May 7, 2017

Every board needs a member of the awkward squad

For many companies, the greatest threat is not an external competitor, but lies within. All too often, organisations suffer from “insider capture” and groupthink — a clannishness that resists outside influence.

In theory, the concept of a very cohesive top team is attractive. A management team possessing loyalty, a single sense of purpose, genuine esprit de corps — these should be seen as powerful attributes. But if that consensus arises not through intelligent debate but via the suppression of alternative opinions, then mass delusion can become entrenched. The madness of the US debt and property bubble that led to the 2008 financial crisis could have come about only because many institutions — banks, housebuilders, investors, regulators — refused to listen to contrary views.

Generally, boards are insulated from the real business on the ground. Information is edited by the executive leadership to suit their preferred narrative, and thus the collective view is propagated by the papers distributed at board meetings. This can lead to doomed acquisitions, foolish product launches and obviously flawed strategies — all of which might have been exposed by rigorous argument in the first place.

Tyco was a huge, publicly traded conglomerate, with considerable resources and onerous governance expectations. Yet when the chief executive, Dennis Kozlowski, presented his board with his new employment contract — which stipulated “that a felony conviction would not be grounds for termination” — no one objected. Four years later, he was given a 25-year prison sentence for misappropriating hundreds of millions of dollars. The Tyco board was either asleep at the wheel or heavily compromised.

Possibly it suffered from “social loafing”, or the Ringelmann effect. This is the expectation that someone else on the board is asking the really difficult questions — so you don’t have to bother. Interestingly, sole non-executives exert more effort in fulfilling their duties of scrutiny and stewardship because they know that if they don’t interrogate the executives, then no one will.

Challenge and dispute are uncomfortable during board meetings; they disrupt the cordial, collegiate atmosphere that would typically prevail. But I think dissent is necessary if companies are to innovate and adapt, and cope with the uncertainties of modern technology and markets. This probably makes me Mr Awkward or Mr Sceptical on some company boards. I guess I can live with labels like these if it leads to better overall performance by the business.

External non-executives can bring useful perspective and diverse experience. Sometimes they can see the big picture in a way that full-time executives, possibly too close to the detail, cannot. According to the auto industry veteran Bob Lutz, the reason Volkswagen went wrong was management style. Ferdinand Piëch, the former chief of VW’s supervisory board, reigned over a culture of fear and intimidation. How did all the brilliant and well-rewarded board members at VW fail to know about emissions cheating at their company? So far the scandal has cost the business at least $20bn (£15.5bn), and seriously undermined consumer trust in the VW brand.

A rigid corporate hierarchy usually means insiders never criticise fellow insiders. Hence only independent and confident outsiders can act as devil’s advocates. Unfortunately, genuinely independent thinkers are seen as an unhelpful menace, so they rarely get appointed to boards. As the investor Warren Buffett put it: “Boards don’t look for dobermans; they look for cocker spaniels.” And while executives might initially disagree with the house view, they tend to become domesticated and comply over time — or are driven out.

The tyranny of the majority is as much a problem for corporate boards as it is for society. Even industries can be subject to unhealthy orthodoxy. Once upon a time, hedge funds were managed by mavericks; now those managers tend to be lookalike types from the same business schools and investment banks. When I chaired a pension fund and we interviewed various hedge funds, several disclosed their “secret” favourite stocks — yet these were the same stocks named by their competitors. The herd mentality had taken over.

Entrepreneurs are rebels who diverge from the norm, and the most successful are willing to tolerate in-house opposition; they realise that harmony is less important than finding the right answer. Of course any organisation must have co-operation to function effectively. But blind obedience and unquestioning belief in the status quo are dangerous tendencies; external talent is alienated, new ideas are rejected, and the illusion of invulnerability takes hold. Be it business, scientific research, politics or the media, thoughtful scepticism makes a vital contribution.