A recent article in The Wall Street Journal argues that boards may have a hidden bias towards the CEOs they chose. “It’s called choice-supportive bias—the tendency people have to defend a choice even if it is clear that they’ve made a bad decision.” In a recent study published in the Strategic Management Journal, the article’s authors found that directors’ education and business experience do not protect them from the bias.
The authors first established that directors are susceptible to developing faulty perceptions of their choices when choosing between two hypothetical CEO candidates. Next, the authors examined data from poorly performing S&P 1500 firms across 10 years and found that directors who helped choose a CEO were unusually reluctant to replace that executive. “The more directors on the board were involved in the CEO choice, the lower the chance that a CEO would be fired in the year after two consecutive years of underperformance. Such directors also tended to overpay the CEO relative to his or her peers despite poor performance.”
The article notes that choice-supportive bias likely plagues boards in a variety of other contexts. “For example, directors might be more reluctant to undo failing acquisitions and international expansions if those moves took place under their watch.” Fortunately, awareness may be half the battle. “Simply being alert to the possibility of choice-supportive bias distorting perceptions can help directors protect against its effects. Understanding that it is natural to view one’s decisions too favorably can lead directors to ask harder questions if those decisions are delivering poor outcomes.”