Challenging the Status Quo

Have you noticed that even a board made up of individual creative thinkers can prefer the status quo over change? If you’ve noticed this tendency, what you’re seeing is status quo bias – just another cognitive bias that affects our decision-making.

You know the saying, “If it ain’t broke, don’t fix it.” In other words, if things are working, we’re content to keep them that way. Simply put, status quo bias negatively affects our ability to make decisions – our ingrained preference for stability keeps us from judging different options fairly. And when the status quo bias comes out in a group setting – such as the boardroom – it pushes collective decisions in a certain direction.

Boards often prefer a set of established norms and value the familiar. Under the influence of the status quo bias, they may overvalue what they’re familiar with and undervalue opportunities that involve substantial change. As a result, boards can be reluctant to embrace new strategies, resistant to new ideas, and unwilling to invest in long-term projects.

All that makes the status quo bias an important topic for board directors who want to have an impact on their board’s decisions.

Behavioral Economics

Behavioral economics is a field that combines elements of economics and psychology to understand how and why people behave the way they do in the real world. Practitioners in this field focus on the differences between what people “should” do and what they actually do, and the consequences of those actions.

Understanding how people actually behave – rather than how we think they should behave - has long been useful in the marketing realm. Now it’s being studied and applied in pretty much every domain where people make decisions – including the boardroom.

Let’s face it – understanding human behavior is a complicated business. The BehavioralEconomics.com article The Three Laws of Human Behavior provides us with a simple model for how humans behave, consisting of three “laws”:

1. People tend to stick to the status quo unless the forces of friction or fuel push us off of our path.
2. Behavior is a function of the person and their environment.
3. Every decision includes tradeoffs and potential unintended consequences.

All three of these laws are relevant to boardroom behavior, but it’s the first one – status quo bias – that we’ll explore in today’s blog. If you’re curious about the other two, check out the article.

Status Quo Bias

Status quo bias is defined as the preference for maintaining one’s current situation and opposing actions that may change it. It’s human nature to feel uncomfortable with situations where the outcome is uncertain. Our tendency to want to keep things the same has a considerable effect on how we behave in all aspects of our lives, whether business or personal.

The reasons we’re all prone to the status quo bias are well understood by behavioral economists.

• Loss aversion and regret avoidance. Our psychological pain from experiencing loss is much greater than the pleasure we feel from gain. That leads us to want to avoid feeling regret at all costs, which makes the status quo feel like the safest choice.
• Choice overload. The more options we have to choose from, the more likely we are to fall back on the status quo. Faced with multiple choices, it’s just easier to go with what we know.
• Preference stability. Once we make a decision, we tend to want to stick with it no matter what. Only something truly disruptive and unexpected can pull us off our previous decision.
• Sunk cost fallacy. We’re often reluctant to abandon a course of action because we’ve already invested time and/or money in it, even when it’s clear that abandoning it would be beneficial.
• Perceived cost of change. We think of the status quo as “free”, even if there are problems with it. On the other hand, we see any change as coming at a high cost.

Status Quo Bias in the Boardroom

When we’re part of a group or an organization, we tend to view them as fixed entities with their own established structure and behavioral norms. We quickly become comfortable with the status quo, not bothering to question why things are the way they are, or how they could be better.

As food for thought, let me provide a few examples of some of the norms that a modern board might be dealing with, and how the status quo bias could affect the way directors think about and decide on potential change.

The work week. Why do employees work five days a week? It’s been an accepted norm for decades, but there’s nothing natural or inevitable about it. Although studies suggest that a four-day work week might actually increase productivity, it’s a fair bet that most directors would tend to resist supporting such a change, wanting to keep things the same as they’ve always been.

Remote work. Our recent pandemic experience demonstrated that a great deal of work can be satisfactorily completed at home, and that it’s possible, maybe even advantageous, to hold most meetings virtually. Yet in many cases, management and boards have insisted on employees returning to the office and in-person meetings. The status quo bias is behind at least some of those decisions.

Diversity, Equity, and Inclusion (DEI). The status quo bias makes it difficult for people to accept changes, even when they support them in theory. Employees, management, and directors can be skeptical about DEI initiatives — not because they oppose equity, but because they oppose change. In a boardroom context, you might hear directors express concern that bringing on new directors from diverse backgrounds may dampen the board’s collegiality.

Artificial Intelligence (AI). In your own boardrooms, you may have spotted the status quo bias at work in the form of resistance to even talking about new technologies like AI. After all, we’ve been getting along fine without it, haven’t we? A general lack of knowledge among directors just serves to increase the reluctance to consider it.

Organizational restructuring. Organizational restructuring decisions often bring the status quo bias to the forefront. Mergers, acquisitions, and re-organizations all have real costs – personal as well as financial - but both directors and management often overestimate these, while at the same time underestimating current costs and pains. Anticipated regret and loss aversion often play significant roles in the way these decisions are handled.

Does Your Board Have a Status Quo Bias Problem?

Here are some signs that your board may have a status quo bias problem, gathered from the PwC article Unpacking board culture: How behavioral psychology might explain what’s holding boards back and other sources.

• Directors advocate for sticking to the current strategy even in the face of changes in circumstances or key metrics.
• The board is reluctant to support entering new markets or divesting lines of business that no longer make sense.
• There’s no long-term succession planning for board members.
• Board turnover is slow, or there are an inordinate number of long-serving directors. Having a static group of directors for a long period of time may contribute to Groupthink.
• There’s a reluctance to bring on younger directors.
• Directors make excuses for a lack of board diversity.
• The board never rotates committee chairs.
• Management, especially the CEO, is entrenched at the company.
• The board doesn’t focus on C-suite succession.
• The board isn’t interested in education on emerging technologies such as AI, or other new areas.
• The board views subpar company performance as a temporary hurdle, not a harbinger of systemic change.

Tips for the Board

For most board decisions, management gets to frame the issue, draft a proposal, and make recommendations. Given that, it’s important for you and your board to keep in mind that members of your management team are every bit as prone to cognitive biases as anyone else.

To counter that tendency, directors need to rigorously examine not just the final recommendation, but also the process that management followed, the inputs they considered, the criteria they used, and the rationale for making their selection.

Ask yourself if the status quo bias was in play in management’s decision-making. Choosing the status quo is not, in and of itself, an indication of bias – it may be, in fact, the best available option. Asking open, direct questions about how management arrived at their recommendation is a good way to satisfy yourself in this area. For instance, management often deals with the problem of choice overload by listing only a few of the available options. It can be useful to ask management what choices were considered then eliminated, and why.

Here are some additional tips to minimize status quo bias in the boardroom, adapted from Unpacking board culture: How behavioral psychology might explain what’s holding boards back and other sources:

• Make structural changes to board discussions, such as bringing in outside experts, revamping the agenda of board retreats, or arranging for a tour of a center of innovation.
• Take a fresh look at board materials. Ask advisors and other contributors to suggest revisions and recommend best practices.
• Use the board assessment process to identify ways the board might benefit from refreshment.
• Ask management to conduct a pre-mortem exercise. That’s where they imagine that, in the future, they are examining a failed strategy and coming up with the reasons it didn’t work.
• Try to devote equal time to the pros and cons of a proposal.
• Consider the tradeoffs and the opportunity costs for each option, including the status quo.
• Look for the burning platform, asking, “What happens if we don’t make a change?” Frame the status quo as a loss, outlining all the risks and concerns for sticking with it.

Advice for the Savvy Director

As with any cognitive bias, the first step to avoiding the status quo bias is self-awareness. Acknowledge it when it happens. When a change is proposed, pay attention to how you react. Are you hesitant? If so, why? Getting to the root of your concerns can help you determine if status quo bias is playing a role.

Learn to recognize status quo bias in your fellow directors as well as the management team. When you do, the best way to shake things up is with questions. Soften your approach by using we instead of you, asking questions like “Are we sure we’ve considered all the options?” or “Have we missed some of the risks of not making a change?”

Go ahead and acknowledge the fears, risks, and concerns involved with change, but also understand what’s driving the board to consider a new idea – an opportunity or threat that can impact the organization and its stakeholders.

False urgency is your enemy when dealing with status quo bias, or any cognitive bias for that matter. If you have the opportunity, use soak time to weigh all of your options carefully and give them each equal consideration. Doing so will prevent you from automatically opting for the default option.

Your takeaways:

• There’s a big difference between how we think people should make decisions, and how they actually make decisions. Studying that is the focus of behavioral economics.
• We have an innate preference for maintaining our current situation and opposing actions that may change it. In the boardroom, that affects the way directors make decisions.
• Management frames the issues and recommends a course of action. It’s the board’s role to ask probing questions to uncover the impact of the status quo bias on management’s proposals.
• Be aware of your own tendency to overvalue the status quo and, when possible, use soak time to counteract it.

Resources:

• Behavioral economics, explained. Max Witynski. uchicago news. University of Chicago Explainer Series.
• Why do we tend to leave things as they are? © 2023 The Decision Lab.
• What Every CEO Needs to Understand About Status Quo Bias. Nicci Nesmith Hammerel. Corporate Visions. March 2023.
• Unpacking board culture: How behavioral psychology might explain what’s holding boards back. PwC Governance Insights Center. February 2022. © 2022 PwC.
• What is Status Quo Bias and How Does It Affect the Workplace? Wharton Online. August 2022.
• The Three Laws of Human Behavior. Aline Holzwarth. BehavioralEconomics.com. May 2019.

Thank you.

Scott

Scott Baldwin is a certified corporate director (ICD.D) and co-founder of DirectorPrep.com – an online membership with practical tools for board directors who choose a growth mindset. 

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