Looking beneath the surface : The impact of psychology on corporate decision making (original) (raw)
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What Corporate Boards have to do with Strategy: A Cognitive Perspective
Journal of Management Studies, 1999
Traditional research on corporate governance has viewed the contribution of corporate directors to strategy making as limited by their lack of independence or firm‐specific knowledge. To the degree that directors contribute to strategy, most previous research has viewed their role primarily as dealing with the conflict resulting from divergent preferences of agents and principles. The cognitive perspective this paper proposes suggests that directors contribute to dealing with the complexity and uncertainty associated with strategic decisions. It argues that directors possess valuable problem‐solving expertise, which they can apply to a variety of contexts. Directors make their cognitive contributions to strategic decision making by performing along with a firm's managers a set of cognitive tasks: scanning, interpretation and choice.
Cognitive Biases in Decision Making in Post-Bureaucratic Organizations
Advances in Human Resources Management and Organizational Development
In today's post-bureaucratic organization, where decision-making is decentralized, most managers are confronted with highly complex situations where time-constraint and availability of information makes the decision-making process essential. Studies show that a great amount of decisions are not taken after a rational decision-making process but rather rely on instinct, emotion or quickly processed information. After briefly describing the journey of thoughts from Rational Choice Theory to the emergence of Behavioral Economics, this chapter will elaborate on the mechanisms that are at play in decision-making in an attempt to understand the root causes of cognitive biases, using the theory of Kahneman's (2011) System 1 and System 2. It will discuss the linkage between the complexity of decision-making and post-bureaucratic organization.
Toward a Behavioral Theory of Boards and Corporate Governance
Corporate Governance-an International Review, 2009
Manuscript Type: ReviewResearch Question/Issue: A coherent alternative to an economic approach of corporate governance is missing. In this paper we take steps towards developing a behavioral theory of boards and corporate governance.Research Findings/Results: Building upon concepts such as political bargaining, routinization of decision making, satisficing, and problemistic search, a behavioral theory of boards and corporate governance will focus more on (1) interactions and processes inside and outside the boardroom; (2) the fact that decision making is made by coalitions of actors and objectives are results of political bargaining; and (3) the notion that not only conflicting, but also cooperating, interests are parts of the boards' decision making and control over firm resources.Theoretical Implications: The consequences are a new research agenda for boards and corporate governance. The agenda will focus on actual instead of stylized descriptions of board behavior. In a behavioral perspective the emphasis on problems of coordination, exploration, and knowledge creation may dominate over problems of conflict of interest, exploitation, and the distribution of value. A future research agenda based on a behavioral framework calls for novel and adventurous research designs.Practical Implications: A behavioral theory of boards and corporate governance will be closer to actual board behavior than the traditional economic approach and research about boards and corporate governance may thus become more actionable for practitioners.
California Management Review
In today’s world, CEOs are frequently dismissed following corporate misconduct or poor performance. Yet, it is often difficult to predict when boards will dismiss the CEOs, as the same behavior often results in different decisions across firms. Taking a socio-cognitive perspective, this article explores the factors that lead a CEO to become tarnished. It then uses expectancy violation theory combined with attribution theory as well as stakeholder theory, concepts of legitimacy, and motivational theory to understand how the board evaluates the tarnished CEO.
The Common Law, parliamentary democracy, and academia all institutionalize dissent to check undue obedience to authority; and corporate governance reformers advocate the same in boardrooms. Many corporate governance disasters could often be averted if directors asked hard questions, demanded clear answers, and blew whistles. Work by Milgram suggests humans have an innate predisposition to obey authority. This excessive subservience of agent to principal, here dubbed a "type II agency problem", explains directors' eerie submission. Rational explanations are reviewed, but behavioral explanations appear more complete. Experimental work shows this predisposition disrupted by dissenting peers, conflicting authorities, and distant authorities. Thus, independent directors, chairs, and committees excluding CEOs might induce greater rationality and more considered ethics in corporate governance. Empirical evidence of this is scantperhaps reflecting problems identifying genuinely independent directors.
2004
The Common Law, parliamentary democracy, and academia all institutionalize dissent to check undue obedience to authority; and corporate governance reformers advocate the same in boardrooms. Many corporate governance disasters could often be averted if directors asked hard questions, demanded clear answers, and blew whistles. Work by Milgram suggests humans have an innate predisposition to obey authority. This excessive subservience of agent to principal, here dubbed a "type II agency problem", explains directors' eerie submission. Rational explanations are reviewed, but behavioral explanations appear more complete. Experimental work shows this predisposition disrupted by dissenting peers, conflicting authorities, and distant authorities. Thus, independent directors, chairs, and committees excluding CEOs might induce greater rationality and more considered ethics in corporate governance. Empirical evidence of this is scantperhaps reflecting problems identifying genuinely independent directors.
2020
The directors of major corporations are hugely powerful in charting the course of industrial civilization. Who selects those directors, and how those directors make decisions, are therefore both topics of critical importance. Various legal frameworks, such as the Accountable Capitalism Act currently under consideration by the United States Congress, have proposed that shareholders and/or employees should have a say in the director-selection process. We conducted an interactive simulation experiment, based on the Accountable Capitalism Act and Delaware corporate law, with human participants acting as three different types of directors: shareholder-selected directors, employee-selected directors, plus a third, novel form of director, “environment-selected directors.” In this paper, we integrate quantitative and qualitative findings from this experiment to provide novel results about the behaviors of these participants, and the deeper motivations underlying their behaviors. We found a ...
BOARD DYNAMICS AND DECISION-MAKING IN TURBULENT TIMES
Corporate Governance and Organizational Behavior Review, 2021
The board of directors’ role is evolving and becoming more important in the wake of corporate scandals resulting in the collapse of large corporations and losses to shareholders. Poor governance can lead to wrong decision-making, which might destroy organizations, particularly during times of environmental turbulence. The 2008 Global Financial Crises followed by 2011 Arab Spring throughout the MENA region and then 2019 pandemic situation are a few of many factors that created a turbulent economic and political environment for organizations, highlighting the importance of excellent decision-making skills. However, there is limited research on boards’ decision-making during difficult times in the MENA region. The authors interviewed 26 board members of 21 companies operated under duress to examine the effects on boardroom level decision making of the magnified levels of duress and stress experienced during turbulent times. Key findings from the research include trends in emotional responses in relation to decision-making, changes in the decision-making process after crises, leadership positions, and board behavior. The authors recommend that boards incorporate diversity training and awareness into all levels of their decision-making process and to the board members’ selection process. Future research should expand to different regions and industries and examine the effects of board members’ personal traits and backgrounds on their quality of choices and decision-making.