Groupthink justifies unethical behavior that has led to the catastrophic collapse or weakening of long-standing companies: Arthur Andersen, Lehman Brothers, GlaxoSmithKline, HSBC, Steinhoff Scandal, and more recently, the Wirecard Scandal. As these ethical lapses can affect other aspects of the organization, opposition parties are pushing the German Parliament to launch a commission of inquiry next Thursday (Oct 8) into the collapse of the German digital payment firm Wirecard.
The silence that comes with obtusely corrupt actions would cause severe impacts lasting for more than 2 decades because huge sums of money are involved, not only from wealthy merchants but even small wage earners. After the smoke has cleared, some judgments can be made on what could have triggered the disastrous decisions which led to their downfall. Often, in the background, lurks a monster they chose to name in sanitized terms: groupthink. What causes corruption which afflicts even those entrusted with moral responsibility?
Dynamics of Groupthink
In his book “Groupthink: Psychological Studies of Policy Decisions and Fiascoes, Irving Lester Janis identifies the causes and fateful consequences of the process that takes over when decision-making bodies agree for the sake of agreeing to abandon their critical judgment.
Groupthink is a psychological phenomenon in which people strive for consensus within a group. In many cases, people will set aside their own personal beliefs or adopt the opinion of the rest of the group. The term was first used in 1972 by social psychologist Janis.
People who are opposed to the decisions or overriding opinion of the group as a whole frequently remain quiet, preferring to keep the peace rather than disrupt the uniformity of the crowd. The phenomenon can be problematic, but even well-intentioned people are prone to making irrational decisions in the face of overwhelming pressure from the group.
Implications of Groupthink
Janis suggests that groupthink tends to be the most prevalent in groups with the following characteristics:
- A high degree of cohesiveness.
- External threats, moral problems, etc, threaten the group
- Structural issues (lack of impartial leadership).
In the case of the Steinhoff scandal, a small group of former Steinhoff executives and individuals from outside the company, led by an identified “senior management executive,” implemented the deals, which substantially inflated the group’s profit and asset values, the summary said. Steinhoff did not name the individuals but said those implicated were no longer employed by the company. A company spokeswoman declined to give further details.
Wirecard, which offered electronic payment transaction services, risk management as well as physical and virtual cards, collapsed on June 25, owing creditors more than €3.5 billion (almost $4 billion) after disclosing a gaping hole in its books that its auditor EY said was the result of a sophisticated global fraud.
The same herd instinct can be detected now in the DeFi industry where institutional investors practice their own groupthink pursuing profits with disregard for both value or growth-oriented investing.
While groupthink can generate consensus, it is by definition a negative phenomenon that results in faulty or uninformed thinking and decision-making. Three consequences top the list:
- Obedience to authority without question
- Overconfidence in decisions
- Resistance to new information or ideas
The eagerness for massive profits develops into unrelenting hubris and arrogance when profits are coming in. This pervasive culture of bullying smothers any discussion about unsustainable unethical practices and alternative solutions drown out. Do we need to recalibrate our ethical conduct as a matter of urgency?