How do bad decisions get made? I mean this in the context of a board or governing body? So how do disastrous IT solutions, changes to business processes, major capital projects, major business initiatives go so wrong and for so long?
I think the answer lay in the way boards are put together. It is rational for any governance and secretariat function to look for the very best people it can find. The issue is perhaps that the best people for decision-making may be counter-intuitive. By most people’s definition of the best board members, they are often people who are high powered and have high-powered roles and careers. Even if they are recently retired they are often in demand. As a consequence they lack time to tackle their roles in the depth to really understand the detail of the business.
Let’s also consider that they are likely to be individuals who are used to being in an executive position. As a consequence they are likely to be decisive individuals who are inclined to action. Thus a move to a directing and controlling role only (which is what good governance is) can be challenging. Thus I have found in my career, board members often over compensate and avoid taking any decisions. They move instead to supporting the executive team instead of directing and controlling them. The concept that boards should make major business decisions (not none as some consider governance to be) is challenging to some board members.
Then there is the position that management teams, in order to lighten the load on the non-executives, try to summarise the complexity of the business into one or two sides of A4 paper. This is just not tenable in the modern business world. How can complex decisions be boiled down into RAG (red amber green) coloured ratings or simple directional arrows? It is not really reasonable that any complex business can be simplified in this manner in my view. No wonder I have seen boards in my career oscillate between simple one-siders to overly long, detailed, papers.
Non-executive board members seem to adopt a polite tone and edge towards agreement. I’ve been there. You are new to a board, to a business, and feel that you cannot challenge and need to be polite to board colleagues. A variation on this is groupthink, a pop-psychology term for the need for members of a group to agree in order to feel included in the group.
Then there is straightforward hubris. Can a board, or senior members of it, committed to a major strategic decision, really admit they are wrong or that it hasn’t worked? Until boards learn controlled and managed failure is a corollary of success, this will always be a problem.
All of these are problems of an ‘effective’ board. What if the board is ineffective and is given the ‘run-around’ by the management team (who have greater resources, information and power)? No wonder businesses and their boards make bad decisions.
Internal audit should in my view be a counter balance. It is challenging for an internal audit function to say a board is ineffective though. This is particularly so, buried under the yoke of an audit committee of the board. We should, as internal auditors, be stronger in our views and our efforts to publish them. I have seen some boards perform well, some less well, in all cases I confess I have not challenged or supported them as much as I should have done, putting it on the ‘too difficult’ pile. Yet if governance is poor and ineffective, the whole enterprise is likely to fail. It is our role to prevent this happening for all beneficiaries and stakeholders of that organisation.
When was the last time you qualified a governance opinion?