Study: Too Many Experts on Board Bad for Business

By:
Chris Gaetano
Published Date:
Aug 30, 2016
2Many Cooks

A recent study of about 1,300 community banks has found that technical experts on the board of directors, that is experts in the banking industry, makes no difference as far as profits, and can even hurt the company in times of uncertainty, according to the Harvard Business Review. The study, published in the Academy of Management Journal, focused on community banks with a legal charter, less than $1 billion in assets, and a locally focused business model. What the researchers discovered was that the presence of banking industry experts on the board made no difference in terms of bank profitability. The study also found that, when dealing with uncertain situations, such as rapid growth in a new market territory, having more experts on the board actually made it more likely that the bank would go out of business over the 17 year period the researchers examined. 

"We predict that the greater the level of decision uncertainty—due to rapid asset growth or operation in less predictable markets—the stronger the relationship between the proportion of banking expert directors and the probability of bank failure. Longitudinal analyses of 1,307 banks between 1996 and 2012 support this prediction, even after accounting for both the overall level of professional diversity among directors and banks’ different propensities to have an expert-heavy board," said the study abstract. 

Why could this be? The study's authors pose three possibilities. One is that, as experts gain more experience in their field, their ability to understand and adapt to new ideas diminishes, and so are less flexible in adapting to unfamiliar situations. Another is simply that experts can be overconfident and won't realize the extend of a problem until it's too late to do anything. The third possible reason was that the more experts there are on a board, the less likely it is that non-experts will speak up when they see something wrong, and so alternative views don't get as much attention. 

"Our research shows that these three problems of expert-dominated boards are most likely to be damaging when a company veers off the beaten path and faces uncertainty. Dealing with changing, unfamiliar situations requires flexible thinking and a healthy dose of disagreement. And when conditions are novel or ambiguous, expert overconfidence is especially severe," said the study's authors. 

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