More than half of all strategic decisions made by directors turn out to be wrong according to new research, conducted by PHD student Joep Steffes at Nyenrode Business University.
This is due to time constraints, not having all of the information, and bias which often causes directors to make important decisions that are not based on reason but ‘gut’.
These decisions, which could be deciding not to enter a new market or to pursue a merger, require more thought than your average decision – a director can’t simply rely on automatic actions, speed, and intuition.
Each year over 30,000 new products are launched but 80% of these fail as a result of poor decision making, according to research from former professor Clayton Christensen at Harvard Business School.
“Businesses need to ensure that their directors are making fully-informed decisions by selecting directors based on cognitive capabilities and critical thinking skills. They have to put more cognitive effort in the decision-making process. They need to have decision governance structures and responsibilities in place which effects how decisions are made and that monitor the decision-making process.” says Steffes.
Poor decision making among directors could be as a result of the ‘old boys’ network’ where these jobs were given rather than earned. This is often due to non-diverse thinking as a result of homogeneous boards.
“The position of director would often be passed on to those in the ‘old boys’ network’ rather than a candidate who is more qualified. However, this doesn’t work anymore. Directors need to have real knowledge and expertise to be able to do this role, they need to fully understand how the behavioural process works.” says Steffes.
If a company is more responsive to the behaviour of directors in this capacity, it leads to better decisions which can not only be of value to shareholders and the organisation but can bring social benefits too.