Although an audit firm might not be the first place you'd look for advice on board behavioral psychology, here's an exception: a really interesting article from PwC about board dynamics and psychological biases that can impede boards from optimal performance and decision-making. The article identifies four common biases—authority bias, groupthink, status quo bias and confirmation bias—and provides clues for recognizing when your board might be afflicted with any of these problems, along with tips to address them. Well worth a read!
Sometimes, the authors maintain, directors can rely too heavily on a director's special expertise, allowing themselves to "become too influenced by that opinion, dismissing what others have to say, or abdicating responsibility." Or directors may defer to an authority figure, such as the CEO or board chair, who is perceived to hold power over the board. For example, the authors suggest, the board "may be more likely to prioritize the views of its male members, long-tenured directors, or those with a commanding stature or tone of voice." Boards might find that some directors "suck up all the oxygen in the room," while others are reticent to participate. Some signs of authority bias the authors identify are that the same director regularly has the final word, regardless of the topic; directors regularly defer to the authority figure; instead of revealing their views openly at the meeting, the directors may engage in side conversations or save most of their issues for executive session, and let the lead director decide what, if anything, to tell the CEO.
Below are the authors' tips to minimize authority bias:
- "Board leadership can solicit views from each director in turn. This ensures that all directors have a voice on an issue—and also that the 'expert' speaks up in other areas as well.
- Offer deep board education opportunities in specialized areas to prevent the board from relying too much on one director's experience.
- Have board leadership purposely withhold opinions until the end of the discussion. Alternatively, if the same person always has the last word, ask them to contribute first so their idea can be discussed.
- Ask each director to offer thoughts or ideas at the beginning of the meeting on what they would like to cover, or, at the end, about items that were not captured during the meeting."
This paper from the Rock Center for Corporate Governance at Stanford University, Board Evaluations and Boardroom Dynamics, presents survey data showing that "[o]nly 72 percent of directors believe their leader is effective in inviting the participation of all directors, and only 68 percent believe they are effective in inviting the participation of new members." According to this article from the Harvard Business Review, "How to Be a Good Board Chair," board chairs can do a lot to improve board dynamics. The author, an academic and consultant, contends that "the harsh reality is that collective productivity suffers when the person at the head of the table has strong views on a particular issue"; instead of being the problem-solver and decision-maker, the chair can improve board discussions by planning the process rather than looking for solutions. As discussed in the article, one board chair, whose previous decision-oriented participation in board discussions had led to a disaffected board, now "maps out to a minute how much time to devote to the CEO's report and how much to the following discussion, and how to structure the latter—down to who will get the floor first and who will speak last." Another chair, describing a similar evolution, offered this "insight into board-chair dynamics: 'If I want to see the whole picture and facilitate the work of the group, I should not play. I should become an onlooker without any stake in the game.'" Although, initially, it was tough sledding, she eventually unlearned her old habits. Now, instead of looking for solutions to problems, she looks for the best way to organize a discussion of the problems, focusing "on how to structure conversations and allocate time for presentations, committee reports, and discussions, and which directors should open or close discussions." Over time, her skills became even more refined:
"During the meetings, [the chair] concentrates on listening to what each director says, observing how that person says it and the group's emotions. At first she allowed herself only to frame a discussion, rephrase what other directors had said, synthesize solutions from their opinions, and articulate a proposed resolution. Over time she learned when to extend a discussion, when to shorten it, when to let the conversation flow freely, when to ask everyone to express opinions in one minute, and when to solicit detailed views from particular directors. Her meetings became more dynamic, less noisy, more fun, and altogether more productive. To reinforce her new style [the chair] organized mini-evaluations at the end of each board meeting, asking directors to recall instances when she acted as an expert rather than as a process facilitator. But eventually she learned to put her 'expert hat' on when required—though not at the expense of the quality of the process. As she puts it: 'If I do it well, the board does not notice it was the chair's idea.'" (See this PubCo post.)
The authors highlight the potential amplification of authority bias when the CEO serves as board chair, especially if there is no lead director or the lead director is "less vocal. This effect can stymie the board. In [PwC's] Annual Corporate Directors Survey, 43% of directors on boards with an executive chair said it was difficult to voice a dissenting view—compared to just 35% of directors on boards with an independent or non-executive chair." The authors suggest that regular executive sessions after every board meeting may help, and, while it's appropriate for some issues to be raised in executive session, "if directors are routinely 'saving' issues for executive session, board leadership should dive deeper into why board members are not comfortable enough to bring it up during the full board meeting."
The authors of Boardroom Dynamics advise that executive sessions should be useful settings for framing, in advance, that day's discussion topics and, post-board meeting, for reviewing information learned and putting it in context. Interestingly, the authors observe that executive sessions that last longer than 10 to 15 minutes may signal problems: "Long meetings can be a red flag, indicating that board members do not feel comfortable expressing their honest opinions in front of management and instead wait until management is not present to speak freely. This dynamic is detrimental to decision making." A 2016 study discussed in the article demonstrates the prevalence of these issues. Slightly over half (53%) of directors surveyed very much or somewhat agreed that board members did not express their point of view when management was present and instead waited for executive sessions or situations when management was not present. Worse yet, only 68% strongly agreed that there is a high level of trust among board members. Only 63% very much agreed that their boards were willing to challenge management. (See this PubCo post.)
Although reaching consensus and maintaining collegiality may be critical to board effectiveness, the authors caution that boards that are too inclined to seek harmony or conformity may fall into the trap of dysfunctional groupthink, "where dissenting views are not welcomed or entertained. In fact, while most boards work to solicit a range of views and come to a consensus on key issues, 36% of directors say it is difficult to voice a dissenting view on at least one topic in the boardroom." Other potential causes for groupthink are failure to effectively educate the board on a topic by, for example, not providing access to the appropriate information, sending out board materials too late for real review and reflection or glossing over complicated subjects in management's board presentations. In these circumstances, directors may be "more likely to go along with the group's decisions." Even virtual board meetings may enhance groupthink because a director is less able "to quietly float an issue," and may have no opportunity to "take a member of management aside to ask a question." And then directors may also be less engaged on the call—perhaps even multitasking—making them more reluctant to press hard on an issue.
Signs of groupthink identified by the authors include minimizing or limiting time for controversial topics, domination of meetings "by directors nodding in agreement," marginalizing (or even not re-nominating) directors who challenge the standard view, meetings organized primarily as presentations with little time for discussion, a dearth of probing questions or board pushback on management's assumptions, late delivery of board materials that don't even highlight key issues, and the formation of board cliques, where "directors share privately what they do not offer during meetings."
Below are the authors' tips to minimize groupthink:
- "Leverage the board's assessment process. Seek input during individual interviews or questionnaires, when directors may feel more open, on whether dissent is discouraged. If particular directors are a problem, board leadership should have the difficult conversation about how to change the dynamic.
- Bring in outside advisors to share a new or dissenting view on issues, and shake up discussions.
- Discourage side conversations between directors outside of meetings, as they relate to the business. When business matters are discussed, bring that conversation back to the boardroom to seek input from the whole board.
- On controversial issues, solicit views from each director.
- Recruit directors who bring a true diversity of viewpoints to the boardroom.
- Push management for the materials directors need, when they need them. Ensure the materials are highlighting key issues and discussion points.
- When possible, conduct meetings in person or over video conference, not telephone, to maximize director focus on the issue at hand.
- Consider whether the current board size is optimal. With too many members, directors may be more likely to give in to groupthink."
The study discussed in the Boardroom Dynamics article cited above indicated that just "two-thirds (64 percent) of directors strongly believe their board is open to new points of view; only half [56%] strongly believe their board leverages the skills of all board members; and less than half (46 percent) strongly believe their board tolerates dissent. Forty-six percent believe that a subset of directors has an outsized influence on board decisions (a dynamic referred to as 'a board within a board')." Almost half (47%) of directors surveyed very much or somewhat agree that members of their boards are too quick to come to consensus and do not encourage dissenting views.
In its proposal to impose a comply-or-explain mandate for board diversity, Nasdaq expressed concern that "boards lacking diversity can inadvertently suffer from 'groupthink,' which is 'a dysfunctional mode of group decision making characterized by a reduction in independent critical thinking and a relentless striving for unanimity among members.'" Nasdaq said that studies suggest that "board diversity can indeed enhance a company's ability to monitor management by reducing 'groupthink,'" lead to robust dialogue and better decision-making. Nasdaq concluded that cognitive diversity is particularly important for boards because of their "advisory role, especially related to corporate strategy."
Status quo bias
Why mess with success, right? The authors suggest that boards too may prefer to stick with established norms and might "be reluctant to pursue initiatives involving substantial change, simply because it brings too many risks of the unknown." That notion applies to both "how boards view their own composition, as well as how they evaluate new ideas." Status quo bias could make directors reluctant, as a group, "to embrace new strategies and ideas," potentially leading to failures to make long-term investments, such as R&D. A related bias the authors identify is the "'sunk cost' bias—the idea that the board has devoted too much time and effort to an idea or topic to walk away," even when the idea no longer makes sense. Some of the clues that authors identify as signs of status quo bias are directors pushing a consistent strategy in the face of changes in circumstances or key metrics; reluctance "to support entering into new markets or to divest lines of business that no longer make sense"; failure by the nom/gov (or other) committee to engage in long-term succession planning for board members or the C-suite, instead addressing only immediate needs; too many long-tenured directors and a board turnover rate behind peers; absence of periodic rotation of committee chairs; entrenched management; absence of educational opportunities for the board on emerging technologies or other new areas; and acceptance by the board of "subpar company performance by viewing results as hurdles, as opposed to harbingers of systemic changes."
Below are the authors' tips to minimize status quo bias:
- "Incorporate 'If you were a competitor...' activity into strategy development sessions, which includes answering the following three questions: What would they hope you do? What would they fear that you do? How would they respond if you did what they feared?
- Make structural changes to board deliberations. Bring in outside experts, revamp the agenda of a strategic offsite meeting, take a board trip to Silicon Valley or other center of innovation.
- Take a fresh look at board materials. Ask advisors and other contributors to suggest revisions and recommend best practices.
- Use the board assessment process to identify ways the board might benefit from refreshment. Having a static group of directors for a long period of time may contribute to groupthink.
- Ask management to conduct a pre-mortem exercise, where the team imagines that it is in the future and the strategy did not work—and must come up with all of the reasons why it did not work."
The topic of director tenure has increasingly become the focus of both academics and investors, especially as investors and others clamor for more board diversity. Some argue that long-term directors contribute deep knowledge of the company and provide experience, historical memory and continuity to the board—along with the gravitas sometimes necessary to challenge management. Others contend that directors with long tenure are "stale" and rarely contribute fresh perspectives.
Moreover, as discussed in this article in the WSJ, some suggest that the independence of directors with long tenure may even be compromised—not in the technical sense of the NYSE or Nasdaq definitions of course, but rather more in the sense of "social independence," meaning that the development over time of shared social connections might bias them or taint their objectivity. The WSJ also suggests that this type of "longevity tends to ensconce white males, whose dominance of boards has been criticized for leading to less robust risk management, among other things." According to the WSJ, long board tenure, together with the tendency to appoint directors who are retired CEOs or other C-suite executives from other firms, is giving rise to a new class of director: the "new insider." One academic cited in the article speculates that the "increasing use of board members who serve for longer periods and come with a predisposed background as corporate insiders elsewhere is not accidental, but is in fact an effort on the part of companies to import the benefits that an 'insider' board would have produced." The NACD has previously identified director tenure as a critical issue for board focus and encouraged boards to consider succession planning and proactive approaches to refreshment. (See this PubCo post.) Some investors have also taken up the cause, becoming more proactive in addressing board tenure. On the other hand, some experts cited in the article warn that, while potential loss of independence for long-term directors can be an issue, "any board reshuffle should be mindful of preserving valuable experience gained by length of service while bringing in a new perspective." (See this PubCo post.)
The Report of the NACD Blue Ribbon Commission on the Strategic-Asset Board has recommended that renominations of directors "should not be a default decision, but an annual consideration based on a number of factors, including an assessment of current and future skill sets and leadership styles that are needed on the board." In addition, according to one NACD Blue Ribbon commissioner in 2016, instead of just waiting for directors to notify the nom/gov committee if they plan to leave, "'[w]e need to shift the expectation from 'serve as long as you want' to 'serve as long as you are needed.' This 'shift' includes setting appropriate tenure expectations with any directors new to the board, as well as having what can be difficult conversations with longer-tenured directors if their experiences are no longer additive to the board."
Confirmation bias can certainly impair objective decision-making, as directors overvalue evidence that confirms their beliefs—whether negative or positive—and downplay or put aside evidence that contradicts their beliefs. Those directors who "were strongly in favor of a project, or a new hire, or a new strategy, can find glimmers of positivity in almost any report from management. But confirmation bias isn't always about overconfidence—it can also confirm a negative view. The director who was against the project from the start may, in the same report, see only the bad news." Similarly, "because people tend to overvalue the opinion of those who agree with them, directors may have a hard time pushing against the tide."
One approach advocated by the authors is to seek out new directors with diverse perspectives as opposed to only directors who share the same viewpoints. Finding directors who "fit in" sometimes "only strengthens the board's confirmation bias, as facts that support shared opinions are given more weight. What they are missing, and what can really benefit a boardroom, is rigorous debate among directors with different views. By having people in the room that hold different views or come at issues from different perspectives, the board may be better able to hear and understand the full picture." Some signals that the authors identify as indicating an issue with confirmation bias are the use by directors of past experiences as "support for their decisions, as opposed to insights, evidence, and facts; directors apparently having made a decision before any real discussion or without a serious effort to focus on potential uncertainties; similar backgrounds or worldviews among directors; and reluctance by directors to "have serious discussions about management teams that are not meeting their goals, or about changing up leadership to address the problem."
Below are the authors' tips to minimize confirmation bias:
- "Have management present strategies that they considered but dismissed. There could be useful elements within those strategies.
- Recruit a director who will challenge the board's preconceived notions. Sometimes a director from a completely different industry can offer a fresh look at old problems, and ask big questions that may not have occurred to those with long experience in the area.
- When confronting a major strategic move, hire one outside advisor to present arguments in favor of the idea, and another to present arguments against it.
- Ask directors to rotate presenting hypothetical dissenting views. Even if the director does not hold that view, it can change the shape of the discussion.
- Ask internal audit and other support functions to provide strong, data-based challenges to the prevailing view.
- Highlight diversity in the room, including diversity of industries and varied past roles. When new directors are added to the board, ensure that they are fully brought into the fold."
According to BlackRock, board gender diversity "is important from a sustainable investment perspective given that diverse groups have been demonstrated to make better decisions. In the board context, this appears to be because they are better able to consider, where appropriate, alternatives to current strategies—a proposition that can ultimately lead to sustained value creation over the long term." (See this PubCo post.) Bloomberg has noted that "there's a pile of research showing that boards and other leadership panels with 50 percent women think more critically, which may explain the better results. Group dynamics change for the better when both sexes are present. Diverse groups solve problems better than homogeneous ones do, possibly because the men and women monitor each other's performance more closely."
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