Judicious corporate governance

11 July 2011

Green Light, Manila Standard Today

While stuck in traffic the other day, I listened intently to the Senate hearing on the PCSO intelligence funds. Particularly interesting was Sen. Enrile’s line of questioning on the approval of the intelligence funds for 2010 in the amount of $150 million. Former PCSO vice-chairman, general manager and disbursing officer Rosario Uriarte explained how she secured funds for the intelligence project and “gave” custody of the project to President Arroyo. Surprisingly, when Enrile asked other members of the board present at the hearing if they were aware of the funds being approved, two replied that they were not aware while one replied that he was aware but did not see the project documents.

I’m hoping that the continuing hearings will reveal more about the process through which the funds were approved as well as the appropriateness of such an approval. But the pattern of answers from Uriarte and the other board members was a jarring reminder of the critical importance of judiciousness and independence among corporate board directors.

The board is the conscience of a corporation. It serves as the final arbiter of the soundness of decisions made on behalf of the corporation. Ultimately, however, the soundness of the decisions of a board depends on the strength of character and the behavior of the board members themselves. Standards of corporate governance emphasize that board members should carefully evaluate matters brought before it and ask as many questions necessary for such an evaluation. It is also important that a board member speaks his or her mind on matters affecting the corporation and the fulfilment of its mandate, even if his or her view may be unpopular.

The difficulty of dissenting within a group has been well studied by behavioral scientists using the concept of groupthink. Groupthink is the tendency of members of decision-making groups to think alike and interpret information and events in similar ways while ignoring negative information and suppressing conflict. This leads to faulty decision-making. This tendency is especially common in groups where members have a high need to please each other. In the case of board directors, this may very well be happening when a director’s appointment is strongly influenced by management itself or, in the case of government corporations, Malacañang. The director has a strong incentive to stay in the good graces of these parties. Also, a director who raises uncomfortable questions can prolong meetings and risk the ire of fellow directors.

But the resulting rubber stamp board that groupthink creates won’t do if a board is to act as the corporation’s conscience. We need board directors with convictions and who can express them in constructive ways that can help the board make optimal decisions. What can conscientious directors do? How can they speak up to avert a crisis when they think something could be wrong? Harvard ethics professor Mary Gentile, in her book Giving Voice to Values: How to Speak Your Mind When You Know What’s Right, makes a number of research-based suggestions. Let me draw three implications from her work which can help judicious directors who want to speak up.

Directors should first want to speak from their convictions. This mental decision gives the psychological strength needed to meet the challenges of speaking up. Moreover, directors can take encouragement from the common fact that they are not alone in their concerns and their example can give encouragement to others to speak up as well.

Directors should anticipate objections to their stand and present their concerns in ways that speak to these concerns. This practice, called “framing” in the research literature, engages listeners rather than turning them off or triggering hostility. Suppose a director is concerned that a proposal will cause trouble for the corporation but he knows that other directors favor the proposal because it is being pushed by a powerful authority figure. Since his peer directors value compliance with authority, the concerned director can find a way to state his objections in a way that is consistent with this value as well. He might say, for example: “I realize that Mr. X (the powerful authority figure) wants this to happen but, as you know, Agency Y (a regulatory agency with authority over Mr. X and the corporation) has issued a clear directive against actions like this. I think that it is our duty to advise Mr. X against this not only to protect the corporation but also to protect him.” An objection framed in this manner has a higher probability of being considered because it takes into account the needs of Mr. X while utilizing the value of respect for authority in a larger sense – this time taking into account the authority of Agency Y over Mr. X and the corporation itself.

Directors should not be discouraged even if they are not able to convince others. The mere fact that they expressed their views based on their convictions already help the board in more fully appreciating the issue at hand. Giving such inputs for decision-making is the duty of every director, after all. Other directors, though unconvinced, may, even in silence, already be rethinking their own stand on the matter and may take a different stand on similar issues in the future. Importantly, directors who express dissent can improve their ability to express dissent in the future. The ability to speak up based on one’s convictions, much like a muscle, gets stronger with use.

The importance of judiciousness and independence among corporate directors cannot be over-emphasized. The corporation is a powerful social and legal invention which has been authorized by the State in the service of the common good. It can only fulfill this function, however, if directors play their role as the corporation’s moral guide.

Dr. Benito Teehankee is associate professor and chairman of the Management and Organization Department of the RVR College of Business at De La Salle University. He may be emailed at benito.teehankee@dlsu.edu.ph. The views expressed above are the author's and do not necessarily reflect the official position of De La Salle University, its faculty and administrators.