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.”
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.”
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.”
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.”
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.”