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@example.com. Publisher’s note: I added the initial graphic and ads.
The focus on groupthink as a problem may be misleading.
Janis developed his idea in the context of US foreign policy decisions: is there a good match between that context and the boardroom? It is frequently asserted that groupthink has negative consequences but I am not aware of any studies of boards that conclusively demonstrate this: I’d be grateful for pointers to anything I’ve missed.
If groupthink has been prevalent for such a long time, how have many apparently homogenous boards managed to lead successful companies?
At the other end of the scale, it is quite possible that diverse boards will have difficulty in arriving at decisions and this would have negative consequences too.
Mandating board composition on the basis of assumptions about the contribution that members of diverse groups can make is unlikely to be as useful as simply enabling boards to choose people who have the skills and experience needed to match company requirements at any point in time.
Thanks Laura for your comment. Please allow me to disagree with you on two key issues:
First, I believe that groupthink is more prevalent in the corporate world that one likes to believe. It is true that Janis (1972) developed the idea in the US foreign policy context, but it’s still applicable to any social setting and interaction (thanks James for sharing the references). Nonetheless, I agree with Laura that more research is needed to study groupthink in the boardroom context.
Second, your contention that board diversification comes at the expense of decision quality is flawed. For one, it assumes that boards have to compromise the quality of directors in order to achieve diversification targets. That need not be the case. Simply put, boards need to be more inclusive while maintaining superior hiring standards.
On older case study on groupthink is “The Enron Board: The Perils of Groupthink”@ http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1791848
A more recent example is “Improving Risk Governance – A Proposal on Board Decision-Making” @ http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2328037
Thanks for the references, James. I don’t have access to the McConnell paper. The O’Connor one looks interesting, I’ll read it in detail later, but I think it raises further points.
Firstly, I think that boards might be considered a very particular kind of group. As far as I’m aware, the social psychology literature does not take into account groups which are elected (I may be wrong, it’s a long time since I read a lot of it). This pattern of accountability may make a significant difference to the decision-making and oversight processes.
Secondly, secondary sources will never provide a full picture of boardroom dynamics and, for all sorts of reasons, there is a continuing dearth of the type of observational research which could provide richer insights.
So I shall continue to believe that groupthink is a facile explanation! Management scholars have developed the groupthink idea a little further in the Abilene paradox but I’m not sure that this has been applied specifically to boards.
Fause, I agree entirely with your final sentence but the route to achieving that may be problematic, especially where regulatory changes are introduced to compel boards to achieve specific targets in composition. There is some evidence that gender diversification may have negative consequences, at least in the immediate aftermath of regulatory changes. The literature which examines Norway’s adoption of quotas for female board members indicates that in fulfilling quotas boards will inevitably have to appoint inexperienced members. However, I don’t think that insights from the Norwegian context are necessarily generalisable.
The work on board gender diversity is diverse in itself: it can be found in many different disciplines and is inconclusive. While attempts to link gender diversity to measurable performance characteristics will no doubt keep scholars busy for many years, I await with interest studies of the experience of newly appointed female board members.
My concerns about mandating any aspect of board composition are based on the evidence of the impact of appointment of independent directors in the UK. There is little to demonstrate that they have had an effective oversight role and the smaller, independent boards that have resulted place greater power in the hands of the CEO and CFO who are typically the only link to executive management. There are also US studies which have questioned the effectiveness of independent non executive directors but it’s always worth remembering that although we may speak of Anglo-American corporate governance the legal and regulatory frameworks in the two countries differ quite substantially
I’ve written about this on my blog: http://whatdoesaprofessordoallday.blogspot.co.uk/
It seems that you don’t subscribe to the groupthink theory in the boardroom context. Therefore, I will leave it at that and just want to make a point that I disagree with you on the issue. I believe I have explained my position in the post and in my response to your earlier comment.
That said, I have the following comments in relation to diversification in the boardroom:
The lack of conclusive evidence concerning the economic case for diversification doesn’t necessarily mean that such efforts should be ignored or dismissed. In today’s corporate world, the financial aspects of businesses represent only a third of the overall business triple bottom line (People, profit and planet). More specifically, a moral case exists for the diversifying of boards on the grounds of social equity.
I agree with you Laura that the introduction of legislation mandating certain board composition criteria is not the most effective method to encourage diversification, but the absence of such legislation, most companies will not even consider the concept.
Finally, let’s keep in mind that my post was not about the economic case for diversification, although one could reasonably argue that it exists. The post is about bringing a diverse group of directors from different backgrounds into the boardroom to disrupt the prevailing board dynamics. In the short run, it might be very disturbing especially to the “old boys club”, but in the medium and long terms it will prove to be worthwhile.
An overview of recent studies reveals that the relationship between diversity and financial performance has not been convincingly established. However, there is some theoretical and empirical basis for believing that when diversity is well managed, it can improve decision making and enhance a corporation’s public image by conveying commitments to equal opportunity and inclusion. To achieve such benefits, diversity must extend beyond tokenism, and corporations must be held more accountable for their progress. http://www.conference-board.org/publications/publicationdetail.cfm?publicationid=2897&mkt_tok=3RkMMJWWfF9wsRolv63AZKXonjHpfsX%2B6%2BwtW6Og38431UFwdcjKPmjr1YcBSsF0aPyQAgobGp5I5FEKSLXYS6J6t6UPXg%3D%3D
A word of caution: many organisations produce such overviews but they are rarely comprehensive, partly because the issue of diversity has been approached in such a wide variety of academic disciplines. As far as I’m aware, no formal systematic review has yet been published.
The best non-academic publication I have found is from Credit Suisse (the web site is down so I can’t give a link). Their report identifies a link between board gender diversity and performance but the authors are very careful to include a caveat right at the start of the report, pointing out that correlation of this nature does not allow any inferences about causation. The caveat has not been included in many of the reports of this study.
Fause, I agree that there can be sound moral and social arguments made for diversity. But the focus of debate in the UK has been on what is described as “the business case”, which is far from proven.
The type of disruption you favour may well be beneficial for some boards in some circumstances. My concern is that incorporation of such a prescription into regulation, whether soft or hard, can have unforeseen consequences, as we are seeing with independent directors.
Laura, I think we place far too much importance on ‘the business case.’ In Norway, the first country to mandate women on boards, the measure was not introduced for economic reasons. As described in Getting Women on to Corporate Boards: A Snowball Starting in Norway https://corpgov.net/2014/02/review-getting-women-on-to-corporate-boards/, the quota was introduced to address societal needs for “justice in society, democracy, participation, equality between the genders, human rights and compliance with various conventions of the United Nations and the European Economic Area.” As one of the authors notes, arguments about women contributing to profitability are “especially used in contexts where social reasons are not accepted.” (p. 13)