The primary role of a board of directors is to make decisions.
There is a wide range of decision-making processes that you should require your executives to apply before they submit recommendations to the board.
Nonetheless, boards will often be forced to make decisions with flawed or incomplete information. In addition, there are some bad habits that will stop boards from making the best decision within the constraints of information available at the time
It is important to be aware of these and to build good practice into board processes.
Groupthink arises when the desire for consensus overrides realistic appraisal of alternative courses of action; it is the result of a culture that prevents contradictory views from being expressed and subsequently evaluated.
Look out for groupthink on boards with similar backgrounds, norms and values and/or a history of making similar decisions.
Directors are, almost without exception, intelligent, accomplished and comfortable with power. But you put them into a group that discourages dissent, they nearly always start to conform, and the ones that don’t often decide to leave.
Head hunters looking for potential directors, and appointment committees will often ask, “Is this fellow a team player?” which is code for “Is this person compliant, or does he make trouble?”.
To avoid groupthink, start by recognising the value of independent-thinking independent directors; appoint them and encouraging challenge at board meetings. Ensure that it is standard practice to ask ‘Devil’s Advocate’ questions before each decision is made.
In the 2006 case of the US Government vs. Enron, the presiding judge instructed the jurors to take account of the concept of ‘wilful blindness’ as they reached their verdict about whether the chief executives of the disgraced energy corporation were guilty.
It was not enough for the defendants to say that they did not know what was going on; that they had not seen anything. If they failed to observe the corruption which was unfolding before their very eyes, not knowing was no defence.
The guilty verdict sent shivers down the spine of the corporate world.
Extreme examples might also be the tobacco industry and climate change deniers.
On a smaller scale, what might be some of the things that you might be subconsciously avoiding? For example, the impact of new technology, changes in the market or bad practice in the workplace. Think of the #MeToo movement.
Again, introduce the practice of asking “What might we be avoiding; what is it we don’t want to admit?”
Blind spots are slightly different. A blind spot is something that you seem unable to understand or to see how important it is. For example, a board might be completely ignorant of strategically important issues or of problems caused by outdated assumptions and interpretations. It might arise from prejudice or outdated thinking, but it is not an act of avoidance.
Bind spots can be avoided by ensuing that directors and boards are exposed to new thinking and developments; wide reading, attending conferences and presentations from experts.
Ask “What might we be unaware of or failing to see?”
Confirmation bias arises from the influence of desire on beliefs. It is the tendency to search for, favour and recall information in a way that confirms your pre-existing beliefs or hypotheses.
When people would like a certain idea/concept to be true, they stop gathering information when the evidence gathered so far confirms the views what they want to believe. Once they have formed a view, they embrace information that confirms that view while ignoring, or rejecting, information that casts doubt on it.
It should be good practice to include a Devil’s Advocate session before any decision is made. “What evidence could we find in order to prove the opposite?”
Anchoring bias is a result of jumping to conclusions, of being influenced by the first idea presented, being impressed with the idea and basing your decision on that rather than considering all the other information.
For group decision making, it is crucial to obtain information from each member in a way that they are independent.
Once again, the challenge is to be aware of the danger of anchoring bias and to include a process to ensure each idea is examined on its merits.
Overconfidence can cause directors and boards to place too much faith in themselves and their knowledge and viewpoints, and allowing this to get in the way of collecting and considering independent information.
Overconfidence can lead to taking unnecessary risks.
Each of these habits is a form of laziness, leading to sloppy decision making. By being aware of them and introducing specific ‘stop and check’ processes, boards can ensure they address issues competently and professionally so that they can be confident of making the best decision within the constraints of information available at the time.
It is useful to review decisions later. “How did we make the decision? Did we take account of all the information and advice available at the time? What can we learn from how events actually worked out?”
As 2018 comes to an end, the FRC publishes the finalised Wates Corporate Governance Principles for Large Private Companies. The last piece in a series of major changes to UK corporate governance that will come into effect from 1 January 2019.[Download]
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