Many factors contribute to corporate governance failings. However, few are as fundamental or as pervasive as poor decision-making.

 

This is often associated with the widespread failure to distinguish between two very different disciplines: the management of agreement and the management of disagreement.

 

Management of disagreement

 

Disagreements among directors are commonplace, especially when the board is composed of capable and independently-minded directors. This can be a good thing, since a board that never argues is likely to be failing in its duties.

 

However, such disputes can get out of hand and may also be indicative of competing factions among the directors. If they are not resolved promptly and properly, they can rapidly escalate into acrimonious disputes that paralyze the board, scare investors and damage the business.

 

Often, the chairperson will be quite capable of dealing with the problem. But what if s/he fails to do so for any reason?

 

The potential consequences of such disputes are so severe that it is incumbent on any responsible board to adopt appropriate dispute resolution procedures well before the need arises – a bit like a dedicated corporate governance dispute board.

 

Management of agreement

 

Potentially just as destructive as a failure to manage board disputes is a failure to manage agreement among directors.

 

A degree of group cohesion is necessary for a board to function effectively. However, the very dynamic that binds a group together also frequently obscures the shortcomings of its decision-making. The greater the cohesion, so the greater the pressure to conform.

 

The resulting false sense of consensus can give rise to serious errors of judgments. The financial crisis highlighted the extent to which  boards of directors are especially prone to ‘groupthink’.

 

Yet 'groupthink' is by no means the only cause of misjudged agreement.

 

The diversity of diversity

 

One of the ways in which constructive debate can be encouraged is by having sufficient diversity on the board. More diverse boards tend to be better able to address the challenges of an uncertain business environment.

 

All too often, however, ‘greater board diversity’ amounts to little more than a politically correct, box-ticking exercise, more concerned with gender and race than with genuine differences of approach and experience.

 

A further critical factor is the extent to which a diversity of views and the proper scrutiny of management may be stifled by the economic dependence of non-executive directors (NEDs).

 

This is frequently reinforced by NEDs' sometimes limited understanding of how the business actually works; their frequent deference to those perceived to be more knowledgeable; their limited exposure - if any - to shareholders and other stakeholders; and management control of information flows.

 

Balancing uncertain expectations

 

The NED is a classic decision-maker under uncertainty, a challenge exacerbated by the extent to which many governance issues are often far from clear-cut, especially in situations calling for a balancing of stakeholders’ interests and expectations. need to be carefully balanced.

 

Significant problems can arise when companies venture into new terrain, with unfamiliar risks and business dynamics.

 

This applies as much to foreign investors in Africa as to the growing number of African companies being listed on foreign stock exchanges.