07 March 2017 by Karl George
Arrogant and complacent boards, that wilfully choose not to see what is wrong, are heading for trouble
Why is it that apparently successful boards comprised of experienced business professionals, can sometimes make bad decisions or fail to predict a looming catastrophe? With the benefit of hindsight many corporate failures of recent years had clear warning signs that should have been noticed by the board but were somehow missed.
Boards that display arrogance and complacency, that have blind spots or wilfully choose not to see what is wrong, are heading for trouble. Performance, process and compliance is only part of the solution and boards also need to exercise their collective intelligence and wisdom.
It seems the more successful an organisation is, and the more accomplished its board members are, the more difficult it is for them to accept they are capable of making mistakes. I describe such boards as ‘confidently wrong’. They are so sure that they are acting in the best interests of their organisation that they don’t even recognise that they could be wrong. They are suffering from cognitive dissonance.
“Boards that display arrogance and complacency are heading for trouble”
This occurs when their decisions and actions have negative consequences, but instead of accepting those consequences they attribute it to other factors and may make a bad situation worse by sticking doggedly to their original, flawed strategy.
One thing we know about bubbles is they burst – like the South Sea bubble, the dot-com bubble and the housing bubble. But it seems organisations still do not learn from these incidents? The reason is that they fail to recognise there are lessons to be learned and risk heading down a similar slippery slope.
The concept of boards being ‘confidently wrong’ can be broken down into three areas. The first is arrogance and the outcome of arrogance is groupthink. One characteristic is the tendency for boards to adopt a stubborn ‘that is how we do things here’ mentality.
The second is ignorance, which leads to blind spots. Being unaware of issues and risks is no excuse for a board’s failings.
The third characteristic is being adamant, the outcome of which is wilful blindness characterised by board members who find it difficult to change their opinions. They may turn a blind eye because acknowledging that things are going wrong and admitting failings seems too difficult.
Irving Janis describes groupthink as: ‘Members of a group striving for unanimity [who] override their motivation to realistically appraise alternative courses of action [leading to] a deterioration of mental efficiency, reality testing and moral judgements that results from in-group pressures.’
Boards susceptible to groupthink make bad decisions because collectively they try to conform rather than challenge. Janis identifies three types of groupthink. The first is overestimation of the group which is an illusion of invulnerability shared by almost all of the group. The board members are deluded because they believe the business is doing well, has always done well, and will always do well.
Type two is closed-mindedness, where the board rationalises past decisions rather than reconsidering any assumptions. They ignore information, underestimate competition, or get their position in the marketplace completely wrong, closing their minds to any alternatives.
The third and final type of groupthink is pressure towards conformity. This occurs when there is pressure from within the group, or from a skilled chair, to silence dissenting views or make those with dissenting views feel uncomfortable. This can be done by creating time pressures where, for instance, the chair may declare that there is no time for any further discussion on a specific agenda item.
We are all aware when driving that even using all the car’s mirrors there are still things which remain out of sight. In order to drive safely we sometimes have to move our heads to see what may be in our blind spot. In the boardroom we can become ignorant of what is going on if we fall foul of three types of blind spots.
The first one is when we do not see things that are coming. I believe boards should be like firefighters ready and waiting to respond when problems arise. They should be in a perpetual state of readiness and avoid complacency.
The second type of blind spot is a flawed way of thinking. One example of this is sector arrogance, where business bosses may rely on the way things are done in their sector and be satisfied, for example, with a certain level of customer satisfaction which is lower than the industry average in another field.
Customers and consumers expect the same level of service regardless of sector. Boards need to understand that all organisations operate in a global environment. Sector arrogance can allow your competition to overtake you.
“Board members need more than normal intelligence, they need to demonstrate collective intelligence”
Another example of flawed thinking is ‘cultural myopia’. People may be talking about your business or organisation in a negative way, perhaps criticising your treatment of employees or customers – but you think that if you are making money everything is all right and it’s not a problem.
The third type of blind spot is when board members try and manage rather than lead and direct the organisation. Boards that get themselves involved in operational detail and try to interfere with the role of the management team create many problems and leave the organisation without the appropriate leadership that the boards was put in place to deliver.
There is a real problem for boards when they are wilfully blind. Many executives in sectors involved in scandals must have had an inkling, but chose not to take assertive action. Were people wilfully blind about the Libor, housing market or emissions tests debacles?
There is a well-known biblical adage about people who ‘have eyes but do not see’. Wilful blindness is not about having blind spots. It is about seeing and ignoring, or seeing and not accepting what you are seeing.
Traditional governance models are good at enforcing compliance and performance standards. Boards appoint members who, on paper, have the required skills and experience. The board follows an agreed strategy and has risk plans in place. Beyond that, you need to move to the next level of governance understanding, which I call insight.
Board members need more than normal intelligence, they need to demonstrate collective intelligence. A board can be comprised of very intelligent people who when they come together become dysfunctional. In recent consumer and financial disasters the boards failed to head off the crisis because of a lack of intuitive governance.
Diversity on boards is about more than monitoring protected characteristics. It is about ensuring the right blend of professional skills, such as legal, marketing or financial expertise, but it is also about a diversity of experience. Bringing that collective intelligence together gives collective wisdom that is almost intuitive, taking us to a place where we can predict those dramatic and drastic failures, or react very quickly at the first sign of trouble.
Diversity of thinking comes from differences in styles of approach to decision-making or problem-solving, core disciplines, and diversity in relation to ethnicity, gender, age and background.
The Governance Forum’s governance framework has compliance and performance drivers as the key measures relating to governance and board behaviour. These cover the structures needed to run an organisation effectively, the composition and skills of the board, how the members perform, and how the board collectively executes its role. However, merely focusing on compliance and performance drivers will not identify boards that are confidently wrong.
Good governance is more than just achieving standards of compliance and performance. In order to anticipate the unpredictable, and to be able to manage disruptive influences, we need decision-making that is not formal, predictable and deliberate, but is more reflective.
Boards should be groups of individuals working together and relying on each other’s unique skills, experience and knowledge. They should use that collective intelligence to predict and evaluate disruptive risks and opportunities, to identify areas of growth and development, and to ensure the organisation is protected. By doing this, we move from oversight to foresight, from foresight to insight, from compliance to performance, and from performance to intuition.