Another Example of Weak Governance

Brace yourselves, ethics and compliance officers! Today we revisit another  example of corporate leadership gone wrong: Vince McMahon, the long-time (and now former) CEO of World Wrestling Entertainment, accused sexual predator, and overall blowhard.

McMahon agreed last week to pay $1.7 million to settle charges from the Securities and Exchange Commission that he failed to tell WWE’s investors, board of directors, and auditors about two hush-money settlements he made worth a total of $10.5 million. The payments, one made in 2019 and the other in 2022, went to two women who had accused McMahon of sexual assault or other inappropriate behavior. Both were WWE employees or contractors at the time of his misconduct.

McMahon

McMahon

Simply put, the SEC says McMahon, 78, deceived WWE about non-disclosure deals he had struck to cover up embarrassing behavior in his personal life. He committed the company to legal and financial risks without telling anyone, and when the settlements finally did come to light, WWE ended up needing to restate its financial results. McMahon neither admitted nor denied the SEC’s allegations, but did agree to pay a $400,000 civil penalty and to reimburse WWE $1.3 million.

We can examine this case across two dimensions. First is the nuts-and-bolts internal controls dimension: WWE had several policies in place meant to prevent deceptions such as what McMahon foisted on the company, and he walked right over them. Second and more important, however, is the corporate governance dimension: How did McMahon amass so much power within the company that he could even do all this in the first place? Where were the checks on CEO power? 

That’s the issue ethics and compliance officers really should ponder here. CEOs can engage in all manner of misconduct — but in almost every instance, the root cause is unchecked power. If your organization can’t tackle that, then some type of CEO misconduct pretty much becomes inevitable.

Policies Ignored, Risks Assumed

Let’s start with the details as described in the SEC settlement order. The first settlement went to a former independent contractor who worked for WWE. She accused McMahon of assaulting her in 2005 and derailing her career after she refused to have a sexual relationship with him. In 2019 McMahon signed a non-disclosure settlement with the woman which paid her $7.5 million.

From 2019 to 2022, McMahon had a sexual relationship with another woman who was a WWE employee. That woman left WWE at the start of 2022, and at that time McMahon signed a non-disclosure settlement with her that paid out $3 million.

McMahon failed to disclose the settlements to WWE’s legal and accounting departments, its financial reporting personnel, the board, and the board’s audit committee — even though he was CEO and signed the agreements on behalf of the company. Instead, McMahon stored the agreements with his personal attorney and otherwise kept quiet about them.

This violated WWE’s Code of Business Conduct and several corporate policies. For example, the company’s code expressly said: “WWE personnel are required to record and report all information accurately and honestly. No undisclosed or unrecorded fund, asset or liability of the company shall be established for any purpose.” WWE directors and officers also had to answer an annual questionnaire that asked whether they were aware of any company transactions worth more than $120,000 in which the executive had any direct material financial interest; McMahon answered “no” in both 2019 and 2022. 

WWE’s board finally did learn about the settlements in mid-2022. It soon forced McMahon to resign, launched an investigation, and ultimately determined that from 2006 to 2022 he ran up a tab of $14.6 million in unrecorded expenses that should have gone onto WWE’s books. The company overstated its 2018 net income by 8 percent and 2021 net income by 1.7 percent, and had to restate financial results in 2022. 

Let’s stop here to state the obvious: companies need strong, clear policies that require all senior executive officers to report any transactions that create a binding obligation to the company. That policy goal should be stated in the Code of Conduct and employee manual; and then a procedure should exist that compels executives to participate in the policy.

Except, WWE did have those things in place. McMahon ignored them. We could then ask, “How did accounting and internal audit miss those two payments?” but we should also remember that WWE was a large and rapidly growing business at the time; revenue went from $960 million in 2019 to $1.2 billion in 2022, with total expenses in the high nine figures every year. I’m not sure accounting and audit teams would have discovered those two payments, especially if they were made by a powerful CEO who knew how to keep embarrassing issues quiet. 

Which brings us to that second dimension mentioned earlier: the powerful CEO part.

Again, Why Strong Governance Matters

The larger lesson here is the importance of strong corporate governance structures from the very start of an organization’s life. Ethical leadership matters, of course — but when an organization is deliberately designed to place immense power in one individual, how long can we trust that person’s ethical discipline to endure? Power tends to corrupt, after all.

Hence we need basic governance structures that impose guardrails over the CEO’s performance, such as:

  • Separating the CEO and board chairman roles;
  • No dual-class share structures that give majority voting power to people who own a minority of shares;
  • A robust board with engaged, independent directors, including a provision that directors lose their independent status if they stay on the board too long;
  • A strong internal reporting system that reports into someone (compliance officer, HR, internal auditor) who has unfettered access to the board’s audit committee.

How well did WWE score on those fronts? Well, in its 2019 proxy statement, four of 10 board directors were insiders, and two of those insiders were McMahon and his daughter. Its 2022 proxy statement listed eight directors, three of whom were insiders. McMahon has been executive chairman and CEO since WWE’s founding in the 1980s. The company has two classes of stock, where Class B shares can outvote Class A shares by 10-to-1 — and 100 percent of Class B shares went to McMahon, his daughter, and his wife Linda. (Yes, that Linda McMahon, nominee to be Education Secretary in the Trump Administration.)

Indeed, WWE’s governance was so pliable that after McMahon was ousted in 2022, he engineered a boardroom coup in early 2023 and had himself re-installed as executive chairman. The company even had to disclose McMahon as a risk factor in its annual report that year.  

My point being, McMahon is just the latest in a long list of CEOs who amassed overweening power at their organizations thanks to lax corporate governance — and those organizations then lapsed into disarray. That’s true whether we’re talking about the now-disgraced Steve Wynn of Wynn Resorts; or Elizabeth Holmes and her fraud at Theranos; Elon Musk and his ham-fisted handling of Twitter; or Sam Bankman-Fried and the implosion of FTX. 

If you want to audit the strength of your company’s governance program, start there: by looking for structures that funnel power rather than share it. If you want to strengthen your corporate culture, start nearby: with structures that can encourage people to bring bad news to the boss. If you’re a board director, start by hiring a CEO who has, above all, a sense of humility.

For his part, McMahon released a statement dismissing the whole mess as “minor accounting errors with regard to some personal payments that I made several years ago while I was CEO of WWE. I’m thrilled that I can now put all this behind me.”

I don’t think he gets it.

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