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Why Diversity Improves Boardroom Decision Making

By Melissa J. Anderson

Diversity of thought is critical for good group decision-making – according to a new report [PDF] released in by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in conjunction with KPMG LLP and Brigham Young University.

The report provides guidelines for board directors on good decision-making. KPMG partner George Herrmann, one of KPMG’s contributors to the thought paper, explained:

“As business becomes more complex, the demand for effective corporate governance and oversight has never been greater, putting a premium on sound judgment and decision making. This thought paper can help board members better understand where they, and others, are vulnerable to predictable bias traps and how to effectively challenge their own judgments and those of others.”

The report says, “The reality is that in a world of high-stake decisions, deadlines, and limited capacity, the judgments of even highly educated, capable people are vulnerable to common, systematic traps and predictable biases.”

One of its key recommendations in light of these concerns is to seek out and embrace diversity in the decision-making process. Here’s why.

Groupthink and Framing

“It is an interesting paradox that the human mind is capable of solving complex problems and developing new and creative solutions and, yet, can be subject to predictable judgment traps and biases,” write the report authors. By gaining a better understanding of these biases, board directors can be wary of common pitfalls and provide better judgment for their organizations while avoiding liability concerns.

One of the key culprits behind bad decision-making is a rush to judgment that is acerbated by groupthink. When directors all share a similar point of view, overconfidence and the tendency to overconfirm information consistent with preexisting notions, can lead them to quickly agree on a course of action without weighing all relevant factors.

In light of this, the report recommends fostering and encouraging productive disagreement. It explains:

“In a group setting, this rush to solve is often manifested as a tendency to strive toward quick compromise and early consensus. Ineffective compromises are sometimes reached in order to avoid conflict, rather than foster a healthy consideration of opposing views. Groups tend to produce better judgments when diversity of thought is not only tolerated but explicitly and specifically encouraged.”

Ensuring diversity of thought can help boards make better, more thoughtful decisions. Similarly, the authors impart a second piece of advice – to understand and acknowledge the phenomenon of framing. Decisions can be significantly influenced by the frame of reference from which they are approached. By looking at decisions or obstacles from several different frames, directors can be sure they are reaching smart conclusions.

The report says, “A distinguishing characteristic of those who consistently make high-quality judgments is that they are frame-aware. They understand the judgment frame that they or others are using, and they are able to consider the situation through different frames, or what KPMG LLP professionals refer to as a fresh lens.”

It adds, “Boards need to understand management’s frame, but they also need to proactively consider issues through alternative frames, which sometimes means that they need to ask more questions or purposefully think through a view that might go contrary to management’s perspective.”

Leadership and Decision-Making

Leadership has a role to play in ensuring the environment is right for good decision-making. For example, leaders must set the appropriate tone for fostering dissent and discussion, and ensuring diversity of thought exists within a group. The report explains:

“Such an approach can increase the effort and participation of fellow board members, encourage a broader and more complete set of perspectives and alternatives, and enhance the quality of final decisions. In addition, leaders should not only tolerate but explicitly and genuinely encourage diversity of thoughts and opinions and open sharing and full consideration of ideas and perspectives, especially those that go against the flow of the group’s predominant views.”

Particularly in the current state of market upheaval and complexity, leadership should be conscientious regarding these issues, the authors write.

“Consistently making high-quality professional judgments in a constantly changing environment has never been more important or challenging. The growing complexities of the global business environment and demands for effective corporate governance and oversight have placed a premium on sound judgment and decision making by all key players in the marketplace: management, boards of directors, auditors, and others.”

By setting the tone for diverse discussion, leaders can be sure that boards are operating at the height of their ability.

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