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Reputability LLP are pioneers and leaders globally in the field of reputational risk and its root causes, behavioural risk and organisational risk. We help business leaders to find these widespread but hidden risks that regularly cause reputational disasters. We also teach leaders and risk teams about these risks. Here are our thoughts, and the thoughts of our guest bloggers, on some recent stories which have captured our attention. We are always interested to know what you think too.

Wednesday, 23 September 2015

First Lessons from Volkswagen

Volkswagen, scion of German industry, has fallen off its pedestal after revelations that up to 11 million of its diesel cars were fitted with software designed to deceive regulators about levels of toxic NOx emissions. 

It all began to unravel last in May 2014 when Virginia University's Center for Alternative Fuels, Engines & Emissions (CAFFE) discovered that NOx emissions from two of three diesel-powered cars it was testing produced between 5 and 35 times more than the official emissions standard, though in laboratory conditions they complied.  This was the first whiff of rat.

According to a Californian Air Resources Board (CARB) letter of 18 September, CARB took up the case and pursued investigations.  Discussions ensued with VW, who solemnly carried out tests and provided fixes, which did not work when CARB tested them.

As CARB relates in its letter, on 3 September, after a year's prevarication, VW confessed.  As the world now knows, large numbers of VW's diesel-powered motor cars were "designed and manufactured with a defeat device to bypass, defeat or render inoperative elements of the vehicle's emission control system" whilst meeting official testing procedures.

When the news became public, on 18 September, it was met with a mixture of incredulity and a drop in the VW share price of about 25%.  After defending an almost indefensible position for almost five days, VW's Chief Executive Martin Winterkornstood resigned.   Some began asking whether VW would survive.

Beyond VW there was collateral damage.  The share prices of other car makers dropped, though less than VW's.  A discussion began as to whether diesel technology, held responsible for large scale health problems, was a wrong turning that should be abandoned.  And questions were asked whether, after a long string of governance failures in Germany, German industry was really the paragon represented by its good reputation

But the intriguing question is: why did this happen?

We do not yet know what happened but it is not unknown for major corporate scandals to have their genesis in the board room.  Think of the Olympus and Toshiba scandals.  That said there is no evidence of active boardroom involvement and Mr Winterkornstood's protestations of surprise imply that he first learned of the problem very late in the day.  But the composition of the supervisory board, which does not seem to have been chosen with skill sets as its primary concern, has echos of the boards at Airbus at the time of the A380 crisis and at the UK's Co-operative Group when it almost collapsed.

If that is so, he must have been in the dark, unaware of what seems to have been a piece of deliberate skulduggery going on under his nose - but without his knowledge.

This sadly is a very common state of affairs.  We call it the Unknown Knowns problem.  There are things that leaders would dearly love to know - but they cannot find out until it is too late.

The most telling example is that there have been at least 14 rogue traders, averaging one every eighteen months, since Nick Leeson broke Barings in 1995: most recently the London Whale, who breached in 2012.  JP Morgan sustained losses of $6 billion on positions said to amount to about $160 billion.  All the rogue traders operated in an environment where risk teams are huge: JP Morgan's risk team ran to thousands but they didn't spot the Whale; nor did the astute Jamie Dimon - until an even more astute hedge fund began to trade on his misfortunes.

What seems to happen is that some combination of character, culture, leadership, targets, incentives, corner-cutting, complexity, groupthink - and the slippery slope from gently bending rules to breaking them - leads an individual or team to start doing something that, as Warren Buffett put it, you "wouldn't be happy to have written about on the front page of a national newspaper in an article written by an unfriendly but intelligent reporter."  It doesn't help if regulators are not robustly independent.

Once the wrongdoing has begun, it is very hard for participants to confess - doing so will probably lead to unpleasant sanctions - so it continues.  The hole gets deeper.

The wrongdoing is rarely known just to the participants.  Others usually know, but are unwilling to rock the boat.  This may be because the wrongdoer has higher status; or it may be because they are in the same 'tribe', but as time passes unwillingness becomes tacit complicity.  Many may know things are wrong but they won't tell anyone outside the team.

There may be a potential whistle blower; but anyone who researches whistle blowing as an activity will discover that it is commonly terminal if not merely frustrating.  It takes courage and determination to blow the whistle; and it takes an exceptional leader to listen and understand what a whistle blower is alleging with an open mind.

This is one of the ways in which leaders find themselves in the dark.  Breaking this silence is difficult.  It takes an insider-outsider, as anthropologists term it, armed with trustworthiness, skill and understanding of human behaviour to learn what insiders think and know but won't tell.   A sensitive investigation should uncover the root cause behavioural and organisational risks that lead to Unknown Knowns so that leaders can fix at least the root causes before they can cause more harm. 

An investigation may even uncover things you wouldn't be happy to have written about on the front page of a national newspaper.  If so, you should listen and learn; and be deeply grateful for the opportunity to deal with them before they blow up and destroy your personal reputation as well as that of your organisation.

Anthony Fitzsimmons
Reputabilty LLP

Monday, 21 September 2015

The Silo Effect

Like our primate forebears, we humans have long organised ourselves into social groups and it is only natural that we form teams at work too.  Trust, a common purpose, shared culture and social norms are likely to develop within the family, tribe, group or team, along with a sense of identity that defines who is an insider and who is not.

As organisations grow so do teams.  The work of Robin Dunbar, an evolutionary psychologist and anthropologist suggests trouble starts as group size extends beyond about 150.  As teams grow and multiply, so do team identities and purposes.  Those in one team can easily come to see those in another as outsiders and rivals.  Cooperation becomes more difficult as their interests increasingly conflict.

When we examine the entrails of crises, persistently asking the question “why?” we often find that the root causes were well known at mid-levels of the company.  Sometimes the actual crisis was predictable, even predicted, from what one individual knew – but for a variety of reasons no message arrived in the consciousness of someone sufficiently senior to take action.   Frequently, key information known at mid-levels was spread among individuals who did not share it - so the information was never joined up. We have dubbed this the 'Unknown Knowns' problem.

We analyse causes of failure such as these by reference to factors such as culture, incentives, structural silos and the resulting non-communication of information.  Risk, psychology and sociology inform the analysis, but we have long suspected that anthropologists could enrich the analytical framework – if only they were interested in the business world. 

As a postgraduate level anthropologist turned FT journalist, some of Gillian Tett’s most perceptive writing has taken an anthropological look at business life.  Her latest book, ‘The Silo Effect’, explicitly brings her anthropological training to bear on it.  As you would expect of an experienced journalist, it is engagingly written.

Tett begins by introducing anthropology and summarises a few core anthropological insights.  Three are crucial:
  • Human groups develop ways of classifying and expressing thoughts, and these become embedded in their ways of thinking;
  • These  patterns help to entrench patterns of behaviour, often in a way that reinforces the status quo;
  • These mental maps are partly recognised by group members but some parts are subliminal whilst others are ignored because they are thought “dull, taboo, obvious or impolite”, leaving some subjects beyond discussion.
These three explain much about how silos work and provide a useful additional perspective. They also imply an important corollary: it is in practice impossible for an insider to gain a reliable view of the world in which insiders live.  Only an outsider can achieve the necessary detachment to see ‘inside’ life as it truly is. 

But the outsider typically lacks crucial information that is available to an insider.  Tett describes how anthropologists attempt to become ‘insider-outsiders’ with access to inside information whilst retaining the relative objectivity of the outsider.   It is no accident that our methodology has much in common with what she describes.  We face the same challenges: except that we also aim to help insiders to understand what outsiders can see when given access to insiders’ knowledge.

The balance of the book consists of case studies, written in Tett’s usual lucid style.  Two of her studies of failure are built on her extensive knowledge of the financial crash of Noughties.  She dissects how UBS, the Bank of England and the host of financial market regulators, experts and economists managed not to see the crash coming.  A third tells how Sony, then a world-leader, reorganised itself into a series of separate business units, each with its own objectives.  By creating what became silos, Sony lost internal cooperation and its way.

Tett tentatively develops her theme to suggest an anthropological approach to mastering silos, from the outside as well as from within.  She begins by describing how, with advice from Robin Dunbar, Facebook has set out to build structural bridges of friendship and trust between what might become silos; and a culture that encourages experiments and cooperation across what might be frontiers in a culture that treats mistakes as opportunities to learn. 

Tett’s second, contrasting tale tackles breaking down long-established silos. Her story concerns one of the most tribally structured professions: medicine.  Structured around disciplines, there is a wasteful temptation for every doctor to try to apply their particular skill to your symptoms rather than beginning with an objective diagnosis and only then prescribing treatment perhaps by another doctor.  Tett tells how a perceptive question led Toby Cosgrove, CEO of Ohio’s Cleveland Clinic to question and dismantle the Clinic's disciplinary silos to deliver care centred on the patient’s need for a dispassionate diagnosis before prescribing the most appropriate treatment. 

But for me, Tett’s third tale was the most telling.  She relates how a detached but interested outsider, a hedge fund, was able to deduce that JP Morgan’s Chief Investment Office was placing huge bets on credit derivatives – at a time when JP Morgan’s leaders and risk team were completely ignorant of what was going on under their noses, let alone the scale.  The hedge fund, BlueMountain, profited from the insight when the London Whale breached.  The episode cost JP Morgan more than $6 billion in losses on a series of holdings with a value Tett estimates at approaching $160 billion.

This story resonates with our experience.  We regularly find that external analysis can identify organisations that seem blithely to be living on the edge of a cliff.  As with real cliffs, it is rarely possible to predict when they will fail.  But it is possible to predict why and with what consequences they will fail.

Leaders who seek what can be an uncomfortable foresight will usually have time to deal with the issues and avoid disgrace since consequences usually take time to emerge.

Astute long term investors can use such insights to avoid or improve vulnerable investments.  And in those rare cases where the timing seems imminent, there may be opportunities to profit from another’s risk blindness.

Anthony Fitzsimmons
Reputability LLP

Sunday, 13 September 2015

Admitting Mistakes Shows Intelligence

We are delighted that Professor John Kay has allowed us to reprint this column, on how admitting to doubts and mistakes shows intelligence and good leadership, not stupidity.  

When I was much younger and editing an economics journal, I published an article by a distinguished professor — more distinguished, perhaps, for his policy pronouncements than his scholarship. At a late stage, I grew suspicious of some of the numbers in one of his tables and, on making my own calculations, found they were wrong. I rang him. Without apology, he suggested I insert the correct data. Did he, I tentatively enquired, wish to review the text and its conclusions in light of these corrections, or at least to see the amended table? No, he responded briskly.

The incident shocked me then: but I am wiser now. I have read some of the literature on confirmation bias: the tendency we all have to interpret evidence, whatever its nature, as demonstrating the validity of the views we already hold. And I have learnt that such bias is almost as common in academia as among the viewers of Fox News: the work of John Ioannidis has shown how few scientific studies can be replicated successfully. In my inexperience, I had foolishly attempted such replication before the article was published.

It is generally possible to predict what people will think about abortion from what they think about climate change, and vice versa; and those who are concerned about wealth inequality tend to favour gun control, while those who are not, do not. Why, since these seem wholly unrelated issues, should this be so? Opinions seem to be based more and more on what team you belong to and less and less on your assessment of facts.

But there are still some who valiantly struggle to form their own opinions on the basis of evidence. John Maynard Keynes is often quoted as saying: “When the facts change, I change my mind. What do you do, sir?” This seems a rather minimal standard of intellectual honesty, even if one no longer widely aspired to. As with many remarks attributed to the British economist, however, it does not appear to be what he actually said: the original source is Paul Samuelson (an American Nobel laureate, who cannot himself have heard it) and the reported remark is: “When my information changes, I alter my conclusions.”

There is a subtle, but important, difference between “the facts” and “my information”. The former refers to some objective change that is, or should be, apparent to all: the latter to the speaker’s knowledge of relevant facts. It requires greater intellectual magnanimity to acknowledge that additional information might imply a different conclusion to the same problem, than it does to acknowledge that different problems have different solutions.

But Keynes might have done better to say: “Even when the facts don’t change, I (sometimes) change my mind.” The history of his evolving thought reveals that, with the self-confidence appropriate to his polymathic intellect, he evidently felt no shame in doing so. As he really did say (in his obituary of another great economist, Alfred Marshall, whom he suggests was reluctant to acknowledge error): “There is no harm in being sometimes wrong — especially if one is promptly found out.”

To admit doubt, to recognise that one may sometimes be wrong, is a mark not of stupidity but of intelligence. A higher form of intellectual achievement still is that described by F Scott Fitzgerald: “The test of a first-rate intelligence,” he wrote, “is the ability to hold two op­posed ideas in the mind at the same time and still retain the ability to function.”

The capacity to act while recognising the limits of one’s knowledge is an essential, but rare, characteristic of the effective political or business leader. “Some people are more certain of everything than I am of anything,” wrote former US Treasury secretary (and Goldman Sachs and Citigroup executive) Robert Rubin. We can imagine which politicians he meant.

First published in the Financial Times.
© John Kay 2015 http://www.johnkay.com

Monday, 27 July 2015

Shareholders and Short-termism

Are shareholders responsible for slowing corporate growth?

Andy Haldene is bothered that as dividends have risen, profits retained by quoted companies for reinvestment have fallen from 90% in 1970 to about 35% today, leaving firms with far less money for growth-boosting invetment and risking "eating themselves".  This is bad for the long term health of UK Plc.

As Terry Smith lucidly explained in a recent FT article, a firm with a 20% return on capital that reinvests 100% of profits will grow by about 4000% over 20 years.  If the same firm reinvests only 10%, its 20 year, growth will not even reach 1000% over the period.  This matters to long term investors such as the many saving for a pension in 20 to 40 years.  It also matters to governments since a growing economy means more money to spend without increasing tax rates.

It is a subject that Anthony Hilton raised in 2012.  He aired Andrew Smithers' concern that the 'craze' for trying to align CEOs' incentives with their company's interests by paying 'massive' bonuses linked to measures like earnings per share and return on equity gives CEOs corresponding incentives to cook the books by using share buy-backs as a quick-and-easy way to improve earnings per share.  Reinvesting earnings to promote longer term growth takes time to produce results and tends to depress share prices in the short term.  So CEOs with short term bonus schemes (and in this context three to five years is short term) are systematically tempted to shun what is better for the long term good of the company in favour of the short term good of their wallets.

You might think that boards are to blame for this.  After all, they design and set bonus systems with 'long-term' targets including relatively short-term returns on equity.  This despite (in the UK) the Corporate Governance Code, whose opening words are:
"The purpose of corporate governance is to facilitate effective, entrepreneurial and prudent management that can deliver the long-term success of the company."

But things are not that simple.

Incentives set for professional asset managers are usually mis-matched to the decades-long horizons of the many future pensioners investing their funds; and investment managers can be influential in the appointment of boards.

These managers' incentives usually mean they get bigger bonuses if boards deliver short term gains.  Anthony Hilton recently reported the egregious case of an otherwise successful chief executive who was told by a senior shareholder that an unexpected rights issue and subsequent share-price drop had robbed him of his performance bonus and he would have his revenge. The CEO was out soon after. 

This mis-match is widely recognised.  In his review of UK equity Markets, John Kay wrote that:
"short-termism is a problem in UK equity markets, and that the principal causes are the decline of trust and the misalignment of incentives throughout the equity investment chain."

But Con Keating has recently pointed out that there is another layer of complexity.  As he puts it:
"Shareholders are not a homogenous group; their motivations and strategies can vary significantly. Some have even developed strategies, such as the “washing machine”, where engagement and activism seek to achieve short-term gains before the manager then moves on to the next. Heterogeneity among shareholders will tend to reinforce collective preferences for the short-term. In times of corporate action, such as hostile take-overs, groups of activist short-term shareholders, often hedge funds, do have a tendency to arise naturally, through self-interest, without any formal co-ordination or collusion. By contrast, when engagement is concerned with the long-term, formal co-ordination through bodies such as the Investors Forum is deemed advisable or even necessary"
With such a range of shareholder motivatations, Keating believes the short-termists win; and since the long term is a series of short terms, long-termists are also likely to lose in the long run.

Keating toys with weakening the power of shareholders.  This is a tricky approach since if shareholders are unable to hold a board to account, who is left to prevent a malign or incompetent board from wreaking damage?

To escape this conundrum, Keating asks whether a system that discriminates between short- and long-term shareholders might give boards greater practical power to put the long term interests of the company ahead of the shorter term interests of shareholders.  France has attempted to do this with the Loi Florange part of which may have made it easier for shareholders who have held a company’s shares for more than two years to claim double-voting rights. 

States have a huge interest in promoting the long term health of enterprises in their economies.  They have also given enterprises the precious ability to limit their liability, invest collectively on huge scales and overcome mortality.  Is it unreasonable for States to insist on measures that discourage short-termism from ovewhelming the long term succcess of enterprises on which long term national prosperity depends?

And if it is reasonable, what is the best solution?  Loi Florange is one approach that has gained some support, but Sherlock Holmes would recognise this another three pipe problem. 

Anthony Fitzsimmons
Reputability LLP

Thursday, 23 July 2015

Structural Weakness at the FCA Board

Writing about the departure of Martin Wheatley, the Chief Executive of the Finanical Conduct Authority, Anthony Hilton, the renowned city columnist recently suggested that the FCA board shows signs of being dysfunctional.   As he put it:

"No FCA board member has uttered even the feeblest cheep of protest, let alone done the honourable thing and resigned.
Yet if directors were happy with Wheatley, they should resign in protest at this external interference; if they were unhappy with Wheatley, they should have done something themselves to improve his performance or secure a replacement.
Either way, the board appears dysfunctional."

That is certainly an explanation of the conduct he observed but there is a deeper issue.

The FCA's corporate governance framework confirms that:
"The FCA is governed by a Board with members comprising: a Chair and a Chief Executive appointed by HM Treasury (Treasury); the Bank of England Deputy Governor for prudential regulation; two non-executive members who are appointed jointly by the Secretary of State for Business, Innovation and Skills and the Treasury, and at least one other member appointed by the Treasury. The majority of the Board members are Non-Executive Directors (NEDs)." (1.5)
In other words if a board member takes a line that offends the Treasury, they risk not being re-appointed.

In my experience this is sometimes a real fear of NEDs who enjoy the status or the money that flows from their appointment; and there is an additional aversion to risking 'failure' to be reappointed if the non-reappointment may be given publicity, as in the case of Mr Wheatley.

This government-imposed structure is inherently likely to make a board dysfunctional.

First, minsters like appointees who will be compliant and not rock boats. For a minister, an appointee who enjoys the status or wants the money, and preferably also lacks the character to take a public stand against the minister, is an ideal appointee.  From the perspective of the board and its organisation, such an appointee is a disaster waiting to happen.

Second, board composition matters.  An effective board needs an NED team with not only intelligence but also the knowledge, skills and experience to understand every aspect of the organisation's business.  Unless the board has the spine to spell out the characteristics it seeks in a new board member, and resign if they don't get them, the board will lack essential skills leaving it functionally incompetent and blind to risks that matter. A NED team with significant gaps in its knowledge, skills and experience is also a disaster waiting to happen.

When a government agency fails, an adroit politician, supported by the government's media machine, will deflect blame to the agency and its leaders.  This has already happened at the FCA following a botched press briefing that released a maelstrom of criticism, much of it well deserved.  The FCA chairman has said that the board has learned lessons from the experience.

But the fundamental problem remains.  The seeds of the next disaster may already have been sown by the Treasury's wish to maintain control of its progeny through selecting the FCA's board members.  The FCA board should confront the issue. 

Anthony Fitzsimmons
Reputabilty LLP

Wednesday, 22 July 2015

Loyalty - Virtue and Risk

Cultural differences around the world represent substantial organisational risks with severe reputational risk implications.   The Toshiba accounting scandal provides yet another example of just how badly things can go wrong even in an advanced economy.  These risks can only be addressed by leaders of multinationals if their scale and significance are first understood.

In his introduction to the Official Report to the National Diet of Japan into the Fukashima nuclear accident,  Kiyoshi Kurokawa, a former President of the Science Council of Japan sorrowfully wrote:
"How could such an accident occur in Japan, a nation that takes such great pride in its global reputation for excellence in engineering and technology? This Commission believes the Japanese people – and the global community – deserve a full, honest and transparent answer to this question.

Our report catalogues a multitude of errors and wilful negligence that left the Fukushima plant unprepared for the events of March 11. And it examines serious deficiencies in the response to the accident by TEPCO, regulators and the government.

For all the extensive detail it provides, what this report cannot fully convey – especially to a global audience – is the mindset that supported the negligence behind this disaster.
What must be admitted – very painfully – is that this was a disaster “Made in Japan.” Its fundamental causes are to be found in the ingrained conventions of Japanese culture: our reflexive obedience; our reluctance to question authority; our devotion to ‘sticking with the program’; our groupism (sic); and our insularity."

Accounting scandals are found worldwide, but Toshiba provides the latest in a series of Japanese financial scandals that seem to stem from Japanese culture.  About $1billion of losses have been hidden by overstating profits over many years.  The report of the Investigation Commission is not yet available in English but Toshiba website states that nine directors, including the Chief Executive have resigned, and newspapers carry pictures of those resigning bowing long and deeply in shame. The report apparently spells out “systematic” and “deliberate” attempts to hide losses by inflating profit figures.

As to why, it describes a culture that made employees afraid to contradict their leaders when they demanded unrealistic earnings targets.  Within Toshiba, there was apparently a corporate culture in which one could not go against the wishes of superiors.  Loyalty can be a virtue but not if it becomes blind to reality.  In this case loyalty meant cooking the books. The report apparently states that both Mr Tanaka and Norio Sasaki,  knew that profits were being over-stated but took no action to end the improper accounting.  This is despite the Toshiba Standards of Conduct which states: 
"Directors and Employees shall:
  1. maintain proper and timely accounts in accordance with generally accepted accounting principles;
  2. promote the prompt release of accurate accounts; and
  3. endeavour to maintain and improve the accounting management system, and establish and implement internal control procedures for financial reporting."
The problem of speaking truth to power is widespread and driven by a mixture of incentives and culture, but the cultural dimension seems particularly deeply rooted in Japan. Why?  I am no specialist in Japanese culture but in reading the Analects of Confucius recently I came across the following, written in about 500 to 400 BC:
"The Master said, in serving his father and mother a man may gently remonstrate with them. But if he sees that he has failed to change their opinion, he should resume his attitude of deference and not thwart them; may feel discouraged but not resentful." (IV.20)
"The Master took four subjects for his teacing: culture, conduct of affairs, loyalty to superiors and the keeping of promises." (VII.24)
 "The Master said, first and foremost be faithful to your superiors..." (XI.24)
A Japanese travel guide says:
"According to early Japanese writings, [Confucianism] was introduced to Japan via Korea in the year 285 AD. Some of the most important Confucian principles are humanity, loyalty, morality and consideration on an individual and political level.
This may explain why loyalty is given special emphasis in Japanese society. 

But as Andrew Hill points out in a post subsequent to the original publication of this post, it is important that boards everywhere do not think 'it couldn't happen here'.  A long string of European and US corporate scandals demonstrate that Confucianist loyalty is not the only route to board-led failure.  Complacency is deadly everywhere.

Anthony Fitzsimmons
Reputability LLP

Thursday, 2 July 2015

A Contrarian Approach to Groupthink

Groupthink is a  well-recognised psychological phenomenon in which people strive for consensus within a group. People may set aside their own personal beliefs or adopt the opinion of the rest of the group.  Groupthink is found wherever people collaborate, and this includes boards and leadership teams, especially if they embrace collegiality. 

Groupthink happens for many reasons.  The group may recruit in its own image.  Members may conform because job security depends on conformity; or for more subtle reasons, such as group culture or well-recognised psychological biases such as status quo bias, confirmation bias, herding and the availability heuristic. And that is before considering the effects of the individual's character and the effect of a dominant or charismatic person in the group.

Modern corporate governance requires boards to include 'independent' directors but this does not necessarily mean that independent directors will think independently.  A recent McKinsey report found that only 14% of almost 700 directors surveyed included "independent thinking" as a selection criterion for choosing a new director.  This is not a propitious starting point.

Add the ability of groupthink to lead 'independent' directors to lose their ability to think and reach conclusions independently and it is no surprise that many of the corporate failures analysed in 'Roads to Ruin' the Cass Business School report for Airmic, included groupthink among their causes.

Whilst some bad decisions remain latent vulnerabilities for years, our research suggests that about half will manifest into a crisis within 5 years.  When it becomes apparent that the board has made a bad decision, the Chief Executive is often the board's first sacrifice, and this is probably one reason why average CEO tenure seems to stick below 5 years.  In bad cases, it is not unusual for the Chairman to be next in line.

Since ignominious ejection from office often terminates careers, it should be important to CEOs and Chairmen to reduce the risk of avoidable bad decisions.

In her prize-winning essay, Siobhan Sweeney, a Judge business School MBA candidate, has suggested a solution: companies should combat groupthink by appointing a "Contrarian Director" (CD) whose explicit role is to be an independent source of critical thought and analysis for the board.  The concept is a development of the roles of Roman Catholic Church's 'Devils Advocate' and the Advocate General of the European Court of Justice.

Ms Sweeney's proposal includes the following elements:
  • The CD's main role is to analyse and report formally to the board on any important proposal;
  • CDs are full voting board members with long experience in independent analytical thinking and the character required to deliver unwelcome views should this be necessary;
  • An 'Institute of Contrarian Directors' (ICD) should be established with robust governance to set standards for CDs and devise a standard Charter under which CDs can operate effectively, including rights to seek information;
  • The ICD will, on request, recommend a suitable CD from a pool of people who have never been directors other than in a CD role and have not departed from the ICD charter;
  • Such CDs are appointed for a single, non-renewable 3 year term and are paid as professionals;
  • Where an ICD-nominated CD is appointed, the ICD Charter is to be incorporated into the company's governance regime and the CD specifically instructed by the board to act in accordance with the Charter, and
  • Where a CD finds the company obstructing his or her effective operation, the CD is required to resign, making a public statement that she or he was unable to operate effectively.

The concept will appeal most to companies whose self-critical leaders embrace success in the long term, measured in decades, as a corporate goal.  Such leaders are keen to avoid avoidable errors.  It will be an anathema to leaders who are insecure, egotistical, arrogant or dominant, especially those whose personal goals share the much shorter time horizon of their incentive plans.

Given patterns of corporate failure, it is the latter's companies who would arguably benefit the most, but they are the least likely to adopt the concept.  Regulators may wish to take note.

We would welcome your comments on the merits and weaknesses of Ms Sweeney's proposal as well as your thoughts on how it might be improved.

Anthony Fitzsimmons
Reputability LLP