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Why It’s So Hard to Blow the Whistle
March/April 2005
by Jeffrey A. Sonnenfeld
Jeffrey A. Sonnenfeld is associate dean of the Yale School of Management. His most recent book is Leadership and Governance from the Inside Out.
Not long ago, in a panel discussion on corporate malfeasance, I startled one of the other speakers by suggesting that good governance cannot be mandated by law. My fellow panelist was Senator Paul Sarbanes, sponsor of the Sarbanes-Oxley Act of 2002—a far-reaching piece of legislation that outlawed many sorts of corporate misconduct and conflicts of interest. In reply, he cited the law’s new requirements for disclosure. But which of its sections, I asked him, could have prevented the abuse of Walter Hewlett by his fellow Hewlett-Packard board members when he challenged the CEO’s plans to merge with Compaq? There was none. The Compaq merger was a disaster for HP, but the one board member who questioned it was isolated and excoriated.
Nor was there any support at Enron for the head of the board’s committee on compensation when he raised questions about conflicts of interest. Those conflicts were related to the illegal conduct of CFO Andy Fastow—who subsequently pleaded guilty to fraud. Yet the business leaders on the finance committee dismissed the red flags and actually suspended its code of conduct on such matters.
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Good governance cannot be mandated by law.
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Similarly, a decade ago, the turnaround CEO of a former major competitor of Oracle’s told me that any one of dozens of attorneys and accountants and salespeople could have blown the whistle to higher-ups on the revenue recognition scheme that eventually derailed the company. Even after the damage was made public, the board members did not want to unravel the fraud to discover how they had been deceived.
All of these debacles, and many in government as well, point to a single key lesson. From Salomon Brothers in 1991 to Enron, from the 1962 Cuban missile crisis to the Bush administration’s belief in Iraqi weapons of mass destruction, the story is the same: valuable expert information that might have prevented a crisis was lost, ignored, or distorted.
It is misleadingly easy to attribute such breakdowns in oversight to discrete, fixable flaws—corrupt individuals, insufficient disclosure mechanisms, conflicts of interest, lack of financial literacy. What is often missed is the underlying system failure: dysfunctional group processes that undermine vital dissent and independent thinking.
Consider the explosion of the Columbia space shuttle. The government investigators who analyzed the event afterward concluded that the culture of NASA was the chief problem: “The intellectual curiosity and skepticism that a solid safety culture requires was almost entirely absent.” There is a pathology latent in groups, capable of suppressing independent voices and dismissing disagreement as disloyalty.
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More than 30 years ago, the Yale psychologist Irving Janis labeled this malfunction “groupthink.”
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More than 30 years ago, the Yale psychologist Irving Janis labeled this malfunction “groupthink.” He found that while groups can often achieve feats that individuals could never achieve on their own, they can also fall victim to a sense of their own righteousness. Whether the group is the cabinet of a U.S. president, a corporate board, a group of research engineers, a sports team, or an academic committee, the priority of maintaining cohesiveness and solidarity can become more important than evaluating facts realistically and objectively. “The members' strivings for unanimity,” Janis wrote, “override their motivation to realistically appraise alternative courses of action.”
The symptoms include insulation from outside expert opinions; fixation on single paths, with no contingency planning; an illusion of invulnerability; collective rationalizations; the denigration of outsiders; and a coercive pressure on dissenters. At Enron, there was a pervasive group morality, fueled in part by a shared antipathy toward energy regulation and other forms of government oversight that were perceived as anachronistic. Those who questioned the company’s reckless entrepreneurship and conflicts of interest were considered problematic employees lacking perspective.
When Enron finance executive Sherron Watkins warned that the company “could implode in a wave of accounting scandals,” CEO Kenneth Lay did request an inquiry from Enron’s outside law firm in response to Watkins’s memo. But he set such paralyzing limitations on which documents could be reviewed and which executives could be interviewed that the law firm’s report totaled only nine pages and raised no serious concerns. It was issued just before Enron collapsed.
In late 1976, in the wake of a massive price-fixing conspiracy in the forest products industry, 48 top executives from 22 major firms were punished. Fifteen of the executives were sentenced to prison terms and stiff fines. I interviewed those who had served time, after they were released. Both senior executives and young managers felt that an internal moral code had formed that justified their manipulations of the marketplace. These otherwise upright citizens, active in the Boy Scouts, Little League, and other civic organizations, felt that they were acting merely to protect earnest companies that lacked the clout of other “cleaner industries.” As one executive told me, “It wasn’t until the minute I became a convicted felon and sentenced to prison that I realized what I had bought into without serious question.”
Top leaders and boards not overtly complicit in the conspiracies clearly knew what was going on but tried to insulate themselves through layers of “deniability.” One CEO said, “Is it fair to hold the principal of a high school accountable for the misconduct of its students?” Many might answer yes to that question. But more importantly, he had the analogy wrong. The employees of a company are more like the teachers of a high school than like its students; students and parents are parallel to the shareholders. Certainly the principal should be held accountable for misconduct of the school’s teachers. If they were stealing supplies or abusing children, shouldn’t we hold the principal responsible for negligence?
In the scandals I have studied during the last three decades, there was no absence of regulation with clear purpose, no lack of accounting rules with overt intentions, no lack of corporate codes of conduct. Major accounting firms, investment banks, executive suites, and corporate board rooms were filled with able, financially literate professionals who knew that they saw wrongdoing, but failed to act. Some even participated in fraud and other forms of misconduct.
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Is it possible to prevent the misconduct created by groupthink?
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What groupthink contributed to these debacles was bystander apathy and a lack of options for individuals who suspected wrongdoing. The resolution of these sorts of problems is not through more laws. Nor is it through simplistic good-governance checklists of board structure. Some consultants and governance metrics firms are selling one-size-fits-all recipes—but these can actually hurt firms. William Donaldson, the current chair of the SEC and the founding dean of the Yale School of Management, cautions that “there are vast differences in . the thousands of corporations struggling with the issues of good corporate governance … [O]nce the board determines the ethical culture that is to prevail, each company board should be afforded a level of flexibility to create their own approach to its structure.”
Is it possible to prevent the misconduct created by groupthink? Yes, if a board creates elements of governance 1) to build a climate of trust and candor; 2) to foster a culture of open dissent; 3) to utilize a fluid portfolio of roles; 4) to ensure individual accountability; 5) to ensure opportunities for the board to assess leadership talent; 6) to evaluate the board’s own performance regularly; 7) to seek knowledge rather than marquee names for the board; 8) to avoid joiners who collect boards like trophies; 9) to seek those with a passionate interest in the business; and 10) to ruthlessly purge those with conflicting personal or commercial agendas.
These techniques can break the blinders of groupthink without destroying group cohesion. Through these procedures, board members can air doubts, leaders can have their approaches criticized, and devil’s advocates can be celebrated.  |
