How and Why Boards Need to Adopt ‘Black Box Thinking’

This does not mean that I am not suggesting that the codes, tools and working practices they follow are not working, nor indeed that they are not necessary, but every time I hear about a failure it’s clear that something must be missing.

When I read Matthew Syed’s book Black Box Thinking, I understood that he suggests that if we can learn from our mistakes, really study what has gone wrong when there has been a serious incident, then we can put measures in place to ensure it doesn’t happen again.

In the aviation industry, every flight carries a black box so that in the unlikely event of an accident they can understand what went wrong and ensure that the faults or malfunctions responsible don’t happen again. The results in aviation safety demonstrate that this methodology really works. Understanding and learning from things that go wrong in every single incident means that an accident occurs in approximately one in 2.4 million flights (which in the case of potential lost lives is still too many!). I wonder though if businesses or boards should adopt this type of approach? What is the equivalent of a black box for corporate failure that organisations can use?

Leaders and boards have to recognise that they are capable of making bad decisions, they do get things wrong and sometimes they don’t scrutinise, challenge or monitor effectively. The danger is that many board members regard any mistake as a one-off, a unique incident – sometimes known as a black swan because of its rarity. Worst of all they fail to recognise or accept that they could have done anything differently. Black box thinking will not work because they don’t recognise that there is anything that they can learn from.

How many times have we found that organisations just don’t learn from corporate failings? If I mention Barings Bank, Societe GeneraI, UBS or the names synonymous with these failings – Nick Leeson, James Kerviel, Kweku Adoboli, or Bernie Madoff, do we not think that some of these incidents could have been avoided if we applied the lessons learned from corporate failures past? Its unfortunate but I’m certain that although we may have enough black box thinking to ensure that we never have another rogue trader, there is sure to be another corporate catastrophe brewing in some guise as you read this blog.

 

Dr John Carver said: “Boards are an incompetent group of competent individuals.” His inference is that just because members of a board are competent, high performing and experienced individuals it doesn’t follow that the board as a single entity will excel. However, groups don’t have to be ineffective. In fact groups have the potential to be smarter than individuals with one school of thought being that it is when the board believes that it is always right and always wise, that we have a problem.

In Spencer Johnson’s classic management book Who Moved My Cheese?, we’re reminded that the cheese won’t always be there and we need to make sure that we ready ourselves for that eventuality. Andy Grove, CEO of Intel Corporation, put it this way: “sooner or later, something fundamental in your business world will change.” Boards need to adopt a state of mind that accepts that something’s going to go wrong – but they don’t yet know what, when or how. Complacency is the enemy of boards. In fact, it is the enemy of governance. Relying on past experience may not help us to predict what will happen in the future but it can help us to be cognisant of the types of things that could occur.

When an organisation adopts a culture which is self-effacing and critical of its stakeholders – whether they are beneficiaries, customers or shareholders – they are suffering from a dangerous cultural blind spot. The solution is that there is a third level for board performance beyond following the governance code, complying with frameworks and strategy. There has to be transparency involved in using an integrated reporting approach that means boards understand and learn from every incident that does not go to plan.

The work of boards is complex, uncertain. Governance is a generative process which somewhat relies on the lessons of failures past to help us implement new strategies and preventative measures to ensure the long-term success of the company. Adopting black box thinking is one way in which we can make good attempts to avoid failure in the future.

 

Until next time…