Board Decision Making Flashcards
BOARD DECISION-MAKING: AN OVERVIEW
Boardroom decision-making is the ultimate what?
2018 ICSA Guidance on Board Effectiveness states that Boards can minimise the risk of poor decisions by doing what? (3)
outcome and measure of boardroom dynamics
by (1) investing time in the design of their decision making policies and processes, including (2) the contribution of committees and (3) obtaining input from key stakeholders and expert opinions when necessary
EVIDENCE-BASED BOARDS
What is the assumption behind the methodology of ‘evidence-based practice’?
What is the definition of evidence-based practice?
= decisions about important problems or opportunities and their likely solutions should be based on the best available evidence
Evidence-based practice = the conscientious (effort), explicit (clarity) and judicious (critical and quality) use of the best available evidence from multiple sources to increase the likelihood of a favourable outcome
(about a process rather than about a certain outcome, and it is about reducing uncertainty given a particular context)
EVIDENCE-BASED BOARDS
What is the first step in evidence-based practice?
What are the 4 sources?
to recognise the multiple sources of evidence that should be drawn from
- Professional expertise
- Internal organisational data
- Most up-to-date scientific evidence (more accurate than the opinions of multiple experts)
- Local context = key stakeholders and their values and concerns = understanding the answer to what will work in this situation, at this time, under our particular circumstances, is a key final piece of the puzzle with which to make an effective evidence-based decision
EVIDENCE-BASED BOARDS
Evidence-based practice recommends a s6-step process that provides a lens through which to make decisions using the 4 evidence sources.
What are the 6 steps?
- Asking: translating a practical issue or 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
COGNITIVE BIAS
As both individuals and groups, we are evolved to be biased.
What did Manet (2010) conclude?
Why does bias arise?
What is System One and System Two thinking?
Manet (2010) = bias in the boardroom is inevitable, frequently underestimated, and plays a significant role in board decision-making
Due to the 2 different ways that we think =System One and System
Two thinking
System One thinking = fast, emotional, low effort, automatic and unconscious
(More than 180 biases are known to influence our System One thinking)
System Two thinking = slow, effortful, conscious and deliberate
COGNITIVE BIAS - TYPES OF BIAS
What are the 9 most well-known biases that may affect board director decision-making?
(1) Groupthink = overriding desire for consensus and unanimity (lack of challenge)
(2) Confirmation bias = tendency to search for information consistent with our prior beliefs (discount contrary evidence)
(3) Anchoring effect = tendency to rely too heavily on/overemphasise one trait or piece of information
(4) Hindsight bias = tendency to see past events as more predictable than they were = believe future events are more predictable than they are
(5) Availability bias = tendency to make decisions influenced by events/experiences that immediately come to mind or are easily accessible
(6) Loss aversion = tendency to prefer avoiding losses than to acquiring gains
(7) Sunk cost fallacy = tendency not to accept our decisions as wrong and therefore to throw good money after bad
(8) Framing effect = tendency to draw different conclusions from the same information presented differently (e.g. 85% fat-free meal or a 15% fat meal)
(9) Metacognitive bias = tendency to believe immunity from all the above biases
COGNITIVE BIAS - MITIGATING BIAS
The power of decision-making in groups is that it allows for the opportunity to notice and point out flaws in thinking in others.
What do Kahneman, Lovallo, and Sibony suggest?
What are the 3 categories this is broken down into?
Name 1 of the checks/questions and respective remedy in Category 1.
Suggest a 12-question checklist to quality control any decision-making process
(1) questions decision-makers should ask themselves (3 questions)
(2) questions they should use to challenge those proposing a course of action (6 questions)
(3) questions to evaluate the proposal (3 questions)
Category 1: Ask Yourself
(No. 3) Check for groupthink = were dissenting opinions within the team explored adequately?
Remedy = solicit dissenting views, discreetly if necessary
COGNITIVE BIAS - MITIGATING BIAS
Kahneman, Lovallo, and Sibony suggest a 12-question checklist to quality control any decision-making process.
Name 4 of the checks/questions and respective remedies in Category 2.
Category 2: Ask the recommenders
(5) Check for confirmation bias = are credible alternatives included along with the recommendation?
Remedy = request additional options
(6) Check for availability bias = what information would you want to make decision in a years time, and can you get more of it now?
Remedy = use checklists of the data needed for each kind of decision
(7) Check for anchoring bias = can there be a motivation to use a certain anchor?
Remedy = re-anchor with figures generated by other models or benchmarks, and request new analysis
(9) Check for sunk cost fallacy = are the recommenders overly attached to a history of past decisions?
Remedy = consider the issue as if you are a new CEO
COGNITIVE BIAS - MITIGATING BIAS
Kahneman, Lovallo, and Sibony suggest a 12-question checklist to quality control any decision-making process.
Name 2 of the checks/questions and respective remedies in Category 3.
What is the contention of using this checklist?
Category 3: Ask About the Proposal
(10) Check for overconfidence = is the base case overly optimistic?
Remedy = have a team build a case taking an outside view
(12) Check for loss aversion = is the recommending team overly cautious?
Remedy realign incentives to share responsibility for the risk or to remove risk
Contention = using this checklist of questions will raise awareness of any inherent System One bias, so that it can be minimised within a group and organisational decision-making context
COGNITIVE BIAS - MITIGATING BIAS
The FRC recommends some key steps that boards may consider to minimise bias in decision-making.
Name 6.
- Seek advice from experts
- Introduce processes that allow time for reflection
- Consider the possibility that it might be the wrong decision
- Find reasons not to agree with management’s proposals
- Allocate different roles within boards = deliberately introduce a devil’s advocate to provide challenge
- Record the pros and cons of the decision in the meeting minutes
INDIVIDUAL DIFFERENCES IN RELATION TO DECISION-MAKING
Knowing the personality traits of others helps us become aware and more open to diverse ways of thinking.
What are the 3 models/methodologies used to categorise individual behaviours and their approach to decision-making?
Who are uni-focus and who are multi-focus in terms of solution finding?
Who are maximisers and who are satisficers?
(1) Five Factor Model (AKA Big Five personality traits) = openness to experience, conscientiousness, extroversion, agreeableness and
neuroticism
(2) Myers Briggs Type Inventory = extroversion or introversion, sensing or intuition, thinking or feeling, and judging or perceiving
(3) Decision Style model = tool uses 2 distinct preferences that individuals may show = (1) uni-focus or multi-focus and (2) ‘maximisers’ or ‘satisficers’
Uni-focus = typically come up with 1 specific solution that they feel is best or most feasible
Multi-focus = will generate a variety of alternatives for dealing with the situation
Maximisers = prefer to know almost 100% of the information possible before making a decision and taking action
Satisficers = will make a decision when they have reached a certain threshold of information
INDIVIDUAL DIFFERENCES IN RELATION TO DECISION-MAKING
The Decision Styles model combines uni-focus / multi-focus and ‘maximisers’ / ‘satisficers’ characteristics into what 4 decision-making types?
What is the 5th type under the model?
(1) the ‘decisive’ (uni-satisficer) = who is fast, action orientated and efficiency minded
(2) the ‘flexible’ (multi-satisficer) = who is fast, action orientated, yet
adaptable
(3) the ‘hierarchic’ (uni-maximiser) = who is an analytical, methodological, logical and focuses on quality
(4) the ‘integrative’ (multi-maximiser) = who is analytical, exploratory and creative
(5) the ‘systemic’ (uni & multi- maximiser) =who is analytical, comprehensive and prioritises solution strategies
(it has been noted that maximisers tend to struggle when there are multiple options)
DECISION-MAKING TOOLS - THE WRAP FRAMEWORK
What is the WRAP framework developed by Chip and Dan Heath?
Name an example for each.
(W) - Widen your options = break out of a narrow frame and expand the set of options that are being considered
E.g., do an internet search using 3-4 keywords that relate to a particular decision to find someone who has solved your problem previously
(R) - Reality-test your assumptions = fight confirmation bias and ensure that trusted information is gathered when assessing options
E.g., use the tool of asking ‘disconfirming questions’ such as, if we failed, why do you think it would be?
(A) - Attain some distance before deciding = resist the disrupting influence of short-term emotion and ensure decision is based on core priorities
E.g., 10/10/10 rule = How will we feel about it 10 minutes from now? 10 months? 10 years?
(P) - Prepare to be wrong = avoid being overconfident about the way decisions will unfold and plan for both good and bad potential scenarios
E.g., run a pre-mortem and a pre-parade (image a future where the decision has led to disaster or great success - brainstorm why occurred in both scenarios)
DECISION-MAKING TOOLS - COMPLEX DECISION-MAKING
Badaracco describes how the complex decisions that are encountered by senior leaders do not have clear right or wrong answers or consequences.
To make decisions within this context, he suggests what 5 key questions to manage complex, gray areas?
(1) What are the consequences of all our options?
= analysing the winners and the losers of the decision and taking an evidence-based view
(2) What are my core obligations?
= director governance and fiduciary duties, role as NED or ED?
(3) What will work in the world as it is?
= within this increasingly volatile, uncertain, complex and ambiguous world, what will work?
(4) Who are we?
= consider the core values of the organisation and board
(5) What can I live with?
= great decision-making is not just about applying an algorithm, but also about carefully and judiciously harnessing judgement
DECISION-MAKING TOOLS - GENDER DIFFERENCES IN DECISION-MAKING
What are the 2 main differences in decision-making between men and women?
Huston (2016) suggests what 7 recommendations for men and women to make better decisions?
- Males are more decisive decision-makers e.g., make quicker decisions and are more confident articulating and implementing
- Women are more likely to involve others in decision-making
(1) Increase the options that are considered (3<)
(2) Increase one’s distance from a decision (e.g., sleep on it, take after lunch)
(3) Moderate your confidence (turn down during decision-making, turn up to ensure decision is effectively communicated/executed)
(4) Take time to explore assumptions = what would have to be true for this option to be the best choice?
(5) Recognise and counter the reasons for individual or group indecisiveness (e.g., reduce stress and balance personality traits within a group setting)
(6) Step out of your own shoes (create greater objectivity = if I was advising a friend, what would I suggest to do?)
(7) Enhancing group decisiveness (get clarity on the core purpose
of the meeting and set clear time limits)
