Board’s Cognitive State and ERM Capability

“Group thinking” or lack of courage to ask the tough and strategic questions Is the chief weakness of boards today” – Pearl Zhu.

“That which the team does not want to discuss, it most needs to discuss” – Paul Gibbons.

A baffling thing sadly noted is that apparently successful boards comprised of experienced professionals, can sometimes make very bad decisions or fail to envision a looming catastrophe. With the advantage of hindsight, many company failures of our present age had an undarkened warning signs that should have been noticed by the board of directors but were in some measure missed.

Boards that display arrogance and complacency and self-congratulation, that have blind spots or with a stubborn and determined intention choose not to see what is wrong head for trouble. Performance, process and compliance is only a part of the whole solution and a board is expected to exercise its collective intelligence and wisdom.

“Such a board is suffering from cognitive dissonance, a psychological conflict resulting from incongruous beliefs and attitudes held simultaneously”.

It appears the more successful a company is, and the more accomplished its board members are, the harder it is for it to accept they are capable of making mistakes. Such a board could rightly be described as confidently wrong. A board of such a mindset is so sure that it is acting in the best interests of the company that it does not appreciate the fact that it could be wrong. Such a board is suffering from cognitive dissonance, a psychological conflict resulting from incongruous beliefs and attitudes held at the same time.

This occurs when the boards’ decision and deeds have negative ramifications, but instead of accepting those consequences, the board ascribes it to other factors and may make a manageable situation worse by behaving in a manner that shows tenacity and grim persistence to its original, blemished and unsound strategy.

The idea that of the board being confidently wrong and indeed being sincerely wrong can be broken down threefold.

“The board may turn a blind eye because acknowledging that things are going wrong and admitting mistakes and failings appear too difficult and perhaps below the dignity of the corporate collegium”

The first thing is arrogance and the outcome of is groupthink. This one attribute is the tendency for a board to adopt a stubborn stance “that is how we do things here” mentality. The second is ignorance, which leads to blind spots, an area where the board’s view is obstructed. Being unaware and unenlightened of issues and risks cannot be condoned for board failings.

The third characteristic is the state of being adamant and inflexible. The outcome which is clear from this disposition and inclination is the willful blindness characterized by board members who find it hard to rethink and change their point of view. The board may turn a blind eye because acknowledging that things going wrong and admitting mistakes and failings appears too difficult and perhaps below the dignity of the corporate collegium.

What is very vivid in such a board is the toxic combination of arrogance and ignorance. The marriage of these two business adversaries is lethal.

“A board of directors susceptible to groupthink makes bad decisions because collectively board members strive to conform rather than challenge”.

Groupthink refers to members of the group striving for unanimity who override their incentive to realistically appraise alternative courses of action, leading to a deterioration of mental efficiency, reality testing and moral judgements that results from pressures within. This psychological phenomenon occurs within a group of people in which the desire for harmony or conformity in a group results in an irrational or dysfunctional decision-making outcome.

Group members try to minimize conflict and reach a consensus decision without critical evaluation of alternative viewpoints by actively suppressing dissenting viewpoints, and by isolating themselves from outside influence. Groupthink is enough to cloud the minds of the group and is inimical to the natural ability to exercise freewill and remain singular.

According to Janis, the symptoms of groupthink include the following:

• Illusion of invulnerability: This creates excessive optimism that encourages taking extreme risks.
• Collective rationalization: Members discounts warnings and do not reconsider their assumptions.
• Belief in inherent morality: Members believe in the rightness of their cause and therefore ignore the ethical or moral consequences of their decisions.
• Stereotyped views of out-groups: negative views of “enemy” make effective responses to conflict seem unnecessary.
• Direct pressure on dissenters: Members are under pressure not to express arguments against any of the group’s views.
• Self-censorship: Doubts and deviations from the perceived group consensus are not expressed.
• Illusion of unanimity: The majority view and judgements are assumed to be unanimous.
• Self-appointed “mindguards”: Members protect the group and the leader from information that is problematic or contradictory to the group’s cohesiveness, view or decision.

There is a story of a skier who was mesmerized by the heart- pounding story of other skiers caught in an avalanche. He was struck by the fact that these highly skilled and experienced skiers eagerly joined in some out-of-bound skiing during extreme avalanche –prone conditions. They knew better, but they all went anyway. What an example of groupthink! Very sadly, three of them lost their lives in the inevitable avalanche. So, it is with many boards.

The desire for harmony or conformity is so strong that at times no one director would dare say, “Wait a minute, this may not be a good idea”. This happens so often in the boardrooms.

A board of directors susceptible to groupthink makes bad decisions because collectively board members strive to conform rather than challenge. This is a conform rather than challenge philosophy of the board. Groupthink can be looked at from three distinct perspectives.

The first is the overestimation of the group (the board) which is an illusion of invulnerability, that it is impossible for the board to damage, injure, or wound, shared by almost the whole group, the board. Here, board members are deceived because they believe that the business is doing well, has always done well, and will always do well.

The second form of groupthink is closed-mindedness. This is where the board rationalizes past decisions rather than reconsidering any assumptions which informed its past decisions and courses of action. The board ignores information, underestimates competition, or may get its view of the marketplace wrong. The board clings to a wrongful past decision, completely wrong, closing its mind to any viable and feasible alternatives.

“This culture is malignant and works in favor of autocrats and in the worst case mediocre who happen to have found their way to the top”.

The third and final type of groupthink is the pressure towards conformity. This situation occurs when there is pressure from within the board, or from a skilled and adroit chairman, to silence dissenting views or make those with dissenting views feel uncomfortable. This can be achieved by creating time pressure where, for example, the chair may declare that there is no time for any further discussion on a specific agenda item.

The harmful side of this culture, which is indeed as contagious as it is destructive, is cascaded downwards the ranks of the company by the Chief Executive Officer who may use the same venom to sting dissenting views in the management team and even further down to the marzipan layer. This culture is malignant and works in favor of autocrats and in the worst case mediocre who happen to have found their way to the top.

Every trained and licensed driver is aware that while driving, even using all the car’s mirrors, there are still things which remain out of visual perception. In order to drive safely, a driver has to sometimes move his head to see what may be in his blind spot. In the boardroom, directors can become ignorant of what is going on if it falls foul of three categories of blind spots.

The first one is when the board does not see things that are coming. It is principally believed that the board should be like fire fighters ready and waiting to respond when problems arise. The board should be in a perpetual state of vigilance and readiness and avoid complacency. Unfortunately, when this does not happen, the board irresponsibly vacates the sentry box, then the company falls prey to all sorts of invaders and attackers as reflected in weak risk management or susceptible to being devoured by ferocious and violent animals as a result of feeble internal control systems because of a weakened and ineffective line of defense.

“People outside of the company may be talking about it or the business in a negative way, perhaps criticizing the treatment of employees or customers but the board and even the management may reason and think that as long as the company is making money everything is all right and it is not a problem”.

The second type of blind spot is a flawed way of thinking. One of this is sector ignorance, where directors 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 sector. Customers and consumers expect the same level of service regardless of the sector. A board needs to understand that the company operates in a global environment and sector arrogance can allow competition to overtake the company.

Another instance of flawed thinking is “cultural myopia”. People outside of the company may be talking about the business in a negative way, perhaps criticizing the treatment of employees or customers but the board and even the management may reason and think that as long as the company is making money everything is all right and it is not a problem.

The third type of blind spot is when board members try and manage rather than lead and direct the company. A board that gets itself involved in operational details and try to interfere with the role of management team creates many problems and leaves the company without appropriate leadership that the board was put in place to offer. This is a kind of a board that would spend a considerable amount of time discussing operational matters more and less and less on strategic direction of the company.

There is a serious problem for a board when it is willfully blind. Many officers and executives in companies involved in scandals must have had a hint, a slight knowledge or suspicion, but opted not to take assertive action. There is a well-known adage in the holy book, the bible, about people who “have eyes but do not see”. Willful blindness is not about having blind spots, it is about seeing and ignoring, or seeing and not accepting what one is seeing.

A board that has not developed the habit of looking at whatever happens through a positive mindset instead of a negative one is a defeatist board. A board should be happier and more peaceful with foresight and actively seeking for means of mitigation rather than fighting to resist reality. It should not be infested with the “It won’t happen to us syndrome”.

“Members of the board need more than normal intelligence, they need to demonstrate collective intelligence. If this does not happen, then for certain, the company is heading towards perdition”.

Conventional governance frameworks are good at enforcing compliance and performance standards. A board selects and appoints members who, on paper, have the required skills and experience. The board pursues an agreed strategy and has a risk plan in place. Beyond that, the board is required to move to the next level of governance understanding, which is called insight.

Members of the board need more than normal intelligence, they need to demonstrate collective intelligence. If this does not happen, then for certain, the company is heading towards perdition. This is obviously a terrible fate for the company and the board never constituted for the purpose of being “a prophet of doom” but of “prosperity”. The board is expected to conduct itself proactively guided and moved by a risk based strategic impression.

“There is to be a considered consensus and not groupthink in the boardroom. This consensus must be brokered by unity of a singular purpose, to make risk-based decisions and options in order that long-term value should be created”.

The board can be comprised of very intelligent people who when they come together become dysfunctional. In the recent consumer and financial disasters, the boards failed to advance off the crisis because of a lack of intuitive governance, a governance based on feelings rather than facts or proof.

Diversity on the board 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 also about diversity of experience in order to harness collective intelligence. Bringing that collective intelligence together gives collective wisdom that is almost intuitive, taking the board to a place where it can foresee those dramatic and drastic failures, or take actions as soon as the first sign of trouble is seen.

Once the board acts and behaves in this manner, it moves away from oversight to foresight, from foresight to insight, from compliance to performance, and from performance to intuition.

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, a board needs decision making that is not formal, predictable and deliberate, but more reflective. A board should be a group of individuals working together and relying on each other’s skills, experience, and knowledge. It should use that collective intelligence to predict and evaluate risks and opportunities, to identify areas of growth and development, and to ensure the company is protected.

In order for the board to avoid corporate failures and scandals that have tainted the business world, the board must purpose to overcome and wage a decisive battle against groupthink which has the tendency to end up with a complacent leadership which is again characterized by relaxation, upbeat, and contentment. Complacency is dangerously contagious in the company once it permeates the lower ranks if the tone is set at the top.

Board members should be unified by none other than the mission, vision, core values, and the strategic direction of the company in order to create long term shareholder and stakeholder value. This is a noble calling for any director to which each director owes a duty of care, allegiance and to which a director is personally liable. This liability calls for exercise of independent judgement.

There is to be a considered consensus and not groupthink in the boardroom. This consensus must be brokered by unity of a singular purpose, to make risk-based decisions and options in order that long-term value should be created.

Amani Mbuja Tuntufye, ERMCP, CERG

References

1. Corporate Finance Institute, “Groupthink”: Suboptimal decisions made by a group due to social pressure. Article visited on 08/03/2019.
2. David Houghton: “Understanding Groupthink: The case of operation of Market Garden (2015).
3. Financial Reporting Council, “Guidance on Board Effectiveness” July 2018.
4. ICSA(The Governance Institute), “ Confidently Wrong”. An article published in the Institute’s Journal, March 2017.
5. Irving Janis, “Groupthink”: A Psychological Study of Foreign Policy Decisions and Fiascoes (Boston: Houghton Maffin 1982.
6. Jeffrey L. Coles et al, Board Groupthink”, March 2015.