Common mistakes made by companies often do not stem from a lack of information, but rather from human/cognitive biases. Two of the most dangerous cognitive traps are “status quo bias” and “escalation of commitment.” Companies with status quo biases tend to maintain the current practices despite changes, thereby missing opportunities for innovation. On the other hand, escalation of commitment occurs when companies, unwilling to admit past mistakes, continue allocating resources to already failing projects, leading to greater losses. If these psychological mechanisms are not identified in a timely manner, they can cause companies to fall into long-term misallocation of resources. In such decision-making dilemmas, the role of independent directors is essential. They should not merely attend meetings and sign documents, but rather serve as the voice of rational judgment and vigilance within the boardroom.

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■The Common “Escalation of Commitment” Phenomenon in Boards of Directors

In many cases of corporate governance failures, early warning signs were present. However, the absence of dissenting voices within the board led to imbalanced decision-making.

The following are three common manifestations of escalation of commitment:

1. Continued investment in loss-making projects: Even when market feedback is poor, the company continues to inject funds simply because of an unwillingness to acknowledge that prior investments have been wasted.

2. Further resource allocation following failed acquisitions: In order to save face and protect reputation, the board refuses to admit its mistake in judgment regarding a merger, resulting in further losses.

3. Failure to replace clearly unqualified senior executives: Due to personal relationships, past contributions, or internal politics, the board remains silent on unqualified executives, ultimately undermining the organizational morale and overall performance.

In such situations, the real issue is not a lack of information, but the absence of rational voices willing to “hit the brakes.”

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■Specific Functions of Independent Directors

To ensure that independent directors can effectively fulfill their role, attention should be directed to the following three aspects:

1. Establish clear exit conditions: For major projects, preset clear exit thresholds. For instance, to prevent blind persistence, review the project if key performance indicators are not met.

2. Break the decision-making echo chamber: Boards should actively introduce opposing viewpoints and implement a “red team mechanism,” ensuring that dissenting opinions are not only heard but also systematically incorporated into the decision-making process.

3. Enhance cognitive awareness: Boards should be encouraged to develop an understanding of core behavioral economics principles, such as the “irrecoverability of sunk costs” and “loss aversion distorts judgment,” thereby establishing an internal psychological safeguard against biased judgment.

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■Empowering Independent Directors to “Speak Up, Be Heard, and Make an Impact.”

If a company genuinely expects independent directors to fulfill their role, it must also provide corresponding institutional and cultural support as followed,

●Information Transparency: Ensure timely, complete, and equal access to information so independent directors can effectively exercise oversight.

●Respect for the Role: Encourage diverse opinions and constructive challenges, rather than prioritizing superficial consensus.

●Structured channels for expression: Establish regular questioning sessions and formal mechanisms for raising concerns about major projects, enabling independent directors to express their positions in accordance with governance procedures.

Silence does not make mistakes disappear. Sound corporate governance requires an effective voice: “We may be heading in the wrong direction.” The true value of independent directors lies in the ability to press the stop button while there is still time to change course.

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This article was published in the Expert’s Commentary Column of the Commercial Times: https://www.ctee.com.tw/news/20250514700132-431303