Groupthink: is your Board immune to this risk?
Financial services organisations often make decisions in groups, and the Board is the ultimate collective decision-making body for any firm. According to an Occasional Paper published by the FCA, “Groupthink occurs when groups of people prematurely coalesce around poor decisions.” Much has been published about the role of the Board, and directors (non-executives in particular) are well versed in the need for oversight, debate and critical challenge. The regulatory push for diversity in the Boardroom has a clear linkage to this topic, with the FCA having published many speeches connecting diversity with better decision-making and the PRA reminding insurance company boards in 2020 that “diversity requirements aim to reduce the risk of groupthink which can adversely affect the safety and soundness of PRA-regulated firms”. And yet, despite this knowledge and focus, Boards are not immune to the risk of groupthink.
The FCA/PRA Review into the failure of HBOS is a prominent example of the regulators criticising a Board for its approach, noting that some of its decision-making showed features of groupthink. The regulators considered that discussion in HBOS Board meetings was limited by virtue of the fact that the Chair would signal his (dis)agreement with the proposals in advance of a Board debate. The fact that directors reached consensus views in advance of Board meetings, leading to insufficient debate and a blindness to colleague concerns, was also cited as an example of poor governance approach. Such practice also risks the introduction of confirmation bias to Board meetings – where people seek evidence to support their prior beliefs and ignore or belittle evidence that contradicts them. Coupled with the significant potential for senior leaders and Boards to have overconfidence in, e.g. internal systems and controls, these risks have the potential to crystallise into serious and unanticipated governance failings.
How certain are you that your Board meetings provide an environment in which debate and challenge actually take place, and directors voice their independent critical views without fear of poor reception from the group? Have you cause to look back and do your own ‘lessons learned’ exercise in relation to decision making and the culture within which key proposals are presented and discussed?
This short video, in which Harriet Ellis discusses the psychology behind groupthink, its influence in organisations and how to avoid it is definitely worth a watch. We’ll also be posting our views on what makes a good Board Evaluation to the website in due course.
