The Contrarian Director
Public companies should appoint a “Contrarian Director” to systematically challenge management recommendations, says Australian corporate lawyer Siobhan Sweeney. Sweeney won the 2015 Cambridge-McKinsey Risk Prize at the Centre for Risk Studies at University of Cambridge Judge Business School for her paper on the subject:
In the current economic climate marked by volatility and uncertainty, risk oversight by boards is increasingly important. The function of boards to ensure a healthy balance between risk-taking and risk avoidance is critical to the success of the company and the stability of the economy.
This paper notes the significant failings of boards in this regard. The changes suggested by this paper go directly to improving this position. The paper examines the economic, social and psychological forces propelling directors on boards towards collegial consensus and deterring real independence from each other.
The paper offers a highly innovative yet simple solution. It develops the concept of a ‘Contrarian Director’, inspired by the Advocatus Diaboli (‘devil’s advocate’) of 1587 but modelled more closely to the Advocate General of the European Court of Justice. The paper provides a structure and process to appoint and support this director. The result of these proposed changes would be a change to culture on boards and a radical improvement in the risk oversight function by boards.
The name derives from the Greek for someone who “habitually opposes or rejects prevailing opinion or established practice”. The aim of the proposal is to prevent groupthink and rubber-stamping of management decisions by overly-collegial boards by ‘independent’ non-executive directors who are independent in title only. The Contrarian Director’s role would be to review every recommendation to the board of substance, giving careful consideration to any possible case, if any, against the recommendation.
There have been a wide range of scandals in recent years were boards have agreed to flawed proposals without adequate challenge or failed to stop risky or illegal practices, for example the classic tales of:
- Bearings Bank: Rogue Trader,
- Enron: The Smartest Guys in the Room,
- HBOS: Hubris,
- RBS: Making it Happen,
- BP: Failure to Learn / Spills and Spin and
- Olympus: Exposure as well as
- GM Ignition Switch Debacle and the
- faked Koito airline seat safety data).
So any proposal that enhances corporate governance and engenders a more questioning culture (as recommended by Charles Haddon-Cave QC in the Nimrod Review) is worth attention. It is perhaps not surprising that a quasi-adversarial solution has been proposed by a lawyer.
Taking a contrarian view of this proposal, an unintended consequence may be that some directors could chose to just compare the proposal with the Contrarian Director’s analysis and simply decide which case is stronger, rather than probe the proposal directly. It also may mean that every non-objection by the Contrarian Director may expose them to greater personal liability as a director for not identifying a weakness that emerges later. A single Contrarian Director will also probably be at a disadvantage in being significantly less well resourced than the management team preparing the proposal.
Perhaps it would be better to appoint multiple non-executive directors who have the right knowledge to ask challenging questions, identify weaknesses in proposals and opportunities to reduce risk, perhaps supported by a small staff to gather data independently for them.
UPDATE 11 September 2015: This article offers a complementary perspective Why Getting Directors on Board with Risk Management Matters. It also emphasises sharing accountability for risk management across the board.
UPDATE 30 January 2017: Looking at the The Takata Scandal and the Value of Diversity for boards and management teams: “The problem is not with any specific culture — all of which have their advantages and disadvantages — but with a lack of diversity. After all, it’s easier to fall prey to groupthink when you’re part of a uniform group”. More on Takata: Airbag Explosions: Independent Takata Corp QA Panel (‘Skinner Panel’) Reports
UPDATE 24 February 2017: Intelligent Boards Know Their Limits
Today, the real challenge for decision makers is how to turn knowledge into insight. Board members are overloaded with information and are attempting to make the right decision in a short period of time. For the decision process to be effective, board members need to understand how their brains work.
Among all the biases affecting quality of judgement and decision making at board level, the most common one is certainly the overconfidence effect.
Playing the devil’s advocate and framing the problem through different angles will reduce the effect of the cognitive distortions that lead groups astray.
It is now recognised that the practice of referring to “the expert on the board” is very risky…[as this]…presents the perfect setting for a wrong decision if boards do not seek “intelligence” by inquiring further and testing the so-called experts. It is now recognised that the practice of referring to “the expert on the board” is very risky.
Expertise, diversity and inquiry are key practices that make a board intelligent. The members of such a board collectively reflect on how they make judgements and decisions, and practice “score keeping” – developing an understanding of how often and why they have been wrong in the past. In this way board members become aware of their own biases and become more effective in addressing them. These boards also embrace diversity and feedback as essential practices for developing their intelligence.
UPDATE 23 May 2017: 12 Questions to Determine Board Effectiveness
UPDATE 12 January 2018: Enron and the Hubris of the “World’s Leading Energy Company”
UPDATE 1 March 2018: How Leaders and Their Teams Can Stop Executive Hubris: Building a culture of critical thinking and humility can spare companies from the ravages of excessive CEO confidence.
UPDATE 2 March 2018: Damning EY report reveals widespread cultural problems at Carillion
UPDATE 9 April 2018: Professor Dennis Tourish (Professor of Leadership and Organisation Studies at the University of Sussex) discussed The Dangers of Hubristic Leadership: Lessons from the Finance Sector at a British Army Centre for Army leadership annual conference in 2017. This included many horrific examples of hubris. He joked:
The banking sector has had a very bad press in the last number of years….That well-known Marxist magazine The Economist had a cover a couple of years ago called ‘Banksters’, published immediately after the LIBOR scandal, drawing attention to the dysfunctional leadership behaviours and the greed and avarice that was common within that sector.
When people in positions of authority acquire hubris it really does have a very serious, immediate organisational effect.
In the banking and finance sector people described to me the enormous institutional pressure for success. Huge rewards if you achieve success but success defined pretty much by narrow financial terms. ‘If we carry out this merger, this acquisition, or do these acts we will all get terribly rich’.
So you can see the incentive there to go in that particular direction: high levels of reward, which is always associated with the acquisition of power.
Ultimately leadership is 90 percent example and unless we, and people in authority, role model that acceptance of dissent other people will not take it seriously.
We need to lead with questions and not answers. We don’t have to pretend to have all the answers when we are in positions of authority. We need to use that magic phrase ‘I do not know.’ There are many historical examples that show the value of that kind of approach. I think we have drifted away from it. We need to go back to it.
UPDATE 4 August 2018: Smart companies hire people who don’t believe in their mission: perhaps the headline of this article is over-blown, but hiring people who are share your values but prioritise them differently could help constructively challenge proposals and identify the unintended consequences.
Aerossurance has extensive safety, risk management and organisational governance experience. For practical advice you can trust, contact us at: firstname.lastname@example.org