A Columbia Business School professor says boards avoid addressing CEOs, which is problematic. Here’s why and how they can overcome it.
A Columbia Business School professor says boards avoid addressing CEOs, which is problematic. Here's why and how they can overcome it.
How Boards Can Break Free from Groupthink and Improve Decision-Making
In the world of corporate governance, the role of boards of directors is paramount. These boards are responsible for overseeing the strategic decisions of companies and ensuring that they are in the best interest of shareholders. However, according to Professor Shiva Rajgopal, many boards are failing in their duties and are suffering from a phenomenon known as groupthink. This stifles dissenting opinions and can lead to poor decision-making.
One recent example of a board failing to fulfill its responsibilities is the proxy fight at Illumina, the world’s largest maker of genomic sequencing machines. Billionaire activist investor Carl Icahn won the battle, accusing the board of failing to prevent the former CEO from making disastrous decisions. This case highlights the need for boards to scrutinize management decisions more closely and hold executives accountable.
Rajgopal argues that there are numerous large companies whose boards deserve the Icahn treatment for their failure to prevent even basic transgressions that ultimately harm investor returns. Boards often succumb to groupthink, avoiding constructive confrontation with CEOs and allowing them to push through projects and strategies without sufficient scrutiny.
To address this issue, boards need to introduce more productive confrontation into their decision-making processes. Rajgopal suggests that companies should reconsider their board recruitment practices. Instead of seeking conflict-averse individuals, boards should value directors who are willing to challenge prevailing opinions and offer alternative viewpoints.
Another strategy to counter groupthink is to designate a “rock thrower” on the board. This director would be officially responsible for questioning decisions, bringing complaints, and challenging the status quo. This role would encourage dissent and promote a more robust decision-making process.
- Saudi Arabia has the world’s most profitable company and $3.2...
- Tech worker’s LinkedIn post listing past and current salaries...
- BP increases dividends and stock buyback to maintain shareholder sa...
Rajgopal goes even further, proposing that boards invite activists or short-sellers to present their perspectives and criticisms. This outside perspective can provide valuable insights that board members might miss due to their tendency to think alike. While Rajgopal admits that this idea hasn’t been embraced by board members yet, it offers a unique opportunity for boards to break free from the echo chamber and gain fresh perspectives.
Recent surveys support Rajgopal’s observations. The Conference Board reported that only 33% of C-suite leaders felt that their directors asked probing questions. Another study by PwC found that 19% of board members felt their fellow directors weren’t standing up to management often enough. These findings underline the urgent need to address the issue of groupthink at the board level.
To encourage a more confrontational culture, boards can take actionable steps. Some directors already bring negative analyst reports about their company to board meetings to stimulate discussion. Rajgopal suggests going further and involving activists or short-sellers in board presentations, allowing for vigorous interrogation of the company’s strategies and decisions.
While breaking free from groupthink and promoting confrontation within boards may require a cultural shift, it is crucial for companies to improve their decision-making processes. CEOs need to be held to account, and boards should be the gatekeepers of shareholders’ interests. By embracing dissenting voices, challenging prevailing opinions, and seeking external perspectives, boards can fulfill their role more effectively and ensure the long-term success of the companies they oversee.
Noted
Wall Street Journal reporter Miles Kruppa highlighted the return of Sergey Brin, cofounder and board member of Alphabet, and its positive impact on the company’s culture. Brin’s presence encourages and challenges A.I. researchers, acting as a catalyst for innovation within the company.
On the Agenda
- The Securities and Exchange Commission dropped the requirement for boards to disclose their cybersecurity expertise. Although the National Association of Corporate Directors applauded the decision, it raises questions about the effectiveness of risk management and the role of boards in addressing cybersecurity concerns.
- Jonathan Kanter, assistant attorney general for the Department of Justice’s antitrust division, discussed the Biden administration’s approach to antitrust enforcement on Bloomberg’s Odd Lots podcast. The definition of “anticompetitive” has evolved, impacting M&A laws.
- A study by researchers at Georgetown University found that investors today hold directors accountable for a wider range of issues, such as climate change and board diversity. This highlights the increasing responsibilities boards face and the need for better governance practices.
In Brief
- Richard Dickson, operations chief and president at Mattel, is set to become the CEO of Gap Inc. While Dickson’s experience in transforming the Barbie brand makes him a strong candidate, he faces significant challenges in turning around the struggling clothing giant.
- McKinsey Global Institute’s report reveals that women are more likely than men to face job displacement as generative A.I. replaces human workers in office support and customer service roles.
- Boards are seeking corporate lawyers with compliance expertise to navigate the complexities of antitrust regulations and disclosure requirements, leading to a “golden age” for lawyers seeking corporate board seats.
- The European Commission’s adoption of European Sustainability Reporting Standards introduces new climate disclosure rules for 50,000 EU companies. However, some investors argue that the requirements lack sufficient rigor and allow companies to decide what to disclose.
The Long Read
Substance-use disorders pose significant challenges for companies. Founder and CEO of Chameleon Group, Dana Lariviere, emphasizes the importance of recognizing and supporting employees with addiction issues. Recovery-friendly workplaces, which actively address substance-use disorders, can lead to improved productivity, reduced absenteeism, and lower healthcare costs.
Erika Fry’s ANBLE magazine feature provides a cheat sheet of best practices for companies aiming to become more recovery-friendly. Education, debunking myths, and offering multiple support resources are key strategies for creating an inclusive and supportive work environment.
Author: Lila MacLellan Contact: [email protected] Twitter: @lilamaclellan
