I’ve always been intrigued by the manner in which boards make decisions.
A board is a collection of people with an interest in the organisation who might not know each other outside the boardroom.
Each board member is recruited for their individual skills, and then thrust together in a group expected to make strong and wise decisions about the organisation – sometimes overruling established CEOs with decades of industry experience while they have less experience and only meet together once a month, or less.
Boards get involved in strategy, risk, finance, governance and overseeing the CEO and their performance.
Their work, however, is done as a team and not as individuals, and decisions get made based either on consensus or majority vote. Because of this, the way that decisions get made is important. A good Board Chair knows how to get the best out of the team and draws out each contribution.
Most decisions are made the right way, free from bias, but there can be times when biases play out in decision making and result in less than effective decisions being made.
Psychologists tell us about different types of cognitive biases that can affect our decision making. These biases can affect individual decisions as well as those made in a group setting, such as the boardroom.
While there are many different biases, we will focus here on some of the main ones that can invade the boardroom from time to time.
1. Confirmation bias
This is where a Board looks for information that supports their existing beliefs, and they reject data that goes against what they believe. It can lead to making biased decisions, because you don’t factor in all of the relevant information.
In one example overstepping the bounds of good governance, I saw a Board member exit interview four staff who had been performance managed out of an organisation. In each case, the second, third and fourth person they spoke with validated what the first one said. What they all had in common was that they were behaving in the workplace in ways that were contrary to the organisational values. In listening to these four voices, the Board ignored data from an employee survey completed by all the other staff which gave a very positive view of employee engagement. And in this example, the Board formed a view of organisational culture and made people decisions based on the views of a minority while ignoring the vast majority – they got it completely wrong.
2. Success bias
This is when we assume that success tells the whole story and we don’t adequately consider past failures. It can lead to overly optimistic beliefs because failures are ignored and lead to the false belief that the successes in a group have some special property, rather than just coincidence.
I think the opposite of this can also exist where there is a failure bias and the board of an organisation that has performed historically poorly can fail to see when performance has improved and the organisation is in better times – they still go looking for and assuming failure, and don’t accept positive results.
In an example of an organisation I have seen, the board finance committee regularly tried to find fault in the results of a profitable business because they didn’t accept that performance had been turned around to be significantly more profitable. Not believing the results, they wanted to put those profits away as reserves expecting the client would want them back in future for being over-charged. With the right focus, this board could have focused on how to reinvest new profits in growing the organisation and its impact.
3. The ‘IKEA effect’
This is placing too much value on the things we’ve done or created ourselves, often while discounting other people’s smart ideas or good work. The idea comes from furniture retailer IKEA, which sells many items of furniture that require assembly and leads to their customers inducing a greater liking for the goods purchased there since they had a role in building them.
Boards can do this when egos are involved and directors believe in their own experience and ideas more than listening to management, who often have better understanding of the industry sector and dynamics due to their experience. This is one of many reasons why egos have no place in a Boardroom. Humility and inquisitiveness are to be valued much more.
4. Overconfidence bias
Overconfidence bias involves thinking that your abilities and talent are better than they are. For example, most people think they are a good driver, when in reality most will be about average with a smaller number that are good or bad. This is another bias which is based in egos. It occurs when people are overly confident in their intelligence, experience or opinions.
As an example I have seen in the boardroom: Fred will say “Mary is the expert on this subject so we should listen to her”, then Mary will say how much of this type of work she has done before and give her opinion. And the next thing you know, the Board is making the decision based on Mary’s view without any questioning.
Historically this might have happened where board members without a finance background deferred to the Treasurer or Accountant on the board in regards to their view of the finances, but this has changed now as directors better understand their own responsibilities to understand the finances.
Some research has suggested that Boards with ‘pairs’ of experience performed better than Boards with solo specialists. So if you have two finance people on the Board, you get a better discussion about the numbers, or two lawyers, two clinicians etc. The benefit is not just from them debating with each other, but also because other Board members don’t defer to the individual specialist.
5. Gender bias
Groups of people tend to behave differently when there is a significant majority of one gender or the other. I have been in all male management teams and in other teams where I was the only male in a room of females. I’ve learnt through my experiences that to get the right outcomes, the best mix in terms of gender is to have a minimum one third male and a minimum one third female on the Board or management team. In fact, I’ve seen one organisation write that Board structure in to the Constitution.
How do we avoid these?
Directors are required through their fiduciary duties to act in the best interests of the organisation. Sometimes the biases can come out of self-interest which is contrary to the interests of the company.
First and foremost, avoiding biases starts with getting the right people on to the board through recruitment – it is better to the right soft skills in a less qualified person, than the industry expert with an ego. Humility, growth mindset and an inquisitiveness are so important in director recruitment.
Secondly, it’s also about the Chair running the meeting effectively in drawing out different opinions to arrive at a decision.
Lastly, it is about building a culture of humility and inquisitiveness. This culture and environment will help the board as a group to truly listen to one another and act in the organisation’s best interests.
What examples have you seen of bias in the boardroom? How can you reflect on and learn from your own experience?
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