It may seem counterintuitive but formal processes are not a panacea for good governance; post-mortems of Enron and WorldCom, or closer to home Centro, reinforce that these companies failed despite entrenched controls.
What leaders can learn from these high profile failures it that risk-taking is a cultural issue and that with respect to decision-making, a culture that encourages independence and debate is an asset.
Yet in many companies, disagreement continues to be seen as disloyalty.
Worse, as in the case of Enron, active collusion can be seen as a precondition for maintaining a seat at the table.
In his book Innovation Corrupted: The Origins and Legacy of Enron’s Collapse, Harvard Business School Emeritus Professor Malcolm S Salter highlights sophisticated internal controls failed to impact the behaviour that led to Enron’s demise.
Instead executives both actively colluded with questionable transactions; or acquiesced under pressure.
While legislation and risk systems are essential, no amount of process can fix this kind of complicity.
For example in the US despite changes to the Sarbanes-Oxley Act to enhance corporate responsibility, Ernst & Young’s 2006 Global Fraud Survey showed little change in fraudulent behaviour and that when it is detected it is frequently as a result of tip-offs rather than audits.
That means leaders have to weave different kinds of behavioural checks and balances into the cultural fabric.
One way to do so is to encourage active disagreement as part of the decision-making process for properly weighing opportunity and risk.
Here I am not talking about populating the upper layers with bomb-throwers who use hostility as a controlling technique, or sometimes to deflect attention from their own poor performance. Such personalities can render boards ineffective.
I am talking about creating conditions that encourage diversity in thinking and create a workable balance between dissent and the kind of cohesion that is required to deliver on strategy.
Talking about the power of conflict, CEO Margaret Heffernan says disagreement is central to progress and that our best partners are active challengers.
She relates the story of a scientist who was given limited funding to deliver a very complex project. To hone her thinking and ensure she could deliver on budget, she hired a statistician to deliberately oppose her findings.
The deliberate use of such rigour could be a powerful tool for leaders in the business world.
In Willful Blindness Heffernan shows how the need for unhealthy agreement can lead businesses to ignore warnings with consequences as dire as the GFC or even nuclear crisis.
This can impact every layer of the business, for example, employees who do not feel safe to speak out in their environment often become conflicted and leave.
In a tough job market this can lead to ‘presenteeism’ — that is where workers turn up physically to the role but are not engaged, leading to lower productivity.
There are a number of ways leaders can encourage disagreement and build rigour into the culture:
- Actively resist your tendency to seek recruit people like you.Heffernan says we have an inbuilt neurobiological drive to prefer people like us. She says we should recognize that and resist it by recruiting people with diverse skills and different ways of thinking.
- Conduct pre-mortems.Nobel laureate and author of Thinking Fast and Slow laureateDaniel Kahnemansuggests leaders conduct regular pre-mortems. People are invited pretend they’re a year down the track on a decision that went horribly bad and track back what happened and why. This process creates a safe space for throwing mud at ideas.
- Get conflicting expert advice.Another way to send the signal that disagreement is healthy is to get advice from experts with different points of view. Expert disagree with each other but off a higher knowledge base than those outside the field and this can provide valuable inputs and nuances for executives to consider.
- Bring the doubters out.Group-think and the desire to belong mean that over time people do tend to converge on decisions. By bringing the doubters out you get to evaluate their concerns but also bring them along once a decision is reached.
Encouraging constructive conflict could bring a delightful flavor to corporate life.
Ironically by allowing dissent you enable cohesion; by embracing difference, more considered and likely-to-be-successful decisions emerge.