Groupthink –– it’s bad business

Corruption, embezzlement, fraud, these are all characteristics which exist everywhere. It is regrettably the way human nature functions, whether we like it or not. What successful economies do is keep it to a minimum.

–– Alan Greenspan, former chairman of the US Federal Reserves.

Insolvency, bribery, fraud, bank and insurance failure, black money transactions, setting up unregistered firms to avoid fees and duties, ghost factories to obtain import licences for scarce material, borrowing funds from commercial banks and other development institutions with deliberate intentions to default, and so on . . . . These seem to be so commonplace that many of us simply gloss over news items about them.

But the 2008 global financial crisis, which saw the collapse of several banks and financial institutions, further thrust the issue of corporate governance to the forefront.

Thus far, I have focused on public institutions and the potential for corruption, but repeated scandals in the private sector immediately suggest the private sector also needs to be defined by a similar level of transparency and accountability
to check corruption.

In that context, Transparency International argues private sector corruption demands a three-pronged approach. Not only should companies engage in internal reorganization to prevent its occurrence, but they also need to be marked by a zero-tolerance policy towards bribery and corruption, which must be enforced through specific
anti-corruption measures.

None of this, however, can occur in the absence of the enabling environment which must be created by governments. Here I will therefore turn my attention to ways in which the private sector can limit the occurrence
of corruption.

This is not my area of expertise, largely because I focus on government. But several of my colleagues in the Department of Management Studies at the University of the West Indies, Cave Hill Campus are doing
a tremendous amount of research in it.

So we have, for instance, Diana Weekes-Marshall who is engaged in a comparative analysis of corporate governance in developing countries, Wayne Charles Soverall exploring corporate governance practice in state enterprises in the Caribbean, and Philmore Alleyne examining whistleblowing in the financial sector.

In general, however, good corporate governance, is defined by shareholders, whether by proxy or otherwise, electing their directors or a combination of nominated and elected; directors who vote on key matters and adopt the majority decision; decisions made in a transparent manner so shareholders and others can hold directors accountable; accounting standards that are designed to generate the information necessary for directors, investors, and other stakeholders to make decisions; and the adherence of company policies and practices to the
local laws.

Where legislation exists in the Commonwealth Caribbean it is by and large confined to the financial sector and much of it is rooted in the post September 11, 2001 terrorist attack on the United States which forced changes in relation to money laundering.

The 1980s to the early 21st century are certainly testimony to failings of corporate governance regionally. The Caribbean Corporate Governance Code 2003, which was to be implemented by the CSME, represents what has been described as an appropriate regional response, but unfortunately never fully materialized –– like so many other regional initiatives. However, Jamaica promoted a governance code in 2006 followed by Trinidad and Tobago in 2013.

But the United Nations Convention Against Corruption (UNCAC), which entered into force on December 14, 2005, is the most important global anti-corruption instrument with global scope of application. It is one of the first international instruments advocate criminalization of corruption in the private sector. Interestingly, during the lead-up to its finalization, Latin America and Caribbean governments argued for the broadening of the scope of aspects of the convention which pertained to the private sector given its increasing importance in the hemisphere.

Under UNCAC, Article 12 details several measures which can be adopted by the private sector to prevent corruption. For example, all signatories to the convention, among other things, are required to undertake two broad types of measures which are seen as primarily preventive. Signatories are therefore required to take specific action that would demand the private sector enhance its accountability and auditing standards.

What is the purpose behind this requirement? Just as in the public sector, it is expected that such an enhancement would lead to an increase in the level of transparency and in the process facilitate detection of malpractices in the private sector. The second expectation is that governments would demand that the private sector tighten its accounting procedures and practices that extend to off-the-books accounts; the recording of non-existent expenditure; the use of false documents, and so on. Notably UNCAC fully expects that this would proscribe tax deduction of expenses which constitute bribes.

Part of the misconduct that has clearly left its imprint on the business/private sector is what Steven Ramirez calls culturally monolithic domination. Though Ramirez was concerned about the domination of the white male in boardrooms of corporate America, there is little doubt that his assessment
does have some relevancy for the Commonwealth Caribbean.

Now what is critical about Ramirez’s work is that he concluded that such control is bad business and bad economics. So how can this bad business be mitigated? Ramirez argued that cultural diversity could enhance small group decision-making processes and diminish the inclination of small groups to devolve into a “groupthink” approach to issues.

“Groupthink”, a term developed by psychologist Janis Irving is essentially a “mode of thinking” that people engage in when they are deeply involved in a cohesive in-group, thus ensuring unanimity without the appraisal of alternative courses of action. He continues that this groupthink dynamic plagues decision-making within groups that share a high degree of similar experiences and characteristics.

The end result is in his view the “mindless adherence to group norms and a failure to challenge implicit or underlying assumptions”. Members of this group are therefore seduced into compliant conduct, given the need to achieve approval from the group as a whole.

On the other hand Ramirez contends that boards enjoying cultural diversity should perform better because board homogeneity leads to a boardroom culture that “avoids conflict, avoids impoliteness and as a result does not permit hard questioning”. Thus diversity can be an effective tool to assure boards are “bold enough to ask management the tough questions”.

Ramirez pointed to the mind-boggling compensation for senior executives, with boards passively permitting senior executives to reap billions of dollars in options compensation while the companies they managed went bankrupt. Here in the Caribbean we are prone to believe that funds received from membership on boards can be considered a “top-up”. Nothing can be further from the truth. Ranging from monthly BDS$2,000 to sometimes, I am told, nearly BDS$20,000 this is no “top-up” and clearly is in excess of the average and more significant monthly salaries paid anywhere in the Caribbean.

In the wake of repeated corporate failure and scandals, the United States Congress responded with the Sarbanes-Oxley Act (SOX) 2002 which was designed to usher in a new model of corporate governance and which received presidential support. A prime objective of the Act was to secure the independence of auditors of publicly held companies.

In this case, both the legislature and the executive which have had a highly acrimonious relationship, cooperated in bringing some sanity to the situation. The Act did not only restructure the regulation of auditors of public companies, but it enhanced criminal penalties for corporate crimes, and enhanced disclosure requirements applicable to publicly held companies. The point is that the United States sought to address the issue of corporate misconduct with legislation, and this is clearly of tremendous value.

But it is equally true that non-legislative approaches may work just as effectively or in tandem with the legislative framework. By breaking the stranglehold that a small group of people who share similar social, political and economic bonds have in the corporate boardrooms, we may go a long way in providing boardrooms with much needed “clean air” and independence and in the process break the stranglehold that management has over decision-making; all in the best interest of the public.

Finally, when we decide to get serious in the Caribbean, we must give careful consideration to appropriate sanctions for corporations that are found wanting. Corporate sanctions cannot be so low or absent that they have limited or absolutely no incentives to actively police themselves, or report potentially criminal wrongdoing to the authorities. In other words there must be internal restructuring which can include but is not limited to the creation of an office of an internal ombudsman, a democratically constituted board, as well as genuinely independent internal auditors.

I am unsure existing legislation offers satisfactory punishment to those caught in terms of sentencing and or fines for the corporate offenders. The fact is that corporate governance, as understood, is based on the premise that corporate officers operate best when they are held to account for what they do. Do we have that in the Commonwealth Caribbean?

Nobody made a greater mistake than he who did nothing because he could only do a little.

–– Edmund Burke (1729-1797), British political writer and statesman.

(Cynthia Barrow-Giles is a senior lecture in political science at the University of the West Indies, Cave Hill Campus.)

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