7th December 2018 BUSINESS STANDARD
*The writer is an author, Corporate Advisor and Distinguished Professor of IIT Kharagpur. His new book, “CRASH: lessons from the rise and exit of CEOs” has been published by Penguin India in December, 2018. Email: firstname.lastname@example.org
In my column of 14th September 2018, I mentioned some factors which could cause a leader to feel vulnerable and become prone to a governance mishap—for example, a loner or a void in life, not listening to anybody, and a preoccupation with a place in history. In crisis management writings, these are called ‘prodromal signals’, viz, precursors to behavioral aberrations. If directors can learn to use their long experience to recognize and discuss such signals, some governance mishaps may be possible to avert.
Last week I participated in a conference on how boards can be more effective. After every corporate episode, there is soul searching and considerable independent director bashing (ID)–perhaps appropriate, though I wonder why the criticism of IDs is more strident than that of auditors, rating agencies and executives.
In entrepreneurial businesses, mishaps will occur—like safety incidents will occur in manufacturing. Like with industrial safety, excellence in corporate governance requires adoption of system-oriented improvement to (a) minimize risk and (b) reduce the incidence of mishaps. Experience with safety teaches us that while the technical aspects of safety are critically important, behavioral aspects have immense importance. The acclaimed DuPont safety system strongly emphasized behavior training.
The same applies to corporate governance. The current discourse has a disproportionate emphasis on rules, procedures and tick-in-the-box routines by committees and regulators. I argue that apart from the accounting/legal/regulatory specifications with respect to corporate governance, there needs to be some thinking and training on directors’ behavioral aspects. There is a compelling case to heighten and deploy judgment and natural intelligence (artificial intelligence may even help with predictions in the future!) In my board work, I see companies which really want better board outcomes. Social dynamics principles help, though its application in corporate governance is under-developed. Social dynamics is best illustrated through the example of the Hubble Space Telescope episode of 1990.
At that time, Dr Charles Pellerin was the Director of Astrophysics and head of the project. He was a top-class scientist, leading talented engineers, and responsible for spending a large budget. The project cost was USD 1.7 billion because high resolution cameras and mirrors were mounted on a rotation mechanism with hyper accuracy. Due to this exceptional precision, scientists would get pictures that had never been obtained before, leading to fresh insights.
After the rocket was launched successfully, they found that the super-accurate mechanism was malfunctioning. What, after all those rigorous testing protocols and precision engineering planning? The null corrector mechanism was flawed. The episode was headlined in one newspaper as “National disaster, Hubble launched with flawed mirror.”
The Failure Review Board traced the failure to a flawed null corrector and, believe it or not, there were hints of the flawed mirror in the pre-tests. These were not reported. In the aggressive atmosphere of schedules and budget pressures, conditions of tension had been created as also the habit of not speaking up. Scientists and vendors found it safer to keep quiet. The test-failure of the mirror mechanism fell prey to this behavioral tendency. The Failure Review Board reported to US Congress that it was “a leadership failure that caused the flawed mirror.”
In short, the engineers had focused so strongly on the technical aspects of the project that they failed to notice, less alone manage, the team’s social context. The head, Charles Pellerin, accepted responsibility, stepped down and joined the University of Colorado. For the next fifteen years, he researched the possible remedies, developed training materials and wrote a book (How NASA builds teams, Charles Pellerin, Wiley, 2009). Pellerin’s 4D methodology is sound.
I feel sure that it could be adapted into a corporate governance tool if practitioners would team up with academics/behavioral specialists to do so. More on this in future articles.
I have experience of two cases when the board acted upon such signals; the results were beneficial. There are behavioral aberrations among powerful people as evidenced in the Sorrell-WPP and Thomas Middelhof cases, and indeed in Indian cases like Religare, YES Bank and ICICI Bank. The aberrant signals were noticed, but directors felt hesitant to recognize and act on such signals.
This ‘softy subject’ deserves more attention in the delicate art of reducing corporate governance failure. I hope to explore this more in future columns.