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Avoiding company scandals

Everyone can clearly see a strategic misstep or scandal afterwards. Hindsight often allows the underlying causes of particular board failures of governance or direction to be exactly and expertly identified. A better skill would be able to do so beforehand. But what are some of the warning signs to look for? The Independent Director: The Non-Executive Director’s Guide to Effective Board Presence by Gerry Brown.
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Everyone can clearly see a strategic misstep or scandal afterwards. Hindsight often allows the underlying causes of particular board failures of governance or direction to be exactly and expertly identified. A better skill would be able to do so beforehand. But what are some of the warning signs to look for? The Independent Director: The Non-Executive Director’s Guide to Effective Board Presence by Gerry Brown.

Experienced non-executive director and board governance expert Gerry Brown has identified eight tell-tale board level pathologies that allow investors, analysts and commentators alike to spot companies and boards on the curdle before they do so. Though successful leadership at executive board level is often more of an ambition than a science, Brown believes that there needs to be a good balance between executives and independent non-executives to manage the complex series of decisions and trade-offs that any business requires. If this elusive balance gets out of kilter, the board runs the risk of destabilizing pathologies that invariably drive the company towards the rocks of poor governance, poor performance and/or scandal. These eight tell-tale board level pathologies to arrest or avoid are:

1. Excessive conformity, or groupthink

2. Negative group conflict, or factionalism based on differences either in basic values and beliefs, or in personalities

3. Politicking, or people manipulating others in order to acquire more personal power. This can be a defensive mechanism if the power-seekers perceive that their own position is under threat

4. Habitual routines, or “that’s the way we do things around here.” People become ingrained in certain practices and actions, and cannot or will not change, even if a threat emerges.

5. Shared information bias, or “we know what we need to know.”

6. This pathology concentrates on knowledge that is already known and shared among the group, and does not seek to look any further and find out if anyone else has any further information to bring to the table

7. Pluralistic ignorance, where people have important opinions and views but will not voice them because they fear to be seen differing from their colleagues. The “ignorance” results once again from a failure to share knowledge

8. Social loafing, where people work less hard when part of a team than when on their own. On boards, this often manifests itself in a “why should I get involved? Someone else will do it” mentality.

9. Group polarization, which in some ways is the opposite of groupthink. In group polarization, members of the group encourage each other towards more extreme thinking. Those members who have doubts are encouraged to set them to one side. The collective decision, which is finally reached, is thus more risky than any of the group’s members would have made if left on their own.

The Independent Director: The Non-Executive Director’s Guide to Effective Board Presence by Gerry Brown is published by Palgrave Macmillan

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