Boards of directors have a challenging job. They need to monitor senior management's performance and provide advice, counsel, and, where necessary, direction. And they need to do all of this while maintaining an effective and trusted relationship with the chief executive and acting in the company's and shareholders' best interests. It's a tall order. Some boards have done well maintaining the requisite balance, while others have not. Probably the majority have achieved mixed results in carrying out their responsibilities, hopefully learning from past miscues and improving board processes to become more effective over time.

I've worked with plenty of boards that have stumbled and then righted themselves to become highly effective in carrying out their multifaceted roles. Several have struggled with risk issues, but then ultimately established effective protocols for overseeing their companies' risk-management processes. Others worked toward reallocating responsibilities for overloaded audit committees and sharpening the committees' focus on core issues. Some boards learned too late that they weren't receiving relevant information to enable effective oversight of corporate performance. More than a few found their companies' compliance processes weren't doing the job as intended—and focused attention where needed to effect the necessary enhancements.

A company's culture and tone at the top, particularly the actions and behavior of its chief executive, say a lot about a board's effectiveness. A number of my past columns have dealt with missteps of corporate CEOs, too often related to matters involving a lack of integrity and ethical values. Here, we look at a company that has had severe problems and now seems to have learned its lessons and gotten it right. The company is Daimler, maker of the highly regarded luxury automobile brand Mercedes-Benz.  

Several years ago Daimler engaged in a massive and pervasive bribery scheme. According to reports on the scandal, the problem didn't stem from a one-time event. Rather, hundreds of bribes totaling tens of millions of dollars were paid to officials in no less than 22 countries over a 10-year period. In a number of instances so-called “cash desks” were used to pay currency directly to government officials. In other instances the company used foreign bank accounts of shell companies to hide payments.

What's particularly disturbing about the corruption is that it reportedly involved important high-level executives, including heads of overseas sales divisions, not just middle management. And, even more unsettling, it involved the company's internal audit office. The Department of Justice complaint focused on Daimler's longstanding violations of bribery rules and a “corporate culture that tolerated and/or encouraged bribery [and] a lack of central oversight over foreign operations.”

The personal characteristics of the 'Imperial CEO,' are attributes that raise risk levels. The feeling of being all-powerful can drive a chief executive to push the envelope to extremes.

As part of a $185 million settlement agreement, Daimler units in two countries pleaded guilty to anti-bribery provisions of the Foreign Corrupt Practices Act. In addition to the payment, Daimler entered into a deferred prosecution agreement, requiring the company to continue to cooperate with regulators and strengthen internal controls. It also accepted an independent compliance monitor to oversee and evaluate the company's compliance and ethics programs, a role filled by former FBI director Louis Freeh. Insiders say the company has taken this issue very seriously. For example, it appointment a well regarded German judge to a new management board position for integrity and legal affairs, and it is shoring up compliance and control procedures with significantly higher levels of scrutiny.

In October the company abruptly announced that Ernst Leib, head of Mercedes-Benz' U.S. operations, was no longer with the company. This was particularly surprising to some observers, who noted that since Leib arrived in 2006, U.S. performance had been stellar, with significant increases in both sales and market share. This chief executive was well-regarded inside the company and the industry, and was expected to continue to steer operations on a positive path.

What happened? Well, apparently there were serious lapses of integrity by the 36-year company veteran. It seems he had work done on his residence and traveled overseas on personal, not company, business—neither of which would have been a problem, except that he reportedly paid for them with the company's money. And even after these misdeeds came to light, he apparently could have still saved his job. When the company learned of these payments, he was directed to fess up to any other such irregularities. Did he seize the opportunity to disclose what he had done? Evidently not. The company found out about other issues, and then he was out of his job.

We don't yet know the details on the decision-making process within Daimler to remove Leib, but we can presume that the supervisory board was involved. And there's little doubt that the company did the right thing. We know well that it's the chief executive that sets the tone and shapes the organization's culture—not only with words, but largely by his or her actions. The senior leadership of Daimler sent a loud and clear message throughout the worldwide organization that lack of integrity will be dealt with severely, regardless of how high up on the corporate chain of command it goes. It's a new order at Daimler, and this action drives home the point more effectively than perhaps anything else that has been done. At least it's the exclamation point on top of the other ethics- and compliance-related processes that have been put into place.

The All Powerful Chief Executive

We can wonder why a senior executive like the U.S. Mercedes-Benz leader would do what he did. We have to believe he was well compensated. So, was it unbridled greed? Was it the challenge of “gaming” the system, of getting away with something? We don't know now, and unless someone is able to get inside his head, we'll probably never know.

But this certainly isn't the only time a CEO has been fired over such puzzling lapses in judgment. Another who immediately comes to mind is Mark Hurd, and his alleged misreporting of personal expenses at Hewlett Packard. Certainly, there are many others. What drives behavior that puts job, reputation, and many millions of dollars in future income on the line?

We may not know for sure, but we do have a sense of what's behind this behavior. Some years ago while leading a risk-management project, I brought in outside consultants, one of which was a leading business school professor with an M.D. in psychiatry. His combined business, academic, and medical skills provided tremendous insight into what makes some chief executives particularly at risk for such behavior. Without going into detail, due to confidentiality constraints, let us say that the personal characteristics of the “Imperial CEO,” are attributes that raise risk levels. The feeling of being all-powerful can drive a chief executive to push the envelope to extremes. An underlying driver, whether conscious or otherwise, is the need to prove to oneself that their power is indeed unbridled. They seek to control everything around them—including the board—in order to convince themselves of their ability to do what they want without constraint.

It's a Tough Job

We said earlier that boards of directors have a tough job, and indeed they do. Perhaps the most important part of that job is selecting the right person to lead the company and reaching a comfort level with other senior managers. Also critical is monitoring, as well as advising the chief executive and establishing a positive and trusting working relationship. Certainly many if not most effective CEOs are extremely confident in their abilities, for good reason. And they have personal characteristics that go along with being confident, which is normal and appropriate.

But when there are signs of going beyond the norm, that's when directors' need to raise their antennae and take action to ensure appropriate behavior is maintained. And when the behavior goes over the edge, boards need to do what Daimler did. There's no other choice.