Written by David Zahra, 21 October 2013
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The collapse of Swissair is very often quoted as an excellent example of the dangers of “group think”.
“Groupthink” is a situation where members of a group similar in background and insulated from outside opinions, ignore alternatives and take irrational actions.
A short time before the airline’s collapse, the number of Swissair’s directors was reduced leading to the elimination of industrial expertise. It transpired that the remaining directors shared common values and norms and had similar backgrounds. Commentators concluded that, due to the pressure to conform, the directors failed to question poor decisions and gross mismanagement. Eventually, the airline went bankrupt.
The risk of ‘groupthink’ is possibly higher in smaller economies; the human resource pool is small and it is more likely that directors share similar academic and professional backgrounds.
In fact, Malta enjoys a high degree of family businesses with board composed of family members, without the presence of independent or non-executive directors.
The EU has recently announced that it is seeking to increase diversity in boards of companies. It intends to achieve this by enhancing “transparency in order to facilitate an effective oversight of the management and robust governance of the company”.
The Commission has noted that insufficient diversity in boards may lead to similarity of views of the members of the board of directors and more resistance to innovative ideas: directors having a “similar educational and professional background, geographical origin, age or gender […] contribute to the failure of an effective challenge of the management decisions, as the lack of diverse views, valued and competences […] lead to less debate, ideas and challenge in the boardroom”.
Diversity brings innovation, discussions and different views. Companies perform better if their management and administration is diverse.
The European Commission is proposing that larger listed companies provide, as part of the corporate governance statement to provide information on their diversity policy, including aspects age, gender, geographical diversity, and education and professional background. The statement will have to contain the objectives of such a policy, its implementation and the results obtained.
In line with the “comply or explain” approach, those companies not having a diversity policy will only be obliged to explain why this is the case.
The proposal applies only to listed company of a certain size. Companies that require, possibly more than others, such diversity fall outside the parameters of this proposal. It is therefore the role of entities such as the MISCO Directors Network to create awareness for smaller companies, particularly family businesses, to embrace diversity on their boards to avoid the dangers of “groupthink”.