Last month’s column described the dangers of “keeping up with the Joneses” and how businesses seeking to do so have suffered disastrous consequences. I mentioned two corollaries: the risk of blindly following supposed best practices, and of buying into “groupthink.” We explored the former risk in detail last month; this month I want to turn to the latter.
Earlier this year, Yale University economics professor Robert Shiller wrote about how panels of experts can still make colossal mistakes, and he pointed to the 1972 book “Groupthink” by Yale psychologist Irving Janis. The book, Shiller says, explains that people on panels constantly worry about their personal relevance and effectiveness, and believe that if they deviate too far from the consensus they won’t be taken seriously. They self-censor their personal doubts if they can’t express them in a way that conforms to the assumptions held by the group.
The Current Financial System Crisis
The Shiller piece focuses principally on how groupthink played a major role in allowing the current financial system crisis to come to pass. He noted how Former Fed Chairman Alan Greenspan acknowledged to Congress that he had been wrong in thinking the financial markets would properly self-regulate, with no idea that a financial disaster was about to occur. Perhaps most interesting, Greenspan contended that neither the Fed’s own models nor economic experts forecasted the crisis, implying at least to some that no one could possibly have predicted it.
That premise, however, contradicts many who indeed did warn of a bubble that soon would burst, Shiller among them. And we’ve seen other reports of how numerous prominent individuals sounded the alarm. Charles Bowsher, when U.S. comptroller general more than a decade ago, said: “The sudden failure or abrupt withdrawal from trading of any of these large U.S. dealers could cause liquidity problems in the markets and could also pose risks to others, including federally insured banks and the financial system as a whole.”
Several years later Booksley Born, chairwoman of the Commodities Futures Trading Commission, said unregulated derivatives trading “threaten our regulated markets or, indeed, our economy without any federal agency knowing about it.” She planned to take regulatory action until, reports say, Greenspan and other officials convinced Congress to freeze the CFTC’s regulatory authority.
And then the likes of Felix Rohatyn called derivatives “potential hydrogen bombs,” and Warren Buffett referred to them as “financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.”
Getting back to Shiller: He points to his membership on the economic advisory panel of the New York Federal Reserve Bank, where he felt the need to be restrained himself. “While I warned about the bubbles I believed were developing in the stock and housing markets, I did so very gently, and felt vulnerable expressing such quirky views. Deviating too far from consensus leaves one feeling potentially ostracized from the group, with the risk that one may be terminated.”
Groupthink in the Boardroom
Those of you who serve on boards of directors know well that the concept of groupthink can be all too real, and have a dramatic affect on individual and group behavior. I’ve seen first-hand how directors—especially those new to a particular board—often are extraordinarily cautious in expressing a viewpoint that differs from the positions of board members in leadership roles or who otherwise have gained greater stature.
New directors sometimes are told in orientation sessions that they would be wise not to speak for the first year of their tenure; rather, they should listen and get a feel for the dynamics of the boardroom. New directors are wise not to shoot off their mouths early on, certainly, but they are fiduciary equals at the table, and indeed have a responsibility to do their best to carry out their duty of care.
Truly successful boards avoid groupthink, allowing individual directors to express their thinking and make a case for alternative actions.
Beyond how newer directors operate is the central notion that when a consensus seems to be forming, groupthink can rear its head. Yes, there are time constraints and appropriate protocols in the boardroom. But critical issues need the benefit of healthy discussion and debate to ensure that different perspectives and positions are brought to bear.
Experience shows one of the ways a director can ensure his or her views are truly heard is by first having off-line conversations with other board members, to test positions and determine whether there would be support in the board room. At one time deemed inappropriate, such private discussions now are accepted as a positive way to engage fellow directors and ensure the board is positioned to consider ideas that might not immediately be seen as mainstream.
Truly successful boards avoid groupthink, allowing individual directors to express their thinking and make a case for alternative actions. Importantly, major issues are discussed over the course of several meetings so that all sides of an issue can be thoughtfully considered. This contrasts with some boards I’ve seen with extremely tight agendas, where key decisions were made quickly, leaving some directors frustrated and too often arriving at misguided decisions which came back to haunt and later needed to be undone.
Management Is Not Immune
For those of you in management roles: How often do you witness people whom you know have a divergent view, but who refrain from voicing their position? For example, I can recall a professional services firm manager who came out of meeting furious with the decision reached, but couldn’t explain why, despite the opportunity, he didn’t express his view in the group setting.
A particularly good example of groupthink occurred at a meeting with a major financial services company’s CEO and his direct reports. After brief discussion, the CEO presented his position and was ready to move on. Body language and other indicators, however, clearly suggested that at least some of the participants weren’t convinced that the stated position was best for the organization—but they didn’t feel sufficiently comfortable going against their boss. As an adviser, however, I was well-positioned to bring forth an opposing viewpoint. After pushing back on the initial position, explaining the ethics surrounding the issue and probable adverse consequences of going down the identified path, a long silence followed. Ultimately, the general counsel was first to speak in favor of a new course, with others and then the CEO coming to agreement on the new direction. Rejection of “groupthink” resulted in more thoughtful discussion and ultimately a successful conclusion.
Certainly, many Compliance Week readers are in positions where you must, and do, express contrary views. This holds for compliance officers, risk officers, audit executives and others, with typically little hesitation to say, “the emperor has no clothes” or point out dangers that need to be addressed. These individuals are trained to go upstream as necessary to find the right management (or board) level and speak out where appropriate. But my guess is that you, too, have seen too many instances where valid points that may well have helped shape a better business decision were simply left unspoken.
Yes, managers need to be “team players” and stand behind decisions once they are reached. The relevant issue here is whether the right forum exists to hear divergent views, so that good ideas can come forth before a final decision is reached.
Keeping Up With the Joneses
You’ll remember that last month’s column began with the notion that attempting to keep up with peers, while potentially driving healthy competition and positive results, can be extremely damaging. The corollaries of so-called “best practices” and “groupthink” also can be dangerous and contribute to bad decision-making and bad results. My hope is that we all keep these behavioral pitfalls in mind, and work towards effective interpersonal and group relationships, making decisions that contribute to building business success.
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