Still wondering what corporate boards are good for

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UCLA law professor and one-man-media-empire-in-the-making Stephen Bainbridge has responded to my response to his critique of my very first post on this blog, “Who needs a board of directors, anyway?” (Dizzy yet?)

Bainbridge’s essay is highly erudite, with footnotes and everything. Reading it will, to quote an ill-fated Fortune ad campaign of a few years back, “make your brain bigger.” But no way am I giving Professor B the last word.

His main point is that corporate boards are useful because groups make better decisions than individuals. He concludes:

Team production is imperfect, whether the product is a manufactured good or a corporate decision. Teams are subject to unique cognitive biases, such as groupthink, and unique sources of agency costs, such as social loafing. With respect to the exercise of critical evaluative judgment, however, groups have clear advantages over autonomous individuals. Not only do groups clearly outperform average individuals in a given sample, there is considerable evidence that the process of group interaction has synergistic effects allowing groups to outperform even the best decision makers in the sample.

Now surely corporate boards serve some purpose, or we wouldn’t have them. But is it really because small groups are so great at making decisions? In his fascinating new book Infotopia: How Many Minds Produce Knowledge, University of Chicago law professor Cass Sunstein offers ample evidence of the flaws of what he calls “deliberating groups.” Such bodies do well on questions where there is a clear correct answer. But on less definitive matters–like most of the questions that corporate boards have to deal with–group deliberation often has less to do with finding the right answer than with imposing the views of the most outspoken (or powerful) members of the group.

Consider the experiment that Sunstein and two other scholars conducted recently in Colorado. They gathered residents of conservative Colorado Springs and liberal Boulder in small groups, segregated by city, to discuss global warming, same-sex civil unions, and affirmative action. Participants were asked to state their opinions anonymously before and after the discussions. Recounts Sunstein:

In almost every group, members ended up with more extreme positions after they spoke with one another. … Aside from increasing extremism, the experiment had an independent effect: It made both liberal groups and conservative groups significantly more homogeneous–and thus squelched diversity.

This sort of groupthink is potentially disastrous for a corporate board, which is there in part to keep the CEO from driving a company over a cliff. To be effective, boards need to foster diversity and dissent. The practice of meeting regularly without the CEO in the room, which has become standard since the scandals of 2001 and 2002, is a big step in this direction.

But too much diversity and dissent can be a problem, too, as HP’s recent board troubles indicate. It’s a delicate balance, and my bet is that most boards fail to achieve it. That’s not to say that the two other possible methods of governing corporations in a free economy–shareholder democracy and self-perpetuating autocracy–are any easier to get right. Just that we shouldn’t expect too much of the setup we’ve got, and shouldn’t be afraid to tweak it in ways that might improve it.

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