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The Simplexity Gap Why Boards are Always a Step Behind their Management Teams – and What To Do About It

July 4, 2018 • Corporate Governance, Strategic Spotlight

By Mihnea Moldoveanu and Richard Nesbitt

How impactful can simplexity gap be in corporate boards? In this article, the authors show how such gap undermines the role, function and integrity of the board by making it impossible for boards to ratify decisions on the basis of all of the information that is valid, reliable and relevant to the case at hand, as well as how the design and execution of the right board communication process can help boards bridge the gap and restore agency and accountability to the board.

 

A Widening Chasm. A growing chasm separates corporate boards from the competent exercise of their duties of care and diligence. It threatens to make boards everywhere into no more than ineffectual rubber-stampers that do not fully understand what their management teams do and why they do it and end up sanctioning the wrong actions for the wrong reason at the wrong time. It is a gap in knowledge rather than information; in expertise rather than evidence; and in understanding and comprehension rather than judgment.

On one side, you have top management teams leading organisations whose technological, operational and social complexity has grown momentously during the past decade – the ability to deal with complexity is cited by most CEO’s as the greatest challenge to their businesses.1 Their recommendations to the board are based on detailed analyses of dense, changing, uncertain information. They are informed by expert analyses couched in technical language systems that are opaque and are easily misunderstood by untrained board members. Their reasoning and arguments are complex – and scarcely intelligible to those who have the obligation to audit and understand them.

 

The simplexity gap is the yawning space between the simple expectations of board members and the complex predicaments, problems and rationales of management.

On the other side, you have directors who typically spend less than 100th of the time that management does on the intricate details of the business they are entrusted with. They expect the information, analysis and recommendations management presents them with to be intelligible, valid, easily auditable and immediately actionable. In a word, simple. They expect to be able to understand Web 2.5 product launch plans with the technical skills of Web 1.0 – and in no more than the two or three hours they schedule for reading management’s decks; to be able to monitor risky asset allocations using dated techniques developed before the Financial Crisis of 2008 – the ones they know about; to be able to ratify outsourcing plans involving remote  R&D teams working in countries with different legal systems and social cultures on the basis of rationales simple enough to lay out in 10 minutes’ worth of discussion at a board meeting. Boards rely for their decisions on what information management provides – and legal statutes and practice actually encourage them not to go beyond that information: failures arising from ignorance are far less culpable than failures arising from knowing-but-not-doing.

The simplexity gap is the yawning space between the simple expectations of board members and the complex predicaments, problems and rationales of management. It leads to failures arising from not understanding enough to ask the right question at the right time – an effect too subtle to be picked up by legal status, at present. It opens up whenever consequential communications about critical decisions or events occurs between management and the board. Boards that do not heed and proactively deal with the simplexity gap are flying blind – unable to exercise the duties it has accepted as its charge. And whether things go well or not, they do not do so on account of the board, because the board could not have understood the rationale for the decisions it ratified – and cannot, thus, properly monitor them.



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About the Authors

Mihnea Moldoveanu is Professor of Economic Analysis, Desautels Professor of Integrative Thinking, Director of the Desautels Centre for Integrative Thinking and Vice Dean of Learning, Innovation and Executive Programs at the Rotman School of Management, University of Toronto. He is also a Visiting Professor at the Harvard Business School. He is the Founder, past CEO of Redline Communications, Inc. (TSX:RDL), a leading manufacturer of broadband wireless networking equipment.

Richard Nesbitt is CEO of the Global Risk Institute and Adjunct Professor of Management at the Rotman School of Management at the University of Toronto. He is also a Visiting professor at the London School of Economics and Political Science. He is past Chief Operating Officer of the Canadian Imperial Bank of Commerce (TSX: CIBC) – a leading commercial, retail and investment bank in Canada and globally. He is also past CEO of the Toronto Stock Exchange (TSX: TMX).

The authors would like to thank Mr. Corey Li for his sharp, proficient and diligent research assistance.

References

1. IBM. (2013). Capitalizing on Complexity: Evidence from Fortune 1000 CEO’s.

2. Moldoveanu, M.C. and J.A.C. Baum. (2014). Epinets: The Epistemic Structure and Dynamics of Social Networks, Stanford: Stanford University Press.

3. … which are the basic building blocks of economic models of communication between principals and their representatives (boards) and agents (managers) – see, for instance: Gibbons, R., H. Matoushek and J. Roberts. (2012). Decisions in Organizations, in the Handbook of Organizational Economics. Princeton University Press.

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