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Are you proud of the harmony that exists in your company’s boardroom? Don’t be, because it could very well be bad for the health of your business.
That’s the warning from researchers at Victoria-based Deakin Business School, whose research shows that lack of conflict in the boardroom may be a significant contributor to poor-quality decisions with potentially dire consequences.
The full study, entitled ‘Board co-option and default risk’, has been published in the Journal of Corporate Finance with co-authors Associate Professor Edward Podolski, (Deakin Business School), Dr Ghasan Baghdadi (RMIT University in Melbourne) and Dr Lily Nguyen (University of Queensland).
Podolski said the evidence suggested that, as a society, we should learn to be more tolerant of conflict and the bruising process of making tough decisions.
“Companies where the board of directors is more likely to be in agreement are more likely to make short-sighted, idiosyncratic and extreme decisions which lead to greater outcome variation and contribute to collapse and bankruptcy risk,” he said.
“Companies whose board members are more likely to voice dissenting views will also explore a wider array of possibilities and be forced to work towards a consensus.
Although boards that promote disagreement will be more chaotic and unpleasant in the short-term, our research shows their decision-making process will be significantly better and more profitable in the long-run.”
Podolski and his colleagues conducted their study by analysing boards with high levels of ‘co-option’ – where a greater number of directors have been appointed after the CEO assumes office.
“Co-opted or ‘captured’ boards are assumed to be associated with a lack of independence, since co-opted directors are more likely to owe their allegiance to the CEO who was involved in their initial appointment,” he stated.
“Co-opted boards debate and contest decisions less rigorously and we find that co-opted directors are more likely to miss a large portion of board meetings, propose fewer agenda items, and are more likely to make recommendations in favour of management proposals.
“Our results also suggest co-opted boards are associated with greater performance volatility and less consistent decisions, facilitating more erratic and poorer quality decision-making.”
While the paper focuses on corporate outcomes, Podolski said the findings could be applied to other group dynamics.
“For example, a natural conclusion would be that the tendency of governments to stifle debate when dealing with a crisis can be counterproductive in the long-run,” he explained.
“While decisions can be made more easily when power is vested in a single decision-maker (or a small group of decision-makers), those decisions are more likely to be idiosyncratic and lead to undesirable outcomes.”