West Falmouth Associates

The Social Psychology of Governance in the Boardroom

By John K. Allen, Ed.D.

Reprinted with permission of SUM News

Sarbanes-Oxley (SOX) legislation and SEC regulation have introduced a broad range of rules and procedures designed to increase disclosure, accountability, and effective corporate governance. These practices may become a de facto standard for private as well as public companies. While compliance with SOX and SEC regulation may have many of the desired effects we should not underestimate the complex set of social psychological forces that also govern behavior in the boardroom. Board members, auditors, and executives need to understand how these forces can help or hinder effective corporate governance and work to create a social climate that supports legislative intent.

The boardroom is home to the Board of Directors and many subgroups including audit committees, governance committees, compensation committees, outside auditors and potentially management. Each group has its own culture and norms that can support the intent of SOX legislation or subtly work against it.

Most board members, managers, and professionals view themselves as ethical individuals, working hard to do the right thing. It is easy to underestimate the extent to which social forces may lead us to view

actions as appropriate or effective when they are not. We also tend to feel that others will agree with our opinion or position when in fact, they may not. So, it is easy for a well intentioned Board or committee to sanction ineffective controls or governance procedures with a self-serving confidence that says, “We’re an ethical company.” “She is an honest person.” or “That’s the way everyone else is doing it.”

The antidote for this perhaps overconfident attitude is a measure of skepticism as well as candid self-scrutiny. Yet most people are more optimistic and positive, especially in social situations, assuming the best and confident that things will work out well in the end. In an odd way, good auditing and, to some extent good governance, requires a bit of pessimism about the human condition to motivate diligence.

The dynamics of small groups which meet infrequently are such that there are often inhibitions to raising difficult questions, questioning the way the group operates, or challenging the group’s perception of an event. We know, for example, that it is easier to disagree with a group opinion if just one other member of the group disagrees as well. But when three or four high status members of a board express a strong public opinion it will be very difficult for others to disagree.

Naive observers suggest that following a set of rules and selecting board members, executives, and professionals who are assertive and morally strong

will ensure effective disclosure and corporate governance. These steps will certainly help. However, social factors will govern behavior in the boardroom as strongly as individual personality factors. Therefore, boards and their professional advisors need to attend to social factors such as culture, norms, perceptual bias, and group influence to ensure that these forces support the goals of SOX and effective corporate governance.