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When the CEO Goes Bad, the Whole Company Needs a Fresh Look Cutting off the head does nothing to fix what is likely cultural rot throughout an entire organization.

By Ray Hennessey Edited by Dan Bova

Opinions expressed by Entrepreneur contributors are their own.

Ben Rosett |

If Erasmus were alive today, he'd probably lift his head up from his iPad in Rotterdam and mutter, "Piscis primum a capite foetet."

The fish stinks first from the head.

We've seen a string of CEOs exiting to the Rogue's March over a range of allegations of corporate malfeasance. The CEO of Japanese conglomerate Toshiba, Hisao Tanaka, stepped down after the company admitted it fudged its books to inflate profits for years. Stewart Parnell, the CEO of Peanut Corporation of America, was sentenced to 28 years in prison for doctoring reports that led salmonella-tainted peanuts to enter our national food supply. And Volkswagen CEO Martin Winterkorn was ousted by his board amid allegations the automaker installed software that could evade analysis of environmental standards in some of its cars.

In all cases, it's appropriate for the CEO to leave, whether by choice or in chains. But, for entrepreneurs and leaders of all types of companies, it should be a reminder that the next step has to be to fix whatever cultural rot remains because of the former leaders' bad behavior or inexcusable inattention.

Which brings us back to the aforementioned rotting fish. The phrase is frequently misapplied. For one thing, its origins are always getting screwed up, with people saying it comes from China, Turkey or Europe. Even the Erasmus quote, in Latin, is actually his translation from the Greek. No one knows who said it first. What's more, it isn't even biologically true. Fish stink all over, starting from the stomach.

Still, lay origin and ichthyology aside, and you find a neat phrase: Fish stink from the head first. Leaders are responsible for all the decay in their own companies. Makes sense. But it means something more, something we don't talk enough about: The head may stink first, but the body stinks eventually, too. Just because you cut the head off doesn't mean you want to hang the rest of the carcass on your rearview mirror.

When companies have a bad CEO, they have a bad organization. This doesn't mean all employees are tainted. It just means all people, processes, programs and structure need to be quarantined and studied for risk of contamination. Chances are, the will of the CEO was carried out by others, the wrongdoing was institutionalized. No one works alone.

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Look at the Volkswagen contretemps. Winterkorn isn't a coder. He didn't craft the software, QA-test it, install it into the cars, and sell it. Many people touched the software in question. Workers at the lower end of the chain probably had no idea what they were doing. But, higher up, someone other than Winterkorn had to know something. Given the scale of what is alleged, a lot of people worked on this. Even one pointed question, seeking to frame a decision in terms of right or wrong, can alter the course of a company, yet no one seemed to ask. Ousting one executive doesn't fix anything but temporary optics.

Lest I be accused of putting too much blame on employees for the sins of their leaders, you must remember that it is always a two-way street. Truth is, most company wrongdoing happens outside of the C-suite, by lower-level employees who steal, lie, cover up and cheat. Companies usually are swift to punish these people and try to move on. But this, too, is a failure of leadership. Behavior like this doesn't just happen unexpectedly. Often, they are the result of leaders ignoring bad behavior beneath them (Enron is the best example) or not knowing enough about their organizations to identify problems and set the right tone.

Make no mistake, CEOs set the tone and behavioral standards for an entire company. It's part of the job. The board of RadiumOne fired Gurbaksh Chahal not simply because he battered his girlfriend, but rather because allowing a person to have such a violent and antisocial approach to women was not the kind of image the company wanted to adopt. Allowing the CEO to brutalize someone could be license to allow everyone else in the company to break the law or the conventions of the civilized world. No one wants to do business with a company like that.

I've had CEOs complain that sometimes the standards set for them are too high. This is particularly an issue at public companies, where CEOs and CFOs have to personally vouch for ther financials of their organizations or potentially face regulatory penalties. My response, though, is always along the lines of, "Heavy is the head that wears the stock options." It is part of the role. You earn your pay as a result of that burden you bear. If you're worried about the responsibility then decline when offered the post.

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A more sympathetic concern is that CEOs feel that, as their organizations grow, they are in less control of the behavior of those below them. But there's a remedy for that: culture. My favorite example is Zimmerman Advertising in Florida. When you walk into his offices, you are greeted with a number of "Jordan says..." quotes on the wall. Jordan Zimmerman meets with new employees as a matter of course to talk about his vision, values, and expectations. Jordan's thinking is considered and incorporated in the decision-making up and down the organization. Employees can even tell you what his favorite cologne and perfume is. (It's a trick question. He has a high-sensitivity to smell, so no one wears a scent. Job applicants, be warned.)

Some call that cultish, but it is more smart culture. If every employee knows a company's values, and those values are sound, then they will think twice about violating the law or engaging in unethical behavior. And if company managers see, through the process of employee evaluation, that these employees don't embrace those values, then they should find better employees.

That's why boards have to be quick to fire bad CEOs. In addition, when boards see that CEOs have lost their way, they have to do more than fire and find a better head. Good governance demands a top-to-bottom approach. Teams need to be evaluated. Processes that facilitated bad behavior need to be scrapped, replaced with ones that have more accountability. Despite an instinct to take a softer approach to build morale, more often than not the organization will also need bloody head-lopping frenzy that would make Robespierre envious.

Nasty work? Absolutely. Necessary? Yep. No doubt there is a temptation to think all the problems have been solved once leadership has changed, but a key role for the new CEO and the board has to be to rebuild the culture from the ground up. That means holding everyone accountable, rather than pointing at the spectacle of the inglorious exit of the former management as a sign that hope and change are upon us. Real, meaningful and permanent change is hard work, but organizations -- their shareholders, customers, partners and employees -- demand that work and the tough decisions that come from it.

For the new CEOs and the director who hire them, there's no bigger fish to fry.

Related: Winning at All Costs Is Not True Leadership

Ray Hennessey

Former Editorial Director at Entrepreneur Media

Ray Hennessey is the former editorial director of Entrepreneur.

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