Invoking the spirit of 1978 – Article of the Week
Updated: Sep 30, 2018
ARTICLE BY: Marc Stigter | Published: 9 AUGUST 2018
The year, 1978, was the year in which the world never had it so good. We had the perfect balance of wealth, work and happiness, according to some Australian experts. They used a novel method to track the social and economic progress of the world, taking into account various economic, lifestyle-related and ecological factors to come to their conclusion.
Marc Stigter, Co-author – Boards That Dare: How to Future-proof Today’s Corporate Boards
Forty years ago, most of today’s board directors were in their twenties. Chances are they were listening to Rod Stewart’s number one single Do Ya Think I’m Sexy, Sony built its first prototype Walkman; the first online forum, the Computerised Bulletin Board System, went online in Chicago, with only one user, at a time being able to post a message; Sweden became the first nation to ban aerosol sprays, and Grease became the biggest grossing film. Another box-office hit that year was Superman, which included a scene where Jonathan Kent turned to young Clark and said: ‘But then a man gets older, and he starts thinking differently and things get very clear’. However, four decades after Kent senior offered that advice, the role of the board hasn’t evolved all that much, directors haven’t been thinking all that differently and governance hasn’t become all that clearer.
“CRAM THEM FULL OF NON-COMBUSTIBLE DATA, CHOCK THEM SO DAMNED FULL OF ‘FACTS’ THEY FEEL STUFFED, BUT ABSOLUTELY ‘BRILLIANT’ WITH INFORMATION. THEN THEY’LL FEEL THEY’RE THINKING, THEY’LL HAVE A SENSE OF MOTION WITHOUT MOVING”
By coincidence, 1978 was also the year that a paper was published in The Academy of Management Reviewtitled; The Evolving Board: A Look at the Board’s Changing Roles and Information Needs, by William Boulton. Amongst other things, Boulton called for directors to become more active in their directing role and more involved in realising longer-term growth. ‘Boardroom discussions move away from being mere reviews of past results to longer-range discussions concerning alternatives for the firm’s future business(es)’. He foresaw that such a changing role and involvement would bring increasing demands on directors for new types of information, particularly external insights. Back then, Boulton warned not only against information overload but urged boards to take control of their own information needs. ‘It is no longer adequate for directors to rely solely upon management to recommend the structure or determine the information requirements of the board’.
The case for future-proofing: Not only must Boards have a handle on current performance, they must future-proof but many Boards don’t because directors are hanging onto old practices/thinking, and are focused on minimising risk rather than seizing opportunities. The authors conclude that most Boards are not future proof, and many are dysfunctional. When big corporate scandals occur, it is legitimate to ask ‘Where was the Board?’. Boards play an enormous role in the organisation that has a wide-ranging impact on the organisation’s employees, stakeholders, and beyond. In a time of increasing transparency and activism, Boards need to raise their game. “The first step is for Boards to ensure they have the right attitudes and capabilities to position the company for the future. It all starts within.”
Based on our research, we found that directors agree that Boulton’s message is as relevant today as it was in 1978. Directors told us they still receive too much information and often too late. They struggle absorbing and analysing all information presented by management. They receive the information often only a few days in advance and are then snowed under. Information overload equals paralysis and subsequently equals inaction as American author, Ray Bradbury, observed: ‘Cram them full of non-combustible data, chock them so damned full of ‘facts’ they feel stuffed, but absolutely ‘brilliant’ with information. Then they’ll feel they’re thinking, they’ll have a sense of motion without moving. And they’ll be happy, because facts of that sort don’t change.’ Furthermore, board meetings are based on highly structured agendas and presentations, leaving little time for real dialogue and collective sense-making. The board therefore depends on management for their information and knowledge regarding key decisions as well as the ‘rationale’ behind those decisions. As a result, directors find it difficult to verify information, furnish multiple perspectives, and gather new insights from different sources. Not surprisingly, a recent survey of company directors reveals that half of them want to see improvement in the quality of management information. Or, as an independent director put it to us: ‘Getting the right information is fundamental to making informed decisions, if directors can reasonably be expected to act in the best long-term interests of the organisation’. This sentiment explains why more than 90 percent of directors today seek improvement in the board’s ability to test management’s underlying assumptions of the strategy, according to the latest survey findings of the National Association of Corporate Directors in the U.S.
We equally find that CEOs manage information disclosure to their boards very carefully, which can result in an information gap. This puts boards in an awkward situation. As the most powerful leaders of the organisation, boards are expected to make the most important decisions, yet directors are often not properly informed or are even misinformed. A board that doesn’t know lacks power, because information is knowledge, and knowledge is power. In our research for our book Boards That Dare, we found that an information gap often exists between the board and management. Academics call this information asymmetry or the imbalance that occurs because the CEO and management team have intimate knowledge of the business, whereas outside directors are unable to devote the amount of attention, nor have the deep expertise, required to match managers’ knowledge. We found that independent directors have fewer sources of information, potentially making it more difficult to gain the knowledge needed for them to evaluate, contribute, and add value. This knowledge imbalance is considered a risk because of the possibility of the CEO taking advantage of the board by blocking certain information. Information may flow along a narrow and CEO-controlled linear channel that effectively forecloses adverse information from getting to the board. Clearly, smart CEOs do not want to keep their boards in the dark. We do, however, observe some CEOs keeping information out of the hands of directors by instructing managers to ‘just leave it out’ of board papers and presentations. Even if a CEO doesn’t withhold information, we agree with academics who suggest that increased information asymmetry ‘might make outside directors more likely to accept the CEO’s judgment’. Needless to say, a CEO’s self-interested judgement, in particular, can be detrimental for boards and their companies.
In the year that the world never had it so good, and William Boulton was urging boards to take control of their own information needs, one of the most popular paradigms for studying reconstructive processes was developed by Elizabeth Loftus and her colleagues. It is called the misinformation paradigm. In their seminal 1978 study, participants were shown a series of slides, one of which featured a car stopping in front of a STOP sign. After viewing the slides, participants read a description of what they saw. Some of the participants were given descriptions that contained misinformation, which stated that the car stopped at a yield sign. Following the slides and the reading of the description, participants were tested on what they saw. The results revealed that participants who were exposed to such misinformation were more likely to report seeing a yield sign, than participants who were not misinformed. The point that we are making is that, theoretically, it is not too difficult to misinform and mislead directors, especially when a knowledge imbalance is already in existence, when confronted with large amounts of complexity, and when incorrect information is received after an event, which is often then incorporated into a director’s memory as ‘reality’.
Psychological and behavioural elements at work within a boardroom can too easily result in the blockage of information and knowledge. There is evidence that boards suffer from many of the same group decision-making biases as other work groups, and the infrequency with which some boards meet can make these dysfunctional group dynamics an even bigger issue. To start with there is the theory of ‘bounded rationality’ or the role of irrationality in decision-making due to directors’ unconscious emotions and motivations. Then there is ‘cognitive dissonance’ or the tendency for directors to seek consistency among their cognitions or beliefs and opinions. When directors feel there is an inconsistency between attitudes and perspectives, there could be a tendency to eliminate their dissonance or disagreement without delving deeper into the different opinions around the board table. This often happens as part of ‘human motivation theory’, which asserts that it is psychologically uncomfortable for people to hold contradictory views and perspectives. Closely linked is ‘conformity bias’ or the tendency for directors to behave similarly to other board members rather than using their own personal and independent judgements. Besides the tendency to behave similarly there could be a closely linked tendency to think similarly or engage in ‘groupthink’. Groupthink requires directors to avoid raising controversial issues or alternative solutions, resulting in a loss of individual creativity, uniqueness and independent thinking. This leads to an irrational or dysfunctional decision-making outcome. Another related element in the boardroom could be ‘motivated reasoning’, which leads directors to focus on confirming what they already believe, while ignoring contrary data. It also drives directors to develop elaborate rationalisations to justify holding beliefs that logic and evidence have shown to be wrong. Through motivated reasoning, directors often respond defensively to contrary evidence, actively discrediting such evidence or its source without logical or evidentiary justification. Clearly, motivated reasoning is emotion driven and often self-delusional. Finally, the problem of ‘over-optimism’ could exist or the tendency for directors to overrate perceived ‘opportunities’ and underrate associated risks and abilities.