Why Good Boards Make Bad Decisions: Four Factors Undermining Board Effectiveness

By PwC

A widely accepted notion is that corporate boards function like well-oiled machines. And why shouldn’t they? At their core, boards are more than a group of highly qualified individuals — they are sophisticated teams, assembled to work together smoothly while bringing diversity of thought, expertise and experience to their oversight role.

But problematic group dynamics can derail all kinds of teams, and boards are no exception. Directors brought onto boards for their creativity and independence may find themselves in a boardroom culture that pushes them to be deferential and disinclined to challenge the status quo. Reaching consensus may become the goal more than offering input and solutions; consequently, board members known for rationality and agility can become irrational and obstinate.

The good news: board culture doesn’t have to become dysfunctional. Boards can take proactive steps to resolve problems and maintain board effectiveness. But this requires directors to consider some key questions.

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Four Behavioral Factors Undermining Board Effectiveness

Threat Rigidity

Rigid group dynamics aren’t inherently bad. When addressing familiar problems, a limited focus may keep the process streamlined, saving collaborative energy for areas that would benefit more from experimentation and brainstorming. But most board decision-making in uncertain environments — and nearly all environments are uncertain today — demands creativity and adaptive thinking. And that’s exactly what threat rigidity shuts down.

Escalation of Commitment

Sometimes it doesn’t matter whether a course of action is paying off — people may double down regardless. They may invest more time and resources into a failing endeavor, long past the point at which they should move on from it.

Every boardroom faces the potential problem of escalation of commitment, as management or directors defend past decisions. But boards don’t need to accept the status quo.

Underestimating Collective Intelligence

We have found that directors generally recognise the benefits of board diversity. Our research shows that strong majorities agree that gender, ethnicity, age and perspective are important to creating diversity of thought in the boardroom.* While achieving the right mix of background and competencies is important for board effectiveness, research also shows that is only part of the equation. There are other, unobservable aspects of board composition.

Lacks of Psychological Safety

Psychological safety is a prerequisite to a board fulfilling its oversight responsibilities. Directors who feel that they face high levels of interpersonal risk may be far less willing to volunteer new ideas or voice effective challenges, let alone dissent. And that can steer leaders toward making decisions based on incomplete information and the overall board toward approving the safest (but not necessarily the best) solutions.

A board can take concrete steps to boost an individual director’s sense of psychological safety and increase interpersonal risk-taking.

Action Items Moving Forward

Board Assessment

Make behavioral questions a greater part of assessment surveys. Assessments should provide insights on how directors individually and collectively contribute to the effectiveness of the board. So revisit the questions being asked in assessments. Consider the question style (open-ended versus closed) and the type (practices versus behavioral).

Board Composition & Recruitment

Move beyond traditional director interviews. Consider behavioral questions and even tabletop exercises to simulate real-life scenarios directors they may face in board roles.

Board Leadership

Set the right tone at the top. Tone from the top starts with the chair/independent lead director. Make it clear that changing course on decisions is welcomed, mistakes are opportunities and respect is based on a collective set of experiences rather than avoidance of missteps.

Board Meeting Processes

Test your response to a crisis. Use tabletop exercises that the board would typically conduct — for example, crisis/breach response — and assess not only for alignment to the company’s response plans and processes but for how directors act under pressure.

Question to Enhance Your Next Board Assessment

In the appendix of the guide, we’ve included an example questionnaire to enhance your next board assessment. While use of this tool will provide helpful information, additional value may be gained by distributing the tool more widely to obtain the views of others (e.g., fellow directors, management and others with whom the board interacts).

… read more in the report

The article was first published by PwC.

Photo by Randy Laybourne on Unsplash.