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Are control bodies out of control?

Time and time again, supervisory boards fail miserably. The governments of the German states of Bavaria and Saxony did a poor job of supervising two state-owned land banks, just as Klaus Wowereit, the mayor of Berlin, did with the new airport Project in Berlin. But why? Our guest author Murat Suner wanted to know and asked the business information systems expert Prof. Peter Mertens, the brain researcher Prof. Gerhard Roth, and me.

Our Executive Forum was held on June 6th, 2013. The theme was “Emotional Management Information”. In my welcoming address, I quoted three examples where supervisory boards failed spectacularly. Over the course of the day, we analyzed the causes. In the audience was my doctoral advisor, Prof. Peter Mertens, who was one of the pioneers in the field of business information systems in Germany and has dealt for a long time intensively with the topic of management systems for control bodies*. One of the speakers on that day was Germany’s leading brain researcher, Prof. Gerhard Roth, with whom I talk regularly regarding questions about perception. Murat Suner was there, too – a longtime friend who is also the publicist and editor of Traffic News-to-go.

The supervisory board of the new Berlin airport relied on traffic lights – with disastrous results.

Murat Suner: At the German Directors’ Conference, Klaus-Peter Müller demanded, among other things, higher qualifications for supervisory board members. Müller is head of the government commission for corporate governance. Today at the Executive Forum, we have heard many reasons why supervision fails. Is a lack of qualification the main problem?

Peter Mertens: Supervision has become more complex, especially in the financial services sector. Evaluating equity warrants can even be overwhelming for super­computers. Getting selected to these boards often has more to do with politics than skills. The requirements are increasing and since most of the members do this job on the side, they simply don’t have enough capacity. Executive boards often don’t tell supervisory boards the truth, which destroys the trust between the two bodies. Plus, the systems for reporting risks are insufficient.

Gerhard Roth: Supervision is brain work. Thinking, however, is expensive and straining. Relative to its size, the human brain needs ten times more energy than other organs – even in a state of rest. Our brain, therefore, is constantly striving to unload. If these board members have limited capabilities, the ability to easily understand control information becomes even more important. It is under­standable, albeit inexcusable, that supervisory board members start fiddling with their mobile phones when the information that is necessary for control gets too complicated.

Nicolas Bissantz: The examples of the land banks and Berlin airport hub have one thing in common: the supervisors’ limited attention should have been directed accurately with the help of traffic-light charts. That delegated the responsibility from the controlling bodies to the people who were supposed to be controlled. The supervisory board members have to evaluate the risks themselves, otherwise you put the fox in charge of the henhouse. The fox was even malicious in the case of Wowereit because the signals were manipulated.

A German expert in the field of business information systems: Prof. Peter Mertens from the University of Erlangen-Nuremberg.

Murat Suner: Many of the concepts at this Executive Forum are interdisciplinary. IT, business information systems, business management, visualization, and psychology – do we need insights from all of these fields to improve controls?

Peter Mertens: We need to reduce the complexity of the control task, increase the qualification, and close the remaining gap between capacity and competency with the help of IT. The role of IT can be to automatically consolidate and share information without any room for tampering. Business management and the experience with expert systems can help us fill competency gaps by automatically interpreting the data at hand.

Gerhard Roth: The brain prioritizes information that is new and subjectively important because it has major consequences. When wrong decisions in a supervisory board have no consequences for their members, as it appears to be in Wowereit’s case, we will continue to see major blunders. On the other hand, we will bleed out our supervisory boards if the consequences are too harsh. It appears to me, however, that considerable improvements are possible. Supervisory boards, it often seems, have no chance of getting a full picture of the situation.

Nicolas Bissantz: Supervision can be simplified and more automated, but the wrong methods for doing that are en vogue. Right now, my most important challenge is to confront misunderstandings. Simple signal systems are used in situations where powerful shareholders are setting goals for a replaceable management team. These systems are fully unsuited for risk identification and supervision.

The brain researcher Prof. Gerhard Roth from the University of Bremen, Germany at the Executive Forum in Berlin.

Murat Suner: The problems with supervision appear to be fundamental and methodic. They can’t really be explained by blaming the mistakes on individuals. Do you already see precise methodical approaches?

Peter Mertens: The information for the supervisory board may neither be too complex nor too simple. Traffic lights are definitely too simple. Clustering, for example, is a moderately complex approach that suites the purpose. This technique shows that a company’s activities in problematic industries and/or countries tend to form clusters of risk. In medical technology, this would be comparable to visualizing of a tumor using CT data (current size and growth in the recent past).

Gerhard Roth: How information is absorbed, what factors impede a fast understanding, what role our sense of vision plays, and how colors, forms and motion can make an effect are all well researched. We can say both: Why do traffic lights, for example, entice the brain to thankfully accept the help that is offered as well as why our associatively thinking brain is just as thankful for a certain level of complexity so that it can search for new findings. This triggers feelings of happiness and can reward recognition and learning.

Nicolas Bissantz: Supervision has a lot to do with distilling the relevant data constellations from large data quantities in a short amount of time. The methods for doing that have evolved at a fast pace over the past 20 years – but they still are not widespread. That partially has to do with the fact that the lifecycle of hot topics in IT overlap in a way that impedes a continual development of the actual content. Right now, everything has to fit on an iPad which was built for private consumers and not business users. At the end of the day, that isn’t necessarily bad, but it is eating up resources that have to be taken from somewhere else. To put it bluntly, some companies just have to first publish bad paper reports for their supervisory boards on an iPad before they will make the time to sit down and contemplate their form and content.

Murat Suner: Mistakes in supervision have cost taxpayers billions of euros. Should the state intervene and standardize the work of control bodies even more?

Peter Mertens: For a long time, providing adequate information to the supervisory board was a task reserved for the executive board. In the meantime, the supervisory board has more power and the executive board only has limited possibilities to deny them information. Obligatory standards would be nice but they still need to be defined and are currently being researched. I personally find the analogy to the black box enlightening. Following a crash landing, the box is sealed and sent to the regulatory authorities. The pilot cannot “edit” the data, for example, and remove any information that could lead to the conclusion that he or she was not concentrated prior to the accident. I personally feel that these types of direct links between IT systems and the supervisory board are needed. That is even possible in a watered-down version. The system can generate suspicious facts that could provoke the supervisory board to request on-demand reports from the executive board.

Gerhard Roth: Politicians are often members of supervisory boards – and fail for the same reasons. If the legal framework to create transparent, understandable communications between management and supervisory board is missing, there is a need for action. I don’t see that the time has come for governmental norms and standards. In politics, I have observed many board decisions where the available information simply overwhelms the human capabilities to process it. There are indications that decision-making rules are beneficial in these cases. These rules utilize the functions of subconscious or semi-intuitively experienced processes in the brain. For example, a control body is “bombarded” with all types of information. After 24 hours, a vote will be taken without further consultation. Intuitive decisions can be very good ones. That can be integrated into organizational workflows more systematically than it has been in the past.

Nicolas Bissantz: I would love to say, let’s just ban the use of traffic light charts as a means of informing control bodies! Politicians, however, still need more information themselves. The correlation between information design and wrong decisions is a phenomenon which, I fear, is still relatively unknown. That also has to do with problems in our information culture. The common information formats are still the same that a certain William Playfair invented over 200 years ago. Newer, better formats are spreading, but slowly. The final stretch of the process – namely when information is cast into form – ultimately determines if people understand the content or not. In this regard, there is still much work to do.

* Mertens, P., Führungsinformationssysteme für Kontrollorgane – neue Paradigmen für die Managementinformation (in English: Management information systems for control bodies – new paradigm for the management information), Informatik Spektrum 33 (2010) 1, pages 14–26.