Editor’s Note: Rita McGrath is a professor at Columbia Business School. The opinions expressed in this commentary are her own.
In recent weeks, we’ve seen how concentrated power and a lack of diverse perspectives on corporate boards can cause systemic blind spots in organizations and lead them into avoidable crises.
Facebook, for instance, is currently in the crosshairs of regulators, business partners and users after damning reports came to light about its reaction to a drumbeat of bad news. Carlos Ghosn’s devastating fall from the upper echelons at Nissan has thrown both the auto maker and its longtime partner Renault into crisis, and has cast doubts on the structure of corporate governance in Japan. And his behavior as an “imperial CEO” led to Jeff Immelt parting ways with GE, heralding a corporate meltdown of epic proportions. These are just some of the most recent and visible examples of how power — particularly absolute power with few checks and balances — can presage a crisis.
Here’s how absolute power can lead a company down a self-destructive path:
Shrinks cognitive bandwidth
Practices such as having the same person serve as chairman and CEO, failing to give decision making power to truly independent directors, and selecting directors from the same tired pool of contenders, are all likely to increase the chances that corporate leadership will miss something important in the external environment. By definition, the number of perspectives weighing in on decisions are reduced if the diversity of the people making consequential decisions is limited.
Moreover, research suggests that more homogenous teams (as one finds when only a small group of people — or even a single individual — is in power) perform more poorly when tasks involve imagination, creativity and out-of-the-box problem solving. Precisely because it is harder to come to an agreement on information and its implications, more diverse teams do a better job.
Discourages sharing uncomfortable news
The people most likely to encounter evidence that the world is changing tend not to be comfortably seated in corporate headquarters. They are at what the late businessman Andy Grove long ago called the “edges” of the organization.
It’s the person at Facebook who first noticed something strange going on with accounts that could be traced to Russian operatives, only for Facebook’s then-security chief to be met by anger from the top of the company when he shared early findings in a conference room deliciously named “only good news,” according to The New York Times. It’s the whistleblower at Nissan who pointed out that all did not seem well with respect to the car company’s books. And they’re the external analysts looking at GE’s businesses and wondering whether something wasn’t “broken” over there, despite corporate management’s denials that anything was problematic at all.
Enables self-interested decisions
When power is overconcentrated in a few players, executives have the latitude to take actions that are comfortable for themselves, but not necessarily consistent with the good of the organization or the people in it. While this should be obvious, we still see many examples of how long-term decisions are colored by the outcomes that will reward the most powerful, even if they prove negative in the longer term.
This can take the form of outright criminal behavior, as the allegations against Carlos Ghosn — which he has denied — imply. Or it can take the form of claiming generous retirement payments, stock options and access to company resources, as has apparently happened with Jeff Immelt, who used a spare plane for travel until 2014, according to GE. During his tenure, GE’s decisions to buy back its own stock (which has the effect of strengthening the share price) were blamed for contributing to GE’s cash problem.
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Or it can take the form of prioritizing advertising revenue over the protection of a user’s confidential information and strict adherence to the law. According to a complaint filed by the Housing and Urban Development Department, Facebook, for instance, has promised advertisers it won’t show housing ads to people in protected classes, such as the disabled who might need certain accessibility, which is considered housing discrimination and actually illegal (and for which the company is being sued — Facebook said it would address HUD’s concerns).
Given these obvious drawbacks, why are so many organizations working under governance structures that expose them to these risks? One reason is that good governance, challenging group discussions and quests to find real information, is hard. It takes time and effort to identify and recruit diverse board members. It can feel uncomfortable to insist that the influence of more powerful people be reduced. And bringing women and underrepresented groups into the conversation means the conversation itself is likely to be different. Nonetheless, it’s an effort worth making — unless you want your organization to star in the next set of shocking corporate headlines.