There are four essential outputs when it comes to Board activity, according to Pick’s 2007 research on Boards in action. Learning. Evaluating. Advising. And decision-making. Making decisions was ranked as the board’s highest and most important activity. An effective board must understand the nuances of decision-making – especially when we consider that human decisions are notoriously flawed. People who make decisions often make errors based on fallacies and biases, and people on boards further need to make decisions that weigh up risks and uncertainties all the time.
The result of poor decision-making at the board level is often evident. That is why we have had infamous corporate scandals. Think back to the likes of Enron, Lehmann Brothers, BP oil spills in Mexico and neighbouring Nigeria, and even the recent bank collapses in Ghana. Bad board decisions behind closed doors can be just as damaging to a company’s success. Boards can approach decision-making with the right tools to minimise the risk of poor choices while steering the company in the right direction. This article explores the challenges of board decision-making, and offers three steps to improve them.
Forget charisma; focus on collaboration
Humans tend to equate good decisions with being rational and logical. Unfortunately, decisions can be irrational and unpredictable in the boardroom, hugely impacted by individual psychology and group social dynamics. While individuals may be able to analyse feelings and understand personal behaviours, board decision-making is a team effort that requires appreciating behavioural patterns driven by whatever happens in the boardroom context.
People in groups are drawn to leaders who can quickly and confidently make many decisions. We believe that confidence and certainty are the same things, whereas there is evidence that shows that even the best decision-makers can be confident and uncertain simultaneously. In corporations, big or small, the leadership skills that we often overvalue – such as charisma, expertise, speed and control – lead to problems (think of the Bernie Madoff scandals and how confidence must have oozed from that flawed board). However, ample research shows that the more undervalued skills such as humility, collaboration, empathy, and listening are essential for positive decision-making.
Harmful individual behaviour needs to be called out as a first step to achieving greater rationality in board decision-making processes. We recommend that board members need to recognise and understand unhelpful behavioural patterns. How often have you sat in a board meeting where the personalities are at play? Good board directors should assess their personal feelings and acknowledge how their behaviours impact board outcomes. Board participation should be set up for all voices to be heard through varied communication channels – not just the loud ones.
Board members should agree (and strive) to value each other’s perspectives, and build a shared understanding. The company’s best interests should guide individuals to see beyond themselves. As a collective, the board should always believe in a better solution and be open to creating options that improve decisions. Because when the decision is taken, the board must commit to taking action and being accountable.
Look to evidence to be more effective
Evidence-based practice is the conscientious, explicit, and judicious use of the best available evidence from multiple sources to increase the likelihood of a favourable outcome. As a second step to better board decision-making, we recommend a process-favouring evidence and usable contextual data.
When your board meets quarterly, it will be presented with company information to guide decision-making. Company perspectives may include anecdotes, experiences, and opinions. Good decisions are made better with more data points. In our digital world, the opportunities to collect data are endless. Even though being evidence-based sounds academic, we all do it every day in various ways because we are so digitally connected. Whether buying a car or planning where to eat a meal, chances are we look for evidence-based information. We seek data that is trustworthy and relevant to our specific context.
Basing professional judgments at the board level on data is more accurate than relying solely on individual experience or multiple experts. Being evidence-based calls on board directors to use critical thinking and the best available evidence to make decisions. Decision-making, as conceptual as it is, must be a practical exercise based on actual impact. The board must seek trustworthy evidence points and decide with fundamental stakeholders’ values and concerns in mind.
Take bias out of the boardroom
Bias in the boardroom is a significant issue that impacts most governance decisions. As human and imperfect as we all are, even the most well-intentioned and seasoned leaders may err in their judgment. Therefore, as a third step to better decisions, we must recognise and avoid cognitive bias in boardrooms. Cognitive bias is when our brains often treat opinions we agree with as facts and see our theories as the only accurate ones. When presented with facts that contradict our current beliefs, we stubbornly reject all arguments that do not fit with the bias we hold.
Research shows that bias in the boardroom is inevitable and frequently underestimated, undermining independent directors’ perceived benefit. There are more than 180 identified biases when it comes to boardroom decision-making; we recommend paying attention to the following significant ones:
- Groupthink: Frequently occurs on boards, and it happens when board members value harmony and conformity as they desire consensus and unanimity. The problem is that groupthink suppresses internal dissent – leaving poor decisions unchallenged.
- Confirmation bias: People tend to interpret and search for information consistent with prior beliefs. In the boardroom, preconceived notions and ideas will lead to board members discounting contrary evidence or facts.
- Availability bias is a human tendency to make decisions influenced by events or experiences that immediately come to mind. For boards, drawing only on available examples could make information appear more relevant than the actual case, and members may fail to see real risks.
- Loss aversion: In behavioural economics, loss aversion is a phenomenon where people perceive an actual or potential loss as more severe than an equivalent gain. In the boardroom, this leads to decisions where we prefer avoiding losses to acquiring gains, which can impact a board’s decision-making on new ventures.
For boards to make better decisions, these three recommended steps will ensure they are performing at their best for their highest and most important activity. First, to recognise and deal with personal behaviours that undermine collaboration. Second, to seek and value evidence-based information. Third, to hold up all decisions against the scrutiny of potential bias. In the end, although the company is deemed a legal person, the boards are run by human beings; and the more we understand humans and how they make decisions, the better we can achieve effective outcomes in the boardroom.
About the author
Jonathan Letsa is a corporate governance consultant who helps Executives, Boards, and Companies with corporate interests in Africa to achieve their business goals by setting them up for success. His core expertise lies in navigating corporate governance challenges and providing compliance, regulatory and business advice to Boards and Companies.
He is the lead consultant for Scribe Advisory, which provides Board advisory and corporate services that resolve company compliance issues and deal with statutory red tape for local and international businesses.
