How does cognitive diversity affect strategic decision-making? In 2006, Human Insight was part of a large-scale study that investigated success within management teams, specifically aimed at organisations in America listed on the S&P 500. This study looked at why some organisations grow explosively within a short period of time in the direction of billions in turnover, while other companies struggle with growth. The results of this research are bundled in a book called Blueprint to a Billion (Thompson, 2006).
The Human Insight tooling was used to map management teams of these organisations. By using the tooling of Human Insight, there are several causal connections that have an impact on strategic decision making.
In the following section, these causal connections will be explained further. Strategic decision-making is necessary to determine the course of an organisation. Decision-making is based on multiple points of information and is collected to address a complex problem.
It often involves one-time decisions which therefore do not fit into our regular routines. That is why it is more important to look at the problem from multiple angles. After all, we do not know which angle is the best, because we did not have to make this decision earlier.
These different perspectives are difficult to understand, but, fortunately, cognitive diversity in boardrooms offers a solution. It will certainly not be the only solution to all problems, but it will be a necessary condition for making good, well-considered decisions.
For instance, Olson, Parayitam, and Bao (2007) show the effect of cognitive diversity on understanding, involvement in, and quality of decision. However, this is not a direct causal relationship.
Figure 1 shows the mediating role of task-related conflict. They also show that competence based trust moderates the effect of cognitive diversity on task-related conflict. This form of trust is seen as trust based on the choice to trust someone through cognitive processes that indicate that the other is competent, responsible, and trustworthy (Lewis & Weigert, 1985; Butler, 1991; Johnson-George & Swap, 1982, cited in Olson, Parayitam, & Bao, 2007).
This form of trust reinforces the relationship between cognitive diversity and task-related conflict. This task-related conflict is then strongly related to the understanding, involvement and quality of strategic decisions made within top management teams.
This form of conflict has been studied before, for instance by Amason (1996). The different outcomes of cognitive diversity have been labelled by him as the consequence of the different types of conflict that can strike up. This concerns the distinction between cognitive and affective conflicts.
Although affective conflicts, which are often emotional and personal, can have a negative influence on decision-making and Boardroom Dynamics. Cognitive conflicts are possibilities to improve decision-making, by encouraging people to think critically about the decision and all the input for the decision-making process. After discussing many different studies, a clear picture emerges.
By not avoiding position-related conflicts and by avoiding affective conflicts, we can ensure that cognitive diversity has a positive influence on strategic decision making.
A certain level of competence-based trust must be present so that position-related conflicts can arise. If this is not present, it is difficult for people to actually engage in critical dialogue within the decision-making process.
If this does happen, people are challenged to reflect critically and think about the decisions to be made. This improves the understanding, involvement, and quality of the final decision.
Conflict management involves minimising the negative effects of conflict and increasing the positive effects with the aim of improving results and learning. Boardrooms with high levels of Boardroom Dynamics and cognitive diversity will score much higher in this area.
Now that we have explained the different forms of diversity, it is interesting to know what impact this has in practice. What is the importance of diversity in boardrooms? At which levels does this matter? And more importantly, is there a difference in the quality of strategic decisions regarding complex issues at an administrative level?
The answers to this are not simple and contain a series of elements that should be looked at. The study by Thomson (2006) looked at several practical examples of dialogue between directors. This involved looking, by means of a set of instruments, at the relationship between top executives within listed organisations.
The findings from this study demonstrate what Human Insight calls the “Golden Dialogue.” Our findings showed that governing bodies (with more than two people) demonstrated an important aspect: the availability of an inside-outside dialogue.
In other words, cognitive diversity between directors in which one director shows a preference to naturally think of the external environment; the customer, the market and to be able to think of what is expected of the company. And with a manager at the other end of the spectrum who thinks more about the internal side of the organisation; processes, quality assurance, scaling up the organisation and people.
In these practical business cases, we established that there is a causality between the different cognitive preferences of the board and the impact this has on making strategic decisions for the long and short term. These directors have demonstrated the ability to shed light on a complex issue from different angles and to engage in a dialogue about the advantages and disadvantages of the strategic decision; something that is often desirable at the administrative level but is often not tested or mapped out as such.
The findings described above are also seen when we look at more recent research conducted by Reynolds and Lewis in collaboration with Human Insight on organisational governance. Over the past twelve years, Reynolds and Lewis have found at more than a hundred organisations that demographic diversity alone (age, background, ethnicity and gender) does not lead to improved performance in teams. Based on this, they did multiple experiments and business games looking at the impact of cognitive diversity.
Time and again it has been found that the teams with a high degree of cognitive diversity were better able to solve problems in different business games than more cognitively homogeneous teams.
We see that for example pension funds face several strategic administrative challenges. These problems can be correlated one-to-one with the new pension system that requires such pension fund directors to make short term strategic decisions for the coming years.
In order to look at the decisions from different angles and to start a ‘golden dialogue’, this is precisely the right time to put the subject of cognitive diversity on the agenda during the annual self-evaluation moments of the board. In the guidance of pension fund boards, we see that the dialogue of making strategic decisions can start when one considers mapping the cognitive diversity of the team.
Although this sometimes means that we say to a board that they are too homogeneous, we offer clear next steps to make the board more diverse. This facilitates healthy decision-making that is necessary for healthy business operations.
In the wise words of Epictetus, a Greek philosopher: “It is not what happens to you, but how you react to it that matters.” What we would like to add is that the way you react can often yield more results when it is done in a group full of cognitive diversity.
By taking a critical look at current Boardroom Dynamics, you can gain insights into boardroom culture and current behavior.
By gaining insights into interrelationships, the quality of interaction and the degree of psychological safety, steps can be taken toward a healthy and positive Boardroom Dynamic and an improved boardroom culture.
Human Insight offers several assessments that reveal what influences the undercurrent in boardrooms and what is thought about the current way of communicating. We can also provide assistance in understanding the level of diversity in boardrooms in order to work efficiently towards better dynamics and collaborations.
Human Insight offers practical insights and strategic tools to support organisations with complex issues, such as optimising Boardroom Dynamics or improving diversity in boardrooms.
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