Board communication – costly, biased and conformist

The board of directors is the forum where intelligent elites conduct serious discussions on matters of strategic importance, protecting the interests of shareholders, setting the "tone from the top", and respecting the rights of all those affected by its decisions. Right? That's the optimist's view of the board, and it's open to question. Few would dispute that directors are elites: being in the role makes them that, come what may. But the rest of those assertions are, as the scholar might say, empirical questions. According to a working paper from a scholar at Stanford University, the work of boards is somewhat different. Nadya Malenko starts with a different set of assumptions as she builds her model of board work. She sees the key features of board decision-making involving costly communication between directors, coloured by the presence of biases, and dominated by directors' concern for conformity.

• Costly communication: Directors meet only every once in a while so time is limited. It's difficult, therefore, to get you full opinion into the discussion. Board effectiveness depends upon good communication between directors, and that mean more frequent conversations and discussions outside the board meeting. For busy people, that's expensive and the cost is one that's easy to avoid by not communicating.
  
• Biases: Everyone is biased. We base our judgements on past experience, and we have only a limited range of experiences. Moreover, directors may act in their own interests. Collective decisions by boards seek to overcome that by having disparate voices and so a mix of biases in the discussion. That only matters if they are prepared to disagree.
  
• Conformity: Directors are often reluctant to disagree, even in private. "This reluctance can be due to several reasons, including the influence of the CEO and directors reputational concerns. For example, anecdotal evidence suggests that directors who oppose the CEO during the board meeting without support from other directors are likely to face retaliation and feel the pressure to resign," she writes.

The way to make things better is to improve communication. If directors can communicate more effectively, then both biases and concerns for conformity might improve the board's decisions because directors have a stronger motivation to convince others of their position. If she's right, then there are implications for the use of open or secret voting, the frequency of executive sessions of directors, board structure and the role of committees.

Source document: The working paper "Communication and Decision-Making in Corporate Boards," by Nadya Malenko of the Stanford Graduate School of Business, is a 63-page pdf file.