Effective boards need contrarians and forward thinkers.
Group think is one of the greatest challenges facing corporate boards. The tendency among decision makers to go along with the seeming consensus view rather than risk voicing important dissenting opinions that could lead to a better collective decision is widespread. Corporate directors are specifically chosen so that they form a cohesive unit. Boards tend to be relatively isolated from the rest of the company. The social, economic and ideological backgrounds of board members tend to be reasonably homogenous. Some boards do not develop robust informal norms or managerial procedures to incorporate a culture of constructive dissent. Fear of being labeled as a “loose cannon” or a “squeaky wheel,” as well as the consequent deep desire to be respected and even loved by colleagues, often prevents directors from speaking up. Candidates who are likely to dissent or ask tough questions are usually not chosen to be on boards, despite voluminous regulatory guidance stating that the directors’ primary responsibility is to ask the CEO probing questions about the company’s strategy and operations.
Based on decades of coaching directors and going through our experiences on our own corporate boards, we suggest five ways to combat groupthink:
Designate a rock thrower. Good hedge funds tend to appoint a member of their investment committee as a designated rock thrower. That member’s job is to find everything that could possibly go wrong with an investment pick. Appointing a person to the role of devil’s advocate disassociates the dissenter from the dissent. Our desire to be respected and loved by our colleagues is so great that we rarely surface questions, concerns or criticism in group settings. A rotating rock thrower feels secure enough to discover and highlight issues with a proposed strategy or a plan that might otherwise never get factored into the final decision.
Create a “What will Amazon us away?” committee. The history of business is replete with examples of companies that disappeared because their business models were disrupted by an upstart, such as Amazon. The remarkable thing is that such disruption and displacement usually does not happen overnight. Boards and management ignore a small upstart for a year or two, assuming that the upstart will simply run out of momentum or capital. Occasionally, the threat comes from a large established company. IBM lost the cloud-computing battle to Amazon (no longer a small startup by then) and Microsoft because of inaction for a mere couple of years.
One way to mitigate these disruptions is for the board to set up a “What will Amazon us away?” committee. The charge of this committee is to continually ask, “Which business or technology will make our way of operating and distributing products obsolete?” Think of this as an approach to institutionalize the teachings of Andy Grove, the founder of Intel, who famously said, “Only the paranoid survive.” Remarkably, Intel itself lost sight of that tenet and lost significant market share in chips for mobile devices to NVIDIA.
Get to know a short seller. Short sellers are investors who bet on a decline in the stock price of a company if they believe the stock is overvalued. We cannot think of anyone more qualified to tell directors what might be potentially wrong with the company’s ability to grow into its valuation or its accounting and disclosure practices. Many shorts are vilified as evil, myopic money-grubbers. However, they are also a valuable source of information who can help pierce the bubble that directors and CEOs can envelop themselves in. We challenge boards to invite a prominent short seller to one of their board meetings and ask, “Why exactly do you hate us?”
Conduct a mock activist attack drill. On the other hand, if the stock is undervalued, activist hedge funds, such as Elliott or Third Point, can launch an attack against the company, seeking to displace both the board and management. Just like “red team” exercises are recommended for boards to simulate responses for cybersecurity and other risks, directors could task a subcommittee with writing a presentation deck about the company from the perspective of an activist investor. What case would such an activist make? Can we preempt the strength of that case by restructuring our business?
Hire a consultant to identify what we don’t do well. Typically, external consultants and thought leaders get hired to support management’s thesis or validate management strategies. It could be valuable to hire consultants solely to provide a contrarian view of the existing management strategy, the business operating model or the management gameplan. The consultant’s report should identify specific examples, based on their experience and research, of what needs to be improved and why. Such a “what’s missing” report could be far more valuable for a management team, the board and the risk management group to review and consider.
Sharda Cherwoo is a sitting audit committee chair or board member at Land O’Lakes Inc., World Fuel Services Corporation, Doma Holdings Inc. and World Quantum Growth Acquisition Corp., and a retired partner from EY.
Shiva Rajgopal is the Kester and Byrnes Professor at Columbia Business School and a Chazen Senior Scholar at The Jerome A. Chazen Institute for Global Business.