Corporate boards are entrusted to make sound and informed business decisions on behalf of shareholders and to take their best interest into consideration. Decisions made at the board level are of strategic significance that may perhaps completely transform the future path of corporations. Examples of major strategic decisions include mergers and acquisitions, entering new markets, launching new product lines, selling off company assets, etc.
An effective board deliberation routine signals to the shareholders that the company directors are carrying out their duties diligently. In the absence of a proper board deliberation mechanism and a healthy and constructive exchange of diverse views across the table, the company and its shareholders could inevitably suffer the unfortunate consequence of losing out on great business opportunities, or being exposed to high levels of risk, or enduring financial difficulties, and ultimately risk losing shareholder value.
One unintended and unconscious attribute of board dynamics that often stands in the way of the board’s making informed decisions is groupthink. Groupthink is defined by the Merriam-Webster Dictionary as ―a pattern of thought characterized by self-deception, forced manufacture of consent, and conformity to group values and ethics. The term groupthink was first coined by Irving Janis as “a mode of thinking that people engage in when they are deeply involved in a cohesive in-group, when the members’ striving for unanimity override their motivation to realistically appraise alternative courses of action.”
Groupthink seriously imperils the board’s decision-making process as it introduces decision biases and blind spots into the process. This is mainly attributed to directors’ endeavor to maintain cohesiveness and solidarity within the board at all costs. Such group pressure compels many directors to ‘go with the flow’ instead of challenging the dominant view in the boardroom.
To overcome this decision-making impediment, companies need to implement a comprehensive diversification program in the boardroom; the board should be as diverse as the company’s client base and perhaps more. A true diversification scheme should incorporate the following key elements:
First, gender diversity, which is of critical value to enhancing board dynamics and effectiveness. In addition to their technical and industry expertise, women bring with them to the board a different perspective, which enriches board deliberations and adds a feminine viewpoint, which is an invaluable advantage for household and marketplace considerations.
Second, it’s essential to appoint qualified, young professionals to enhance the board’s decision-making process. This is especially true if the company is operating in an industry that caters to the young (i.e. Fashion, technology, automobile, etc.).
Third, boards should embrace minorities since their distinctive background empowers them to better understand the market in which the company operates and better serve its broad and diverse range of clients.
Fourth, a diverse professional experience (legal, marketing, accounting, etc.) is also of great significance for corporate boardrooms since it enables boards to better manage different sorts of business challenges and supplies the board with a diverse set of industry-specific knowledge.
Fifth, appointing independent directors injects the board with the much needed objectivity with an outsider’s view that could potentially challenge the status quo in the boardroom and reduce or eliminate altogether the side effects of groupthink.
Sixth, the chair plays by default a key role in fostering a healthy boardroom environment; one which embraces critical thinking and constructive debating, encourages all directors to express their views in an orderly manner and provides them with a sense of appreciation for their contributions. It is worth mentioning at this point that the above-mentioned diversification efforts need to be championed by the chair, without his/ her fervent support such ambitious initiatives will not see the light of day.
Boards that represent diverse ethnic, cultural, professional and demographic backgrounds will certainly challenge the dominant view in the boardroom. Additionally, such boards will be armed with the necessary skills for superior board dynamics and ultimately making informed decisions.
Guest post by Fause Antelo Ersheid, Economist and Senior Corporate Governance Analyst & Researcher at the Abu Dhabi Center for Corporate Governance. He has been working with companies in the private and public sectors to promote good corporate governance practices. Ersheid has published a number of papers in economics, capital markets and corporate governance and regularly speaks at regional business conferences. Email: [email protected]. Publisher’s note: I added the initial graphic and ads.