Performance effects of groupthink in the boards of directors of JSE listed companies

Abstract

Board members serving on corporate boards are expected to act objectively and in good faith. Even if the intention is such, cognitive biases are at play which may serve to alter the decision-making process of a board of directors as well as its comprising members. A specific group of cognitive biases – assembled under the banner of the term “groupthink” – are an example of one such phenomenon resulting therefrom. While groupthink is understood in terms of technical composition and sociological presentation, the mechanisms by which groupthink impacts firm performance have not been isolated and understood, and therefore cannot be purposefully affected. This study aimed to lay the groundwork for research into understanding fully the mechanisms by which groupthink affects performance of the boards of Johannesburg Stock Exchange (JSE ) listed companies as well as, subsequently, the firms which they serve. The study aimed to execute this by measuring quantitatively the presence of groupthink-linked proxies in the boards of JSE listed companies and thereafter correlating said proxies to firm performance measures – including, but not limited to, financial performance. Multiple statistically significant correlations were found to exist, encouraging the researcher’s hypothesis that groupthink has a statistically significant and material effect on the boards of JSE listed companies as well as, consequently, the firms which they serve