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Pitfalls in Supervisory Boards' decision making and how to avoid these

Datum:27 mei 2021
Auteur:Fabian Ahrens
Pitfalls in Supervisory Boards' decision making and how to avoid these
Pitfalls in Supervisory Boards' decision making and how to avoid these

Outside directors (Supervisory Board) in any kind of company are often confronted with questions and challenges that are new to them, or are in areas where they have little expertise. Still, it is their duty to hold the CEO of the company accountable and to do their best to guide the CEO. With uncertainly playing a central role in their decision making, outside directors often rely on their intuition when scrutinizing available information to the extent necessary. In our recent studies, we examined how outside directors make decisions and what pitfalls wait for them [1]. We examined this in three studies using survey responses from 300 Dutch outside directors and the respective CEOs, as well as in two experimental case studies of the behaviors in a decision-making situation with 91 outside directors and 334 managers. These studies provide valuable insights into how directors in supervisory boards can avoid pitfalls in decision making and collaboration with the organizations they supervise. Below a preview of our results.

First, conflicts of interest. Outside directors are confronted with multiple, sometimes conflicting obligations. For example, directors are expected to hold management accountable by law. At the same time, however, outside directors form professional relationships and social bonds with both their peers but also with managers – although they actually should keep a distance and remain independent. Outside directors, just like all humans, are social beings which makes it impossible for them to remain fully independent and objective over time.

Second, switching tasks. Outside directors face the dilemma of performing (at least) two roles at the same time: supervising management and advising management. Both roles have their own requirements for doing these effectively. To effectively supervise, outside directors need to possess all necessary information, objectively evaluate these, and make decisions that might go against the interests of management. Sometimes, they even need to fire the CEO, if necessary. On the other hand, advising management calls for a more cooperative approach to being a director [2]. To do an effective job, it is not only important to possess the relevant expertise for giving valuable advice but also to be an empathetic listener at the table. When the relationship is poisoned by power struggles and disagreements over strategic issues, this may become a colossal burden for collaboration.

Third, goal alignment. We found that perceptions of goal alignment play an important role for outside directors in their decision making. When confronted with conflicting expectations (see also first point), outside directors seem to rely on their intuition by assuming that the CEO’s goals are similar to their own. However, this may not always be the case and proves to be a flawed assumption leading to low-quality decisions. In turn, when reminded of the misalignment of their goals with the goals of the CEO, outside directors made better decisions than when left alone with their intuition.

Fourth, boardroom dynamics. A recently published study highlighted the importance of boardroom dynamics, such as having critical discussions with the CEO and the role of the chair of the supervisory board in such situations [3]. Board chairs are important for steering the fate of the supervisory board when it comes to discussing disagreements. If chairs enable an open discussion in which everyone can participate, the supervisory board is set up for success. If chairs dominate the discussion or abstain from getting involved, the discussion is likely to deteriorate and could even poison future collaboration.

For outside directors, CEOs, and board chairs alike, these insights are critical for tip-toeing around potential pitfalls of boardroom collaboration. In fact, small nudges [4] such as gentle reminders of keeping a critical mind, involving everyone in discussions, and being an empathetic listener may help outside directors to increase their impact on high-quality decisions. In addition, effectively working together will reduce the efforts needed for arriving at good decisions and compromises that benefit the company.

Fabian Ahrens (f.k.ahrens rug.nl) is a PhD candidate at the Department of Human Resource Management and Organizational Behavior. He works with Prof. Dr. Floor Rink, Dr. Dennis Veltrop, and Dr. Laetitia Mulder in the field of behavioral corporate governance with a focus on boards of directors, top management teams, decision making, and behavioral processes.

References

[1] Ahrens, F. K., Mulder, L., Veltrop, D. B., Rink, F.: The Boundaries of Social Dependence Effects on Directors' Effectiveness. Working paper.

[2] Westphal, J. D. (1999). Collaboration in the boardroom: Behavioral and performance consequences of CEO-board social ties. Academy of Management Journal, 42(1), 7–24.

[3] Veltrop, D. B., Bezemer, P.-J., Nicholson, G., & Pugliese, A. (2021). Too Unsafe to Monitor? How Board–CEO Cognitive Conflict and Chair Leadership Shape Outside Director Monitoring. Academy of Management Journal, 64(1), 207–234.

[4] Thaler, R. H., & Sunstein, C. R. (2009). Nudge: Improving decisions about health, wealth, and happiness. Penguin.