Too much of a good thing: Limiting experts on boards

But IESE's John Almandoz and coauthor András Tilcsik research, published in the Academy of Management Journal, says this is not so: Too many experts on a board can be downright dangerous and lead to business failure. In fact, having a counterbalance of non-experts, from different fields, is important for good governance -- especially at challenging times, when a company's future is at stake.

Analyzing data from more than 1,300 U.S. community banks over 17 years, they found a clear link between the proportion of experts on boards and the banks' chances of failure during uncertain times.

Meanwhile, keeping to a steady course with low-risk endeavors is generally unaffected by board composition, the authors observe. Understanding why expert-dominated boards might fail in risky situations can help managers and shareholders build better governance structures.

So what exactly classifies as an uncertain or risky activity? For community banks, these types of activities include pursuing rapid growth, high-risk lending (especially in real estate or construction) and competing in saturated local markets.

Prof. Almandoz and Tilcsik identify three main dangers that can be caused by having too many experts on the board: cognitive entrenchment, overconfidence and suppression of alternative views.

1. Teaching seasoned dogs new tricks

Experts, by definition, know a lot about the field or subject they´re experts in. They know more details and are more accurate. However, they have a harder time changing course or responding to new circumstances.  Cognitive entrenchment describes what psychologists observe when we gain deeper expertise in an area but also become less flexible in our thinking.

So, while experts have deep knowledge of their field, they can be reluctant to adapt to unfamiliar situations. In the interviews with CEOs and other directors on boards, the authors of the study found that experts may bring "baggage" or "habits" from previous roles to the table and may not look at a situation "with fresh eyes."

The result: that they fail to anticipate new threats from competitors or adapt to changing conditions.

2. Daredevil Behavior

It´s good to be optimistic. But when it comes to risky situations, experts show an overly optimistic attitude. They can become overconfident, buoyed by faith in their abilities and their experiences of past success. One of the bankers interviewed boasted: "Every deal is doable; you just have to know how to structure it."

At board meetings, non-banker directors (often high-status professionals from other fields) may require more thorough explanations than the domain experts to make a decision. Meanwhile, a seasoned banker might, for example, push to offer loans for construction based on positive past experiences rather than on current risk analyses as market conditions change.

Not to mention that experts are often granted especially strong authority on boards. Pressure to live up to high expectations may encourage them to hide any gaps in their knowledge, rather than to admit uncertainty or lack of confidence in their abilities. The potential result?  A rushed decision, taken with a poor sense of the real risks involved.

3. Staying quiet when you need noise

If domain experts are more likely to be rigid or overconfident at risky times, why don't the non-expert board members point this out? Interviewees suggest that conflict avoidance happens where experts dominate. One CEO observes, "where everybody respects each other's ego at that table... at the end of the day, they won't really call each other out."

No one would argue that healthy levels of disagreement help make effective, responsible choices at uncertain moments. The expression “devil´s advocate” has been around since Roman times.  More non-expert directors at the table can better challenge the entrenched experts' views.

A bank CEO with only a few experts on the board says, "When we see something we don't like, no one is afraid to bring it up because we are not stepping on anybody's toes because of their massive banking experience in the past."

(Reproduced with permission from IESE Insight)

[This article has been reproduced with permission from IESE Business School. www.iese.edu/ Views expressed are personal.]