5 - Board Decision-making Flashcards
What does Guidance on Board Effectiveness (ICSA. 2018) explain? Re decision making
“Well-informed and high quality decision-making does not happen by accident. Many of the factors that lead to poor decisions are predictable and preventable. Boards can minimise the risk of poor decisions by investing time in the design of their decision-making policies and processes, including he contribution of committees and obtaining input from key stakeholders and expert opinions when necessary.”
Kahneman and Tversky
Significant shift in decision-making science. Work highlighted the difference between “rational decision-making” models of economics and “behavioural economics” - that works practically in the real world with real people in real populations - predictably irrational and hugely impact by both individual psychology and group social dynamics.
Need to appreciate decision-making through more modern behavioural lens.
It is possible to have a good decision-making process that leads to a bad governance outcome.
Dulewicz and Gay 1997 resarch into top 20 CEO competencies (as judged by other directors)
1 = decisiveness
#19 = problem analysis
#20 = critical faculty
Importance of evidence-based practice, originating in medicine in 1990s.
What is one definition of “evidence-based practice”?
conscientious (effort); explicit (clarity); and judicious (critical and quality) use of best available evidence from multiple sources to increase likelihood of favourable outcome.
Cross case study on financial incentives
Evidence does not support generous stock options to drive company performance. Can be used to recognise and share success when used to drive performance, can incentivise wrong, often unethical, behaviours.
E.g. sales force had received individual bonuses for selling more products - culture of infighting, low morale, poor innovation, inappropriate customer service and poor sales figures.
Moved to more team-based reward - initially led to best/most aggressive salespeople resigning - reconsidered but stuck. Overall morale and employee engagement increased significantly and sales followed suit.
Evidence-based practice recommends a 6-step process.
- asking: translating a practical issue/problem into an answerable question
- acquiring: systematically searching for and retrieving the evidence
- appraising: critically judging the trustworthiness and relevance of the evidence
- aggregating: weighing and pulling together the evidence
- applying: incorporating evidence into the decision-making process
- assessing: evaluating the outcome of the decision taken
Manet (2010) on bias
(1) bias in the boardroom is inevitable and frequently underestimated
(2) bias plays significant role in decision-making
(3) undermines perceived benefits of iDirectors
(4) governance regulation needs to emphasise effects of bias on decision-making and mandate the use of de-biasing procedures
What are the kinds of bias? (9)
(1) Groupthink
(2) Confirmation bias
(3) Anchoring effect (rely too heavily on or overemphasise one trait of piece of info)
(4) Hindsight bias
(5) Availability bias
(6) Loss aversion preference than acquiring gains
(7) Sunk cost fallacy
(8) Framing effect
(9) Metacognitive bias (we are immune from all above biases)
Kahneman, Lovallo and Sibony “Before you make that big decision” in Harvard Business Review- 12Q checklist (3 categories)
CATEGORY 1: ASK YOURSELF
- Check for self-interested biases (Remedy: review with extra care, especially for over-optimism)
- Check for the affect heuristic (Remedy: rigorously apply quality controls)
- Check for groupthink (Remedy: solicit dissenting views, discreetly if necessary)
CATEGORY 2: ASK THE RECOMMENDERS
- Check for salience and bias (ask for more analogies, rigorously analyse their similarity)
- Check for confirmation bias (Remedy: request additional options)
- Check for availability bias (Remedy: use checklists of data needed for each kind of decision)
- Check for anchoring bias (Remedy: Re-anchor with figures generated by other models/benchmarks and request new analysis)
- Check for halo effect - assumption successful in one area, therefore equally elsewhere (Remedy: eliminate false inferences, seek additional comparable examples)
- Check for cost fallacy, endowment effect - attachment to history of pas decisions (Remedy: consider as though you were new CEO)
CATEGORY 3: ASK ABOUT PROPOSAL
- Check for overconfidence, planning fallacy, optimistic biases, competitor neglect (Remedy: build a case taking an outside view, use War Games)
- Check for disaster neglect (Remedy: conduct a post-mortem - imagining the worst has happening and develop a story about the causes)
- Check for loss aversion - overly cautious? (Remedy: align incentives to share responsibility for risk or remove risk)
FRC reommends some decision-making steps (summarised by Brendan, 2013): (15)
- Execs put case at earlier stages
- Inform boards of pre-boardroom processes adopted to arrive at proposals
- ” “ “ to challenge management proposals
- Commission independent review
- Seek advice from experts
- Take large decisions in stage (e.g. 1 = concept; 2 = for discussion; 3 = for decision)
- Processes that allow time for reflection
- Possibility might be wrong decision
- Find reasons not to agree
- Allocate different roles in boards
- Introduce devil’s advocate
- Introduce automatic stops in decision-making - circuit breakers, mental breakers or calling timeouts
- Sole purpose committee and convene additional meetings
- Record pros and cons of decision in minutes
- Remove management more quickly after problems emerge
Examples of personality measures
Myers Briggs Type Inventory (MBTI); Insights profile; FIRO-B; Hogan inventories.
NB - MBTI based on Jung’s psychological types - energy (intro/extra); gathering/becoming aware of info (sensing/intuition); deciding or committing to conclusions (thinking/feeling)D
Decision Style Model
Uni-focus versus multi-focus
Maximisers vs satisficers
Maximisers = prefer to know 100% info
Satisficers = happy reaching conclusions with relatively fewer facts
- Decisive (uni-satisficer)
- Flexible (mutli-satisficer)
- Hierarchic (uni-maximiser)
- Integrative (multi-maximier)
- Systemic - maximiser combined with both uni- and multi-focus
WRAP Decision-making tool (Chip and Dan Heath)
subsections too - but overall
Widen your options
Reality-test your assumptions
Attain some distance before deciding
Prepare to be wrong (do a pre-mortem)
Complex decisions - Managing in the Gray (Badaracco) (5)
- what are the consequences of all our options
- what are my core obligations
- what will work in the world as it is?
- who are we?
- what can I live with?
Yale School of Management study of gender stereotypes
Women are much more likely to be harshly judged when involved with decisions that have gone wrong.
E.g. police chief got wrong call in protest and 25 people got injured. Male leader ratings dropped by 10%; female 30%.
