Bartz firing and "group think": An apple is an apple no matter what you call it

Bartz firing and "group think": An apple is an apple no matter what you call it

As many of you may have read about this morning, Carol Bartz, CEO of Yahoo! Inc, was fired. A single instance of a female CEO being fired: But what can this potentially tell us about the phenomenon of "group-think"?

Group-think is a simple idea that those working closely together with similar characteristics from the same background will often fail to recognise external threats. Something that, in a corporate setting, is receiving a lot of attention where boardrooms are dominated by middle-aged white males. This has been touted as a possible failing of corporate governance that was a factor that lead to the events of 2008.

Chester Barnard, The Functions of the Executive, wrote in 1964, from his reprinted lectures from 1938, that:

'It must not be understood that the desired degree of compatibility is always the same or is the maximum possible. On the contrary it seems to me to be often the case that excessive compatibility or harmony is deleterious, resulting in "single track minds" and excessively crystallized attitudes and in the destruction of personal responsibility'

So, does having female or diverse representation on your board necessarily mean enhanced firm performance or help avoid catastrophe? From a purely subjective view I would have to say no. Distant investors may originally see such representation as an indicator of good corporate governance, but eventually people will realise a director is a director, just like a politician is a politician, no matter who they are. By focusing on corporate governance reforms as a way of reducing economic instability is purely a scapegoat from true causes: Lack of control and unfavourable directors' duties.

1) Lack of control - by this I mean from the law or parliament. Not from non-executives. Group-think solutions/hyperbole seem to suggest that if there were more diverse boards 2008 may never have happened. The truth is while interest rates and low cost borrowing could be driven to unstable levels, lenders would continue to try and undercut one another until that unstable level was reached. This leads to the second point of directors' duties

2) By this I mean mainly s172 - 'the duty to promote the success of the company'. This requires focus on the long term but also requires that you consider the interests of the shareholders/company as a whole effectively. Such was the economic climate any director who noticed problems before they happened in the economy/sector may be stuck in a catch 22 position. If they, as lenders, do not reduce lending prices they risk of losing customers etc and the total shareholder return/earnings per share reduces, which in turn reduces the director's bonus and even risk not being re-elected.

If they do reduce prices then the market becomes unstable and again bonuses are lost and directors ousted; or even worse being accused of not acting in accordance with s172 by focusing on the short term.

Further to s172, groupthink ignores that s172 can have an overriding element to that of personal views. Even if a board is diverse it does not necessarily mean a different course of action will be taken. A director has a duty to promote the success of the company, and this may conflict with their own views.

By having a diverse board wouldn't have been able to stop what was happening because if the market allows it, people will exploit it. Being male, female, young, old etc does not make you good at your job: Being good at your job makes you good at it.

Trying to predict where the next external threat to a sector or the economy as a whole will come from requires more than just robust corporate governance. Legislation at a national or even EU/international level is needed to stem "over-competitive" or harmful behaviour. However, one is aware of the arguments for and against legislative interference in the market.

*For those wondering I see the next collapse coming from social networking* - How many of us actually click adverts on Facebook? Not to mention the continuing presence of privacy...

As a disclaimer I fully support equality of access for board positions but assuming that the external threats can simply be overcome by having diverse people on the board is ignoring the bigger picture. It may be anecdotal but did Bartz improve Yahoo! by being female? No.

Anyway, that is my two pence worth...


For more commentary on directors' duties and shareholder litigation, visit Gibbs: Law and Life, a blog centering on directors' duties and company law, particularly on interpretation and practicality of directors' duties in the 21st Century.

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