Organization: Virtual Advisory Board (VAB)
Guest Speaker: Sandra Guerra
Bounded rationality and biases
At the start of her remarks, Sandra pointed out that competence alone does not guarantee that boards of directors will be successful. She noted that all human decision-making is limited by what social scientist Herbert Simon defined as “bounded rationality”. That is, humans are limited by thinking that most decisions they take are correct. However, they often fail to recognize that they are constrained by multiple factors when reaching decisions. These include limited knowledge on the topic at hand; different abilities to process and deal with information; time constraints (limits) when making decisions; and cognitive limitations. Then, there’s the need to factor in biases, both conscious and subconscious, that impact decisions. In her taxonomy of biases, Sandra points out that there are a number of individual ones (memory/recollection, statistical information, confidence, adjustment, presentation and situations) alongside group biases (herd effect, group think, false consensus, in- group favouritism and self-serving behaviours) which all impact how the individual (as a board member or chair) and the collective (as the full board of directors) take decisions. All these factors, and their review, have helped corporate and board governance experts better understand over the years how organisations who seemingly had the best and the brightest minds sitting in their corporate governance structures still managed to succumb to mismanagement, fraud or ultimately business collapse. The issue of individual and collective behavioural patterns was at the root of all these situations.
Board dynamics matter – they help overcome biases
The limitations listed above led Sandra and her colleagues to embark on a several-year journey to investigate how boards function and how specific members can influence or impact fellow board members’ behaviours and ultimately the decisions they take. One key factor that led to better quality decision-making was greater board dynamics. Boards with more inclusive, open and questioning deliberative processes were perceived to perform better thanks to comfort to disagree, higher levels of free debate, information sharing among directors and greater levels of trust between the board and executive teams. Overall, those boards had better perceived results as concerned creativity, performance and satisfaction with decisions taken. On the contrary, less dynamic or more insulated boards saw their governance and supervisory efforts stifled by resistance to outside ideas, rejection of new ideas, tendency to refrain from expressing opposing views, social loafing and between- member tension during board meetings. The latter situation of course led to poorer decision-making. That is why Sandra and her colleagues chose to examine what could be done to make boards more dynamic and remove obstacles from decision-making processes.
Mitigating obstacles to efficient board decision-making
Sandra pointed out that the best way to manoeuvre one’s way through the various behavioural issues or pitfalls that negatively affect board decision-making is to have a healthy dose of scepticism along with a “red alert” button of sorts. This includes a number of ways to guide healthy board decision-making by using available tools to ensure that board review processes are fair and adequately provide for time needed to take thoughtful decisions and carry out due diligence on critical issues. This might involve questioning motives for why board materials are not delivered well in advance of meetings or individual members’ exercising rights to withhold signatures (leveraging signatory power). Additionally, there are a number of constructive ways to improve board dynamics and performance by supporting innovation in board reviews and discussions. These range from “what if?” challenges for discussing the merit of specific decisions or using choice architecture (nudges) to help guide board members along the decision-making path. The key issue here is to allow boards time for uncertainty: to support open discussion, to put concerns or doubts on the table, or engage in opinion-free review prior to reaching conclusions. These open approaches allow boards to excel and promote reinvention as standard, effective practice: not just as part of response to crises.
A new path to effective board results: openness to discussion of alternative decisions or allowing for periods of doubt
Sandra closed her presentation with a short enumeration of useful tools that can help boards improve their decision-making. These range from simple exercises like drafting decision trees and check lists on to more advanced techniques that in some cases require external, third-party involvement. For example, devil’s advocate roleplay scenarios help boost levels of scepticism to make sure that decisions taken are the correct, most beneficial ones. Or board chairs can invite members to engage in anonymous premortem exercises where the individual members are given the chance (over a reasonable period of time) to write down what could go wrong in a given situation or when taking a specific decision. This gives board members space to provide critical review services in psychologically safe environments that allow them to carry out the oversight duties they are meant to do. There will never be a situation where boards get decisions right 100% of the time. However, giving board members the tools and freedom to engage in constructive, efficient decision-making can help ensure that their inputs have value and serve the broader, long-term mission of the organisations and companies they represent.