Guest columnists
Good corporate ethics start with rooting out 'group think'

By Dick Cooley and Stewart Landefeld
Special to The Times

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Numerous studies show that good people can make bad decisions when acting in groups, particularly in stressful situations. This dynamic contributed to Enron and to a host of corporate scandals that followed the bursting of the stock-market bubble.

The Sarbanes-Oxley Act of 2002 sought to rectify the problem through government regulation. Compliance with the new rules does improve trans-parency of corporate reporting and accountability, but the new rules alone will not be sufficient to prevent future corporate disasters. Also pivotal is improved board decision-making.

Board decision-making can be enhanced by becoming more aware of the pitfalls of "group think." The term refers to the various pressures that can cause people to alter the expression of their individual opinions. The main symptoms of group think include an illusion of invulnerability; self-censorship; the pressure of conformity; and group members acting as guards — protecting others from negative information that might hinder compliance. When group think takes hold, silence from some members can be seen as acceptance as others push a particular decision through.

Expanding input is a step in the right direction, as are regular meetings of independent directors. Involving more people, and rotating in new people with fresh perspectives, also improve response time. More critical eyes help root out potential problems and facilitate solutions.

Numerous corporate failures can be traced to slow emergency response. A significant reason is "bystander inaction" — the tendency of people in a group not to respond to an emergency when they likely would if they were on their own. A notorious case was the 1964 murder of Kitty Genovese in New York City, when 38 people either saw or heard the attack but not one intervened or called for help.

Boards can take simple steps on their own to help solve bystander inaction and group think. First, a smaller group will act more cohesively and effectively, in part because there is less diffusion of responsibility. Dividing the board into smaller groups to each address the situation separately makes discussion easier and gives everyone more time to speak. This applies as well to key board panels, such as the audit and compensation committees.

Second, a board chairman can use the "executive sessions" of the outside directors to create a "devil's advocate" role to argue the pluses and minuses of major board decisions. By creating a formal role for skepticism, a board can overcome the natural tendency of "bystanders" to wait for someone else to speak up or take action. The role of independent chairman or lead director is crucial in this process.

The story of Victor Steinbrueck shows the success of a devil's advocate in turning a group (in this case the entire city) around on an important issue (the preservation of Pike Place Market). In 1963, Seattle's business and political establishment, in the throes of urban-renewal fever, unveiled a plan to replace the market with terraced garages and high-rise office buildings. Over an eight-year period, Steinbrueck, gradually joined by supporters, articulated the importance of what is now generally recognized as the soul of urban Seattle. His efforts led to a citywide referendum in 1971 that voters chose — over a watered-down alternative supported by the mayor, City Council and other city leaders — to preserve the market for what it is today.

Empowering groups to consider all sides of an issue requires leadership that supports contradiction. Directors need to place a high priority on the airing of objections — guiding all to place deep analysis over quick agreement. The leader should also be neutral, withholding preferences and expectations as much as possible. Members who shoot down dissenting opinions should be asked to listen to be sure no stone is left unturned. Lastly, the dangers of group think should be openly discussed and understood.

Research on group decision-making shows a powerful tendency for individuals to revert to overly consensus-seeking behavior when making group decisions under stress. To reduce stress levels, prepare the board with information well in advance of its meeting; reduce time allotted to ministerial or noncritical reporting matters; and schedule ample committee or board time for thoughtful consideration of key decisions. It may sound simple but it often does not happen.

Most important is the culture created from the top. The selection of the CEO is the key job of the board; the CEO sets the tone for everyone in the organization. With good teamwork and communication between the board and CEO, "surprises" (good or bad) rarely occur.

A board that recognizes the dangers of group decision-making, and that has a proper structure and a healthy culture of debate in place, will be more likely to recognize an emerging problem and take timely, appropriate action.

Thoughtful board leadership can ask good questions and suggest alternative courses of action. Experienced board members will often have lived through similar changes and emergencies in their own corporations and will have sound advice for the company's problem. Hearing all of these voices may do more for corporate governance than Sarbanes-Oxley compliance could ever hope to.

Dick Cooley, former CEO of Wells Fargo, and Stewart Landefeld, chairman of the corporate finance group at Perkins Coie, are part of the Directors Training Academy created by the Seattle University School of Law's Center on Corporations, Law & Society (www.law.seattleu.edu/ccls/).