Why Boards Get Misled by Good Intentions, Not Dishonesty

By James Walker

The validity of any course of action taken by a company’s board is largely dependent on the accuracy and scope of information available at the time the decision was taken. If that information later turns out to have been misleading, the immediate suspicion may be that dishonesty has played a part in the process. But more often, perception has been distorted by good intentions, rather than a deliberate attempt to misdirect boards.

How information is presented, or even what is included or left out of a report, can be skewed by a number of factors. Optimism and a desire to demonstrate positive progress are common factors; loyalty to a project or the wider company often contributes too, as does personal investment in a specific strategy being adopted. The report writer is often accountable for the numbers within it, and nobody has to lie for that to mislead.

Governance, therefore, is not just about preventing dishonesty – it is about creating systems which expose uncomfortable truths, even if they have been hidden unwittingly or without ill-intent.

The bias boards experience

If a strategy is failing or a team underperforming, it is natural for leaders to have faith that – given enough time – they can create the conditions which will enable eventual success. Optimism bias also plays a role in underestimating the potential costs, timescales and risks involved in a decision, whilst its counterpart confirmation bias sees people unconsciously give more weight to information which supports their existing beliefs.

Published in the Journal of Business Research, ‘How decision failures shape escalation of commitment: the role of regret and regulatory focus’ is one of many research papers which highlight the human tendency to continue investing in failing initiatives, despite evidence to support calling a halt to them. It is thus easy to see how even a supposedly objective report exploring multiple courses of action can become heavily influenced by what its author believes is the right decision.

We not only see loyalty creating bias when it comes to leaders and their teams, but also between those leaders and the board itself. If the person relaying the information, who likely holds a senior role within the organisation, has a good reputation and a track record of success, boards may be more inclined to accept what they are being told without effective scrutiny.

What doesn’t reach the boardroom

A serious problem may be reported by an employee, which their line manager portrays to the department head as a challenge which is being addressed. When that leader reports upwards, they describe remedial action as being underway. By the time the board hears about it, it’s a ‘situation under control’. Nobody in that chain of reporting has intentionally been dishonest, but by the time the information has gone through several layers of management (with each applying optimism bias and showing loyalty to their subordinates’ ability to resolve the issue), the board is seeing a picture which seems a far cry from the original complaint.

Had they presented the information in a more serious manner, each person may have felt they would be thought of as negative or disloyal. This reveals the role of organisational cultures in skewing information: where challenge and full transparency are encouraged, we can expect to glean more accurate recollections of events. The FRC even emphasises this in its Corporate Governance Code Guidance, citing fear of speaking up, lack of openness to challenge and overambitious targets as potential indicators of cultural problems.

The same guidance highlights the potential for distorted decision making even among ‘well-intentioned and experienced leaders’, warning against matters being brought to the board for sign-off rather than debate. Some of this distortion may arise simply from convenience. When a report is prepared, the cost and timescale of a project can be easily translated into numbers measurable against targets. But where there are underlying problems with achieving the intended outcomes, these might be far more difficult to measure – and therefore simply not included in progress summaries.

The board may hear that 90% of staff have attended training, but never find out whether operational performance has improved as a direct result. They may be told a new technological system has been implemented or a policy updated, but staff reaction to and adoption of either may not be fed back to them. Not out of dishonesty, but due to complexity.

This could go some way towards explaining why some projects fail to achieve their intended impact: indeed, the Project Management Institute found less than half of all projects were genuinely successful from a stakeholder value perspective, whilst 12% were outright failures and 40% sat in a grey area between success and failure.

The importance of challenge

The intricacies of reporting make effective challenge crucial to the governance process, as advised by the FRC which states that, alongside constructive challenge, clarity must be sought around underlying assumptions, and information drawn from various sources.

There are multiple questions boards should ask of every report they receive: whether there is any evidence which contradicts the information in front of them; if the report omits the experiences of the employees affected; if there are assumptions which must be correct in order for a strategy to succeed; and, importantly, whether outcomes are being measured alongside activities.

By asking for evidence of benefits as well as progress; ensuring major investments and projects are scrutinised by an internal audit or another independent review; hearing from staff and customers as well as leaders; and seeking credible alternative assessments of the situation, boards can increase the likelihood that the information they receive is an accurate reflection of reality. And that is where the distinction between governance as a reporting exercise and governance as an active decision-making process lies.

Companies are rarely full of dishonest people. But it’s an equal concern if the decisions of well-meaning leaders convinced they are taking the right course of action aren’t held up for scrutiny.

Good intentions are valuable, but they must not replace good governance. Because without the right systems and processes in place, the board cannot effectively make or assess decisions. And that’s when we see them being misled – not by the dishonesty of a report’s author, who is ultimately responsible for the numbers in it, but by human nature and corporate culture.

About the author

James Walker is an independent board chair, non-executive director and Chartered Internal Auditor who has led internal audit teams at Credit Suisse and UBS. Currently he provides governance, risk and internal audit services through Lightning Oak, chairs the board of Nature Impact, is a Non-Executive Director and Chair of the Finance, Planning and Performance Committee at Avon and Wiltshire Mental Health Partnership NHS Trust, and advises the boards of Footstep AI and Fallon AI. James is a Fellow of the Association of Chartered Certified Accountants, Chartered Internal Auditor of the Chartered Institute of Internal Auditors, and a Chartered Member of the Chartered Institute for Securities and Investment.