Handled with care, conflict at the top of a company brings rewards. But powerful leaders who sweep away challenge can cause division and damage performance

A remarkable feature of the banking crisis is the number of senior people who have admitted that they felt unable to challenge their leaders' strategies, even though they believed them to be flawed. No one brooks contradiction kindly, and powerful people often feel extremely threatened by it. It's the hard-wired human response reinforced by years of business-school thinking about the benefits of the decisive hero leader. So they snuff out flickers of challenge to the point where no one dare contradict them.

But mistaking a lack of open conflict for agreement is a fool's game, says Richard Brown, managing partner of strategy consultancy Cognosis. "Raised voices, red faces and table thumping is a far less dysfunctional way of challenging each other than withdrawal, passivity and sullen acceptance," he argues. "It doesn't mean that people agree with you: they just take their misgivings underground and spread them throughout the organisation, which has a corrosive effect."

New research from Cognosis, which surveyed more than 3,500 top, senior and mid-level managers in public and private sector organisations, suggests that firms which encourage, embrace and manage confrontation make significantly better strategic decisions and engender greater understanding of those outcomes than organisations that don't.

The reasons are straightforward, says Brown. Not only are the best decisions those that take account of a variety of different views, but also "the very nature of challenge in strategy-making means that you are involved—you are investing mentally and emotionally in the process. So you are likely to be more committed to the outcome and to making the strategy happen than if you weren't involved. Being able to say your piece and be listened to has a big effect on engagement."

Many managers understand this at a rational level, Brown points out. Yet fewer than half of the organisations polled encourage challenge, 25 per cent actively discourage it and only 10 per cent say conflict happens a lot in their organisation. And because most companies studiously avoid confrontation, those brave enough to embrace it often get a hostile reception. Around 60 per cent of respondents said that challengers are typically labelled troublemakers.

So how do you breach the gulf between what ought to happen and what typically takes place in practice? How do you encourage what Brown calls functional—as opposed to dysfunctional—conflict, and prevent it degenerating into personal attacks? And who should be involved? One of the most disturbing findings in the Cognosis research is that in only eight per cent of organisations do non-executives question strategy, while only 10 per cent of chairmen challenge decisions. No wonder the banks went into meltdown.

A further concern is that human resources managers question authority in just nine per cent of organisations. But talent management is a key strategic issue in itself, given increasing global competition for the top people. "People are key to an organisation's ability to achieve its goals, so the talent implications of any proposed strategy need to be discussed early rather than as an afterthought," says Mairi Bannon, director of the Corporate Research Forum, a network for HR and leadership professionals.

Implementing a culture that harnesses a questioning of authority has to start high up, claims Brown, adding that if a leader and the top team embrace challenge, then a culture of inquiry will filter through the organisation.

But breaking down the resistance of the top tier is easier said than done. "Leaders are trapped in a red fog of anxiety," says Brown. Their state of mind is not helped by the lack of emotional intelligence, or what he calls "whole-mindedness"—both within individuals and in the team as a whole.

"You rarely find a whole-minded leadership group," he continues. "Part of that comes down to poor recruitment: people tend to hire in their own image, rather than seeking out complementary styles, personalities and approaches. So the bias in leadership groups tends to be towards the analytical, fact-based, practical and action-focused end of the spectrum. Far fewer teams are innovative, creative, intuitive and collaborative."

But individuals and boards can be coached in emotional intelligence, which is good because it is essential to ensuring that conflict is functional rather than dysfunctional. Because the best strategies reflect diverse opinions and perspectives, you need to involve as many representative voices as you can, certainly in the early stage of strategy development, argues Greg Orme, managing director of Kirkbright, the management development consultancy.

"The initial stage of opening up the box, inviting ideas, options and challenges and tossing them around could involve around 30 people," says Orme. "In addition to the board, you should involve anyone with an operational overview of a business unit, the heads of all the serious functions, and five or six of each of these people's direct reports. They will all have something to add, even if it is just to say they don't understand something, which can be hugely valuable in itself."

The first rule of engagement in what Cognosis describes as "a good fight" is that challenge cannot be personal, says Kevin Money, director of the John Madejski Centre for Reputation at Henley Business School. "Personal challenge is psychologically threatening and quickly degenerates into confrontation, active withdrawal or passive resistance."

The way to ensure conflict remains depersonalised is to frame it in the context of working out "what to do and how to do it" to try to achieve the organisation's aims, advises Money. Nevertheless, the debate needs sensitive handling. "You have to listen carefully and respectfully to the challengers, put yourself in others' shoes, provide positive feedback, adopt an attitude of inquiry—asking the how, why and tell me more-type questions—and allow time for reflection," he says.

Another important rule of engagement is that while people can be as open and honest as they like during the debate, once options start to narrow and the strategy-setting group is streamlined, everyone has to agree to support the ultimate decision. "If a function comes out feeling that they have lost a battle, they may do their utmost to make the strategy fail, to prove they were right," says John Littleton, business development director at brewing giant SABMiller.

A well managed challenge process tends to reduce the likelihood that any one party feels isolated. It also defuses the most insidious organisational "derailers" such as internal politics and personal agendas. An effective system also helps prevent the kind of collusion where individuals agree to protect each other's backs. It may take a more impartial observer to pose the really taxing questions—not how can we do this better, faster or more cheaply, but why are we bothering to do this at all?

"Coming in from the outside, we can draw attention to issues that threaten to remain the elephant in the room," says Brown. "A board will often close ranks, and we have to push them into the zone of uncomfortable debate. But it is when you delve deeper that you get the insights that are real gold dust."

Consultants have a potential conflict of interest: pushing the board too hard could amount to biting the hand that feeds them. So the research finding by Tim Clark, professor of organisational behaviour at Durham Business School—that clients often think consultants don't challenge them enough—is not surprising.

"Issues of seniority and trust are important," says Clark. "Senior consultants with a strong long-term individual relationship with a chief executive have far greater licence to speak their mind and are more likely to be listened to than more junior colleagues."

But the most effective questioning, he adds, often takes place informally, on a car journey or over lunch. "Consultants can make direct challenges in those informal situations but they feel less threatening."

Meanwhile, the ability of chairmen and non-executives to challenge strategy remains dogged by uncertainty about their role. "We see two typical scenarios," says Gary Ashton, director of business consultancy ER Consultants. "In some organisations, non-executives think they are providing healthy critique, but to the executives it feels like a mauling, so they start to be economical with the truth. Elsewhere, the executives think of the non-executives as just providing cover and don't expect them to be able to keep up with the speed of change, so they go through the motions of listening and then just railroad decisions through."

In the first scenario, the non-executives are typically executives elsewhere, so are used to making decisions. In the second, they are career non-executives, who, as Ashton puts it, "float around having a comfortable time".

Fundamental issues concerning the role of non-executives, such as the appropriate level of challenge, are the subjects of ongoing debate. But boards can use simple techniques to improve the quality of the dialogue, suggests Ashton.

"Building in more informal ongoing dialogue means that you can take an issue back to the board which has already been chewed over. That makes for more constructive debate than you will get if the non-executive is just lobbing in challenges every couple of months and then disappearing."

Boards could also agree to deal with strategy twice a year, spending the first session brainstorming and prioritising ideas, so that at the second gathering six months later non-executives are more likely to engage with the strategy proposed by executives.

But how does all this work in smaller organisations? On the one hand, harnessing diverse ideas is easier because people are more likely to know each other and reporting lines are shorter. On the other, standing up to a visionary and controlling founder could be tricky.

Alex Pratt, founder of Seriousreaders.com, is aware of the danger. "It's OK to be dominant in the decision, but you have to be passive in the ideas and evidence phase," he says. "And I always explain the reasons for a particular decision and why we are taking one route rather than another. Any organisation has cynics, and you have to get rid of them. But you should encourage and embrace sceptics, who may see things from a different angle, but who are on your side."

Gerry Ford, founder of Caffè Nero, conducts annual head office review sessions where people brainstorm what is wrong with the company or needs improving. There are 10 sessions, each lasting six hours and attended by about a dozen people who are not allowed to say anything positive about the business. Ford then consolidates the findings and asks each department to address the concerns that have surfaced.

Other organisations hire social psychologists to work directly with their boards almost in the role of "corporate fools" who can hold a mirror up to them.

But Clark says: "One of the problems is that what we think we are doing is sometimes very different from what we are actually doing. So even those organisations who say they are open to challenge may not be so at all."

They need to wake up. The alternative may be the kind of public grilling the top bankers received at the hands of the Treasury Select Committee in February. It was uncomfortable even to watch.