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​Toxic Leaders, Toxic Culture

Internal auditors can identify unhealthy behaviors that may undermine the organization.

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​Leaders whose negative practices sustain an unhealthy, even toxic, culture in their organization foment distrust, behave unethically, disempower employees, play favorites, and put their own needs and objectives first. In the words of Thomas O’Connor, director of internal audit at Urban Outfitters Inc., in Philadelphia, “Toxic leadership styles typically reveal a risky degree of incompetence at the management level.”

Why spend time talking about such negative influences? Because culture affects organizational success. In a recent Duke University study, Corporate Culture: Evidence From the Field, 91 percent of North American CEOs and chief financial officers say culture is important to an organization; 91 percent say improving their company’s culture will boost its value; and more than half say culture has a significant effect on productivity, company value, creativity, profitability, and rate of growth. Thus, knowing more about how a toxic leader can negatively affect an organization makes sense from a purely business point of view. Even more pertinent, internal auditors can take a prominent role in identifying these individuals and suggesting effective mitigation tactics.

Spotting the Bad Leader in the Wild

Recently a roundtable of internal audit experts at The IIA identified leadership traits that strongly correlated with an unhealthy organizational culture (see examples throughout article). Upon reviewing these traits, Phillippa Foster Back, director at the Institute of Business Ethics (IBE) in London, summed them up neatly: “Power and control. They’re all about power and control.”

Take, for example, secretive leaders. They keep information to themselves because of the power it represents. Bethmara Kessler, CAE of Campbell Soup Co., in Camden, N.J., notes that they “perceive information as currency in the workplace. They want to be the ones who use it to advance in the organization.” She cites the example of former Enron CEO Jeff Skilling using the term “black box” to describe the energy company’s special brand of fraud. His joking about it, using a slightly absurd term, shuts down questions and ensures that the power of the information is contained to only a select few.

Robert Taft, CAE, University Audit, at the University of Central Florida in Orlando, points out that autocratic leaders also tend to be driven by power. They are often high producers — the organization’s superstars. As a result, they may end up as the “face” of the organization or of a key function within the organization. That is not necessarily a negative, except when they use the exposure for their own benefit, rather than the organization’s. These individuals can be more focused on their own greatness than the organization’s success, may not be overly concerned about the organization’s future performance, and may internally hope the organization struggles after their departure.

Of course, having a superstar is often of great benefit to the enterprise — think Steve Jobs — so they are not necessarily bad leaders. They cross the line, though, when they begin to believe they are above the rules and not to be questioned. Having a single dominant individual who does not encourage discussion, testing, and debate deprives the organization of the healthy give-and-take that tends to support collaboration, drive innovation, uncover problems in advance, and build competitive advantage. Ron Johnson, the former CEO of JC Penney, is an example of this type of autocratic leader, Taft says. A November 2015 Fast Company profile details how Johnson totally overhauled the JC Penney retail model without listening to anyone, ultimately alienating employees and customers — a scenario that ended with his termination.

Intimidators take such self-centered behavior even further by exercising power through fear. They seldom compliment or reward success. Instead, they accentuate the errors others make, thereby undermining morale, discouraging the sort of experimentation that often leads to breakthroughs, and potentially running off promising talent. “Fear and intimidation have been proven as effective management tools when there is underlying substance to produce positive results,” O’Connor says. “However, a toxic management style typically masks the lack of that substance, causing the organization to lose valuable time going down a path that leads to poor results.”

Manipulators, too, seek to maintain the illusion of power by using the latest buzzwords; cozying up to executive management, the board, and the media; staging flashy diversions from less-than-successful endeavors; and constantly seeking the next big thing while ignoring their primary responsibilities. Taft likens them to “one-hit wonders.” Diana Henriques, financial writer and author of The Wizard of Lies: Bernie Madoff and the Death of Trust, calls the description of “the manipulator” on page 31 “a perfect recipe for the next Bernie Madoff.”

Some toxic leaders are more driven by control. Closed-minded leaders do not like to be challenged. Tom Luccock, retired director of internal audit and senior adviser to the president at Michigan State University, indicates that those he has encountered “would often not explain what they wanted, but expected others to complete a task without direction.” Deflectors seek to control their own reputation by sidestepping accountability for a failure or responsibility for fixing it.

Inappropriately focused leaders try to achieve and retain control by orchestrating results they consider important, to the detriment of the priorities of others. However, Kessler points out that this approach may be intended or unintended. For example, when an organization is struggling, an ethical leader may try to motivate employees by encouraging them to “do what it takes” to make that quarter’s figures. The leader does not intend for employees to override company policy to make that happen, but an employee may interpret it that way. The leader’s focus is not inappropriate; the employee’s is.

Auditing for Bad Leadership

Internal auditors must leverage their experience to flush out the toxic leadership styles that tend to do damage when they go unchecked. Like many aspects of auditing organizational culture, some techniques to accomplish this are subjective and some are objective.

Subjective Methods Foster Back suggests starting with the traits of ethical leadership identified by the IBE: honesty, fair-mindedness, openness, courage, and ability to listen. Internal auditors can evaluate the degree to which these traits are present and how these individuals are perceived by peers and subordinates. She notes that some internal audit departments are bringing in employees with nontraditional backgrounds, such as behavioral psychology, to provide expertise in subjective analysis.

Psychology also can be useful in tailoring communication to the audience. For example, the internal auditor might comply with the leader’s expectations as a way to open the door to delivering the necessary message. So, for the autocrat, this might entail saying, “Of course you are special, but here’s what happens to the organization if you don’t follow the rules.” Luccock suggests a similar method of feeding the leader’s ego by using questions that indirectly compliment him on how he was able to accomplish so much, thus giving him a chance to boast. This approach helped Luccock investigate a kickback incident at an earlier job in an energy company. After the individual admitted that he accepted kickbacks, Luccock inquired how he managed to do it — and received an explanation “in full detail!”

Henriques suggests questions that go straight to the heart of the individual’s flaws. “One attribute of con men I have known is that they have an almost pathological need to always be seen as successful and an ingrained resistance to admitting failure in any circumstances.” Keeping up a facade of consistent success requires them to skirt the truth on a regular basis. It is not easy to unmask good liars, but internal auditors may uncover some valuable indicators of dishonesty and cover-up by asking about past failures and listening carefully and skeptically to the answers. An inability to provide specific details about past projects, a hesitancy to describe exact processes and approaches taken, a reluctance to identify collaborators, and a refusal to share credit with others may be warning signs that the individual’s successful track record is not all it appears.

Kessler points out, though, that internal auditors should never confront a toxic leader. It is important to recognize that an audit is not an investigation. She elaborates, “If, in the normal scope of an audit, the auditor uncovers evidence that would tend to indicate there is a toxic leader in the organization who is undermining controls, it is time to step outside audit mode.” The auditor should speak with the company’s legal counsel or its compliance officer, explain the reason that an investigation may be in order, then, Kessler emphasizes, “follow the company’s established investigative protocols.”

Objective Methods Some tried-and-true objective approaches can be quite effective. For example, these toxic leadership types tend to cause employees to flee the company. Therefore, it is worth looking at turnover rates and exit interviews, which will reveal the number of employees who have left and the reasons why. Employee engagement surveys may provide advance notice of problems by revealing the leaders that employees are grumbling about and why.

Reviewing the individual’s consistency in submitting required paperwork also can be enlightening. As Henriques points out, those with a “rules don’t apply to me” outlook often manifest “a refusal to adhere to sensible documentation requirements established for budgets, expense accounts, invoicing, cybersecurity, etc.”

Other potential evidence to reveal toxic leaders includes a history of litigation and regulatory issues, and a tendency to employ relatives, especially if they are not qualified for the positions they hold. Because many of these leaders don’t take responsibility for failures or mistakes, or simply do not have the commitment to complete a project, there may be value in seeking evidence of their involvement throughout a project. Excessive travel or use of organizational resources for personal use might also be a red flag. Taft notes that bad leaders may believe “they deserve it.”

Beyond the Questions

The work internal auditors do in gathering evidence is necessary and valuable, but the real benefit to the organization comes after that, in the work internal auditors do to help prevent the recurrence of counterproductive behaviors or contain their damage. Luccock suggests, “Offering timely and constructive suggestions and clear paths forward often helps direct some negative types of leaders to improve controls.”

Toxic leaders may exercise control because they believe they are operating in out-of-control conditions. Therefore, they may favorably receive substantive guidance on how to create order out of chaos. Until that results in a change in the leader’s behavior, however, Luccock advises counteracting an inappropriate concentration of control by recommending a separation of duties to ensure adequate checks and balances.

In the same vein of providing constructive suggestions to change behavior, inappropriately focused leaders may respond well to a demonstration of the benefits to the organization of rebalancing their priorities. “Use experience and facts as much as you can,” O’Connor suggests. “Since they may not understand the problem, coach them through a solution.”

These recommendations may be appropriate within the scope of a normal audit — perhaps when the leader’s behavior is disruptive, but does not bypass controls — provided the internal auditor has discussed the recommendations with the CAE to ensure they are constructive, not confrontational. However, sometimes a leader’s behavior goes beyond certain boundaries and is so egregious it must be reported through appropriate channels. If the leader is at a senior level, the CAE should report the concerns to the board or the audit committee. If the leader is a middle manager, then a word to the senior vice president or vice president is advised. If the leader’s actions are beyond poor behavior and instead constitute a known violation of policy, such as fraud, Taft recommends following approved investigation guidelines and creating detailed documentation to keep the focus on the issues as opposed to the emotions and personalities involved. It is advisable to involve the ethics, legal, and human resources functions in these instances.

Learning a Lesson

There are lessons to be learned from interaction with toxic leaders, unwelcome though that interaction may be. Engaging with challenging leaders is an opportunity for internal auditors to polish their skills in asking open-ended questions and listening to both what people say and how they say it.

It also is an opportunity to recognize that things are not always what they may initially seem to be. Most people exhibit some of these undesirable behaviors from time to time without belonging to one of the “unhealthy leader” categories. Internal auditors always have to investigate further and take a bigger-picture view. “Everyone has an occasional bad day,” Kessler points out. “You have to look at their pattern of behavior, not just your short engagement with them.”

Ultimately, despite all best efforts to follow standards, establish quality controls, and apply good practices, some leaders will be toxic. Internal auditors must remain vigilant in spotting them and taking appropriate steps to help identify the situation so it can be addressed through established processes.

O’Connor often flashes back to his time as a loss-prevention officer at Tiffany & Co.’s in New York City, a busy store containing immensely valuable items. Each day, tourists would come into the store to marvel at the magnificent jewelry. “It was an amazing experience to stand and monitor the crowd: hundreds of people, all basically following the pattern of a shopper — except for the three or four people who are not, the toxic outliers,” he recalls. “It’s the same for managers in an organization. There are going to be those outliers. With our unique experience, internal auditors can help keep the honest people honest as well as identify the truly toxic leaders before they cause too much damage.”  

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