Clearly, faulty strategic assumptions led to many of the business failures we’ve seen in recent year. But, the wrenching business scandals that have had such a negative impact on investor confidence were caused primarily by lapses in judgment about human nature, faulty assumptions about incentives and internal controls, and a failure to plan for such contingencies. In the subsequent catastrophes, innocent subordinates and superiors were often pulled into the whirlpool and their careers destroyed along with those of the people who actually perpetrated the illegal behavior.

In response, a new trend is emerging in which the board of directors and CEO set up mechanisms to prevent problems from occurring and provide for "plausible deniability" when they occur in spite of the best intentions.

Let's examine the facts behind this trend and its implications.

CEOs and CFOs are being put on the hook by recent calls for corporate reform in the wake of the Enron debacle and similar scandals. The Sarbanes-Oxley Act in particular poses a real threat to top executives, unless they can be certain everything within the huge enterprises they head is being done honestly.

In "The Myth of CEO Accountability" in the March/April 2003 issue of Across the Board, Peter Lilienthal points out that a CEO complying with the SEC's demand that he personally certify his financial reporting could potentially go to jail if a single rogue employee is caught cooking the books.

Susan Keating, who had to resign from Allfirst Financial in Baltimore, was forced out when a foreign currency trader made off with $691 million. There was never any reason to suspect that Keating knew about it beforehand, and Allfirst had always maintained proper auditing reports. If she had signed the SEC document, she might be facing criminal charges, today. On the other hand, a CEO who refuses the SEC order could face sanctions or the loss of his or her job. What's a CEO to do?

Lilienthal proposes a five-step approach that we believe is representative of a trend toward preventing problems and building the CEO's case for "plausible deniability," in the event that a rogue employee is on board and undetectable.

Step 1: Create the position of Chief Accountability Officer or CAO. The job description should say that he or she is "responsible for assuring that the...