Have you heard the adage, ‘birds of the same feather flock together.’ In a sense it is great when a group of people come together to share common ideals but for board representation, birds of the same feather flocking together is bad on many accounts: Board members that look alike, think alike, with similar education and experience signifies a board that is not sufficiently diverse, often lacking in committee dissent, and are likely to approach decisions in a similar way.
If all board members are risk averse, for example, then decisions are likely to favour strategies with low risk, low return outcomes, jeopardising the possibility of sustained long-term growth for any organisation - because without risk taking, companies cannot grow.
Companies must therefore ensure they have effective boards, which are diverse, with individuals having varied backgrounds and experiences and where each member is responsible to actively contribute based on solid information and knowledge. Board members must be independent and express their views without being influenced by other members and they should not simply fall in line with the consensus for the sake of harmony.
The chair of the board must also ensure that a diverse group of individuals with relevant skills and experiences are recruited, and a culture is created where alternative opinions are encouraged and sought out and where members can express dissenting views.
Wood (2006) [I] cited an example of a bad decision-making outcome where his recommendation to a committee to purchase Ford Motor Company shares was rejected based on the chair’s own poor experience with the company’s products. Other committee members immediately supported the chair’s view to avoid disagreement despite it being based on weak anecdotal evidence.
Prior experience with group behaviour seems to teach most people to preserve consensus or face the consequences - which is always a bad outcome for any organisation. In contrast, boards where different perspectives and contrary views are encouraged leads to better risk/reward decisions that will help firms achieve and even surpass their strategic objectives.
Arkjoy Risk Consultants Ltd can help your organisation assess the effectiveness of your board or committees and provide recommendations where gaps exist to ensure your organisation has an efficient governance structure and decision-making process.
Get in touch today - www.arkjoy.co.uk or info@arkjoy.co.uk or book an initial consultation, choosing our risk management services.
[I] Wood, Arnold.2006. ‘Behavioural Finance and Investment committee decision making.’ CFA Institute Conference Proceedings Quarterly, vol. 23 no. 4 Dec: 29-37
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