Why corporate governance fails

I am about to take my annual break from writing to refresh and energise. It reminds me of the summer holidays I used to have as a child at school. The first school I attended was The British School – Al Khubairat in Abu Dhabi, where I was one of a handful non-British students. I remember the class covering the children’s tale “The Emperor’s New Clothes” by the legendary Hans Christian Andersen. If you haven’t read it, here is Wikipedia’s summary:

[The tale is about] two weavers who promise an emperor a new suit of clothes that they say is invisible to those who are unfit for their positions, stupid, or incompetent. When the emperor parades before his subjects in his new clothes, no one dares to say that they don’t see any suit of clothes on him for fear that they will be seen as “unfit for their positions, stupid, or incompetent”. Finally, a child cries out, “But he isn’t wearing anything at all!” And everyone starts laughing and pointing at the naked emperor.

In the class discussion afterwards my British classmates focussed on the question of how people can be manipulated.

It says something that all I could think about is “What happened to the child who exposed the manipulation?”

It was decades later that I understood the relevance of this child’s tale to business. The formal theory is called the “spiral of silence theory”. It explains how boards, executive management teams and other commercial groups, which, although made of individually decent people, can act in a fraudulent or corrupt manner.

The site Mass Communication Theory has a useful definition:

Spiral of silence is the term meant to refer to the [tendency] of people to remain silent when they feel that their views are in opposition to the majority view on a subject. The theory posits that they remain silent for a few reasons including:

  • Fear of isolation when the group or public realises that the individual has a divergent opinion from the status quo.
  • Fear of reprisal or more extreme isolation, in the sense that voicing said opinion might lead to a negative consequence beyond that of mere isolation (loss of a job, status, etc).

If this theory is correct then any committee style decision making body, such as a board of directors, might have a majority of decent people but still act in a way contrary to the values of this majority. In other words, this theory predicts that a single person can control the whole board.

This needs to be addressed if we are to evolve our economy. Growth comes from good decision making, and good decision making comes from the whole board freely engaging in the decision making. One idea is to have board voting anonymous. You could take it further by having anonymous virtual meetings on a specific topic if 30 per cent of the board requests it. Anonymously, of course.

This article was originally published in The National.