

I didn't know who Gerry Goffin was when I was in junior high school, and high school, in the '60s. I listened to AM radio constantly on my new transistor radio, and I knew all the songs on KEWB's weekly Top 20 - so well that sometimes I even called in and won Name It and Claim It.

Jun 23rd 2014

In Iraq, we are witnessing yet again the tremendous harm caused by religious fanaticism.

Jun 23rd 2014

I'd been writing novels and literary nonfiction for twenty years before I dared to write a 

Jun 14th 2014

The reconciliation of science and religion is one of the most compelling tasks confronting religious believers today. For we are truly faced with a pair of hostile, warring camps.

Jun 12th 2014

In 1923, T.S. Eliot wrote that in Ulysses, James Joyce had "arrived at a very singular and perhaps unique literary distinction: the distinction of having, not in a negative but a very positive sense, no style at all. I mean that every sentence Mr.

Jun 4th 2014

MELBOURNE – In New York last month, Christie’s sold $745 million worth of postwar and contemporary art, the highest total that it has ever reached in a single auction.

Jun 1st 2014

The Isla Vista mass murder was a preventable tragedy. It was the destruction of innocent life without need or reason. It is proof, as if more proof were needed, that we are past the time to break the nexus between guns, murder, and mental illness.

May 25th 2014

History is the story of the struggle of the psychologically normal majority of humanity to free ourselves from the tyranny of a psychologically disordered minority who are marked by their innate propensity for violence and greed.

May 22nd 2014

Part I – Watershed Moments

May 20th 2014

While we all rightly celebrate the protections afforded free speech by the First Amendment and are thankful, as President Obama said recently at the annual White House Correspondents Dinner, "We really are lucky to live in a country where reporters get to give a head of state a hard time on a da

May 20th 2014

Born in 1899, Lucio Fontana was an artistic child of the early 20th century: after being classically trained as a sculptor in his father's studio, he experimented with the major movements of his youth, including Cubism, Futurism, and Surrealism, as he became a painter.

May 16th 2014

Who said these words? “You just don’t invade another country on a phony pretext in order to assert your interests.”

May 13th 2014

The time is ripe for Christians to make a major refocus and become serious about the kingdom of God on earth, which Jesus set out to establish and which was the reason for his arrest, trial and execution by Roman officials.

May 8th 2014

I had the flu when I reread To the Lighthouse, more than 30 years after my first reading, and I was struck in the haze of fever by my frailty in the face of illness and aging and by Virginia Woolf’s poetic vision of life and death and what it all means.

May 4th 2014

John Nava, one of America's pre-eminent realist artists, is the subject of a small show of twelve portraits -- paintings, monotypes and Jacquard tapestries -- now on view at the Vita Art Center in Ventura.

May 1st 2014

“Ukraine – his Ukraine – was dead, a corpse. No, it was worse. It was gone. It had disappeared, vanished. It had been extinguished and obliterated by the Russians.

Apr 26th 2014
In the New York Times Book Review, Adam Kirsch laments a lost love -- the poetry of T.S. Eliot.
Apr 21st 2014

The sensible Joe Nocera is concerned: Apple has lost its creative mojo.

Apr 19th 2014

Christina Baker Kline is the #1 New York Times bestselling author of Orphan Trainand four other novels: