When Consensus Hurts the Company

Management is fundamentally about making decisions. In organizations, key decisions are often made by groups boards, senior management teams, finance committees and so on rather than by single individuals. Thus, an important role of the person leading a decision-making team is to know how to combine multiple opinions in effect, to become a decision manager. The board of directors is responsible for a company's most important decisions. In turn, a key responsibility of the chairman is to lead the board so that, collectively, the board can make the best possible decisions for the company. An understanding of commission and omission errors gives the chairman a powerful lever to improve the board's chances of making the right decision. A requirement of full consensus minimizes commission errors, while a requirement of lowest consensus minimizes omission errors. Studying mutual funds confirmed the logic presented here: Funds whose managers used unanimity tended to err by missing good investment opportunities; those whose fund managers could act independently tended to err by acquiring stocks that ended up performing poorly.