DECISION-MAKING AND GOVERNANCE
If we were to describe what Corporate Governance is about in one sentence, one could say it is about “the balance of decision making power at the top”.
There is little doubt as to what a successful organizational chart looks like. Even during the Golden Age of the Athenian Democracy, the governance system was “…called democracy but in effect it was the leadership of one man (Thucydides)”. The problem starts when this “one man” makes “bad” decisions.
The obvious remedy has been to appoint a group of people to overlook the decisions of the leader. Call it the “council of the crown” for kingdoms or the “senate” in ancient Rome, the “tribal meeting of the elders” or the “cabinet”, the premise is that a group of people is less likely to make a “bad” decision than any individual, whether it is bad because something was missed, or because there was an ill purpose. Hence the concept of a Board of Directors, to “keep an eye” on the CEO.
In recent years though, academic research has shown that a Board can also be a value creator and that its contribution to the performance of a corporation differs significantly, depending on a number of specific factors. Simply put, some BoDs add more value to their companies than others.
The pertinent question is whether a group of individuals can make a better decision that the one any single member of the group could have made. In other words, the question is if, by making the Leader decide together with a group of people, we can improve the decisions made.
Group decisions have specific shortcomings, well studied, and documented. There is the issue of time needed to reach the decision, the problem of groupthink and a number of other cognitive biases, the threat of a compromised average decision, the ownership of the decision and so on.
On the other hand, recent studies are showing that information integration between individuals exceeds the limits of information integration within an individual. In other words, processing the same information from different points of view significantly improves the value of this information in making a better decision.
To achieve this level of decision-making, the process must be well designed, and the group members must be adequately “skilled”. The role of the group “facilitator” is critical, since she must be “directing the show” and not “running it”. In corporate governance, it is now clear that the effectiveness of an independent chair of the Board is directly related to the quality of the decisions made.
The question of whether some specific traits of the leader, such as the entrepreneurial talent or the appetite for risk, will be diluted through a process of group decision-making has not been answered yet. Then again, it is part of the leaders’ job to convince others to follow because they want and not because they must.