Karin Malmström and Christine Houston, Co-founders and Managing Directors of Corporate Governance Reality Check, offer some tips for better decision-making by boards and senior executives.

Decision-making is the fundamental function and process of boards and senior executives. How decisions are made and by whom carries with it material risks for the organisation.

In recent years, we have seen examples of decision-making failures resulting in financial, legal and reputational meltdown. Two recent examples are FTX and OpenAI. Large corporations were caught up in global scandals because those at the top did not make sound choices or keep in mind the best interests of the company and its stakeholders. Why does this happen and how can we improve governance?

Decision-makers come to the table from different backgrounds, experience and expertise, and potentially come with a variety of assumptions and blind spots. Blind spots in the decision-making process can limit the effectiveness of any organisation. Being aware of, identifying, accepting and navigating blind spots is crucial for making well-informed decisions. 

Primary areas where blind spots can occur

Confirmation bias

This happens when decision-makers seek out and focus on information that supports their pre-existing beliefs or preferences, while disregarding conflicting evidence or ideas. Coming into a board meeting with a fixed mindset – having already made up one’s mind regarding a preferred outcome to an issue on the agenda – obscures and diminishes critical discussion. This can lead to important issues that may carry underlying, percolating risks not being considered and thus swept under the carpet, often to surface later in the shape of a crisis.

Groupthink

When the desire and push for consensus and cohesion within a group overrides critical thinking and independent analysis, flawed decision-making may result. There are many causes and reasons for groupthink. For example, some board members may not wish to rock the boat or table potentially contentious, complex or time-consuming topics for discussion that may displease others in the group. Another example is having too many decision-makers with the same backgrounds. Groupthink is not conducive to constructive problem-solving. Instead, it hinders and can possibly limit the company’s opportunities for competitive growth due to insufficient thoughtful, varied discussion concerning essential issues.

Overconfidence

Executives may have an exaggerated belief in their own abilities or the organisation’s capabilities, leading to underestimating risks or being dismissive of alternative viewpoints. Should fellow decision-makers bow to dominant executives who push their positions and views, especially if those dominant personalities are veterans of the company’s industry sector, this can lead to subservience or acquiescence. Overconfidence, especially by the chairperson if he or she has an agenda that blinds them to realities and risks, can pose a material threat to the organisation.

Time pressure

Tight timelines and a need to come to resolution can force decision-makers to rely on incomplete or insufficient information and/or ignore issues of perceived lesser importance. Both lack of information and ignoring other ‘smaller’ issues can result in overlooking critical factors and risks. Making decisions because a resolution is required, but without conducting due diligence and gathering adequate information that supports or challenges the decision, can bring dire consequences at a later date.

Lack of diversity 

Homogeneous decision-making teams lack perspectives from different backgrounds and experiences, leading to limited and biased decision-making. It circles back to groupthink and a closed mindset, which can either stagnate or, worse, dampen an organisation’s growth. Engaging executives with varied professional experience, age, gender and cultural background can produce highly rewarding results. Fresh ideas and diverse opinions that trigger animated discussion and debate can potentially propel an organisation forward with new competitive advantages. It is essential for organisational growth that the board and executive team are comprised of individuals who have diverse backgrounds and skill sets, as this leads to optimum functionality and competitiveness.

Suggested solutions

How then does an organisation identify and navigate blind spots so that decision-making can become a highly productive process with optimal outcomes?

Confirmation bias

To enable and encourage best practices in the decision-making process, executives – having done their due diligence and while holding their own views clearly and firmly – can adopt an open mindset to consider others’ viewpoints and opinions. This will allow for potentially alternative and even surprisingly good results that can yield enormous benefits for the organisation. The essential element of entering meetings with a mindset that has shifted to wider consideration, as well as trust in the people and the process, can relegate existing bias to the junkyard. By opening thought processes to expanded consideration, and not stubbornly clinging to opinions and beliefs that may no longer serve the company, leaders can catapult their organisation forward into a position of enhanced competitiveness.

Groupthink

Groupthink is not governance – it is governing by taking the path of least resistance. Going through the motions, box-ticking and not questioning or challenging the status quo is rife with material risk. While consensus-building among executives is essential to decision-making and operating an organisation, simply agreeing because there is a lack of diversity of thought is dangerous. To address this fundamental issue, look at the board structure to see if there are too many members with the same skill sets or backgrounds, and how long they have been serving on the board. While potentially unpleasant or temporarily upsetting, it may be necessary to consider adopting a fresh board structure to secure a sounder footing for the future.

Overconfidence

Overconfidence by any one decision-maker can be dangerous for the entire organisation. Overconfidence, whether it originates from personal or professional arrogance, is a deterrent to healthy group decision-making. Thinking one knows better than others and pushing agendas to make decisions slanted toward one’s own views can steer the organisation off course from its strategic direction and create even more blind spots. Choosing decision-makers who are professionally strong and capable, yet do not seek to project their opinions over other members, can bring not only the desired harmony and consensus but also better overall decisions for the greater advancement of the organisation.

Time pressure

Time pressure is not an excuse for the avoidance of sound decisions based on independent information, research or information-gathering. Nor is it a valid reason for simply passing resolutions. Doing one’s homework prior to decision-making will have wide, long-lasting benefits. In addition, the decision-making process will be more productive and less time-consuming.

Lack of diversity

This is one of the most typical blind spots, because most companies look at diversity only in terms of gender. A dearth of diversity of opinions– made possible by including executives of varying ages, as well as different cultures, professional backgrounds and genders – is problematic. Individuals with similar backgrounds can create confirmation bias, groupthink and complacency, triggering a tendency to make the same decisions under time pressure. While having a group of diverse decision-makers may make the process lengthier or lead to livelier discussions, it can also lead to a far better result.

We call this ‘corporate longevity’.  The concept of corporate longevity is driven from the top and is practiced throughout any organisation, creating the future it sees for itself. Silo-bust those blind spots. Walk the talk.

Karin Malmström and Christine Houston, Co-founders and Managing Directors

Corporate Governance Reality Check

Corporate Governance Reality Check (CGRC) is a leadership consultancy focused on the governance of listed companies, SMEs, start-ups, and institutional and non-profit organisations. They can be contacted at: malmstrom@cg-realitycheck.com and houston@cg-realtiycheck.com.