Chapter 5 - Board decision-making - 4th quadrant - 2 of 6 Flashcards
In the Delaware Court in the US, what is the ‘Business Judgement Rule’?
This is where the court evaluates not whether the board have made the right decision but whether they have taken the appropriate steps and demonstrated reasonable process that facilitated good business judgement.
i.e. evaluation of the board’s process rather than the resulting outcome
What does the ICSA Guidance on Board Effectiveness say on 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 the contribution of committees and obtaining input from key stakeholders and expert opinions when necessary
Which theorists said that ‘decisiveness’ was ranked number one as a top 20 CEO competency?
Dulewicz and Gay (1997): ‘decisiveness’ was ranked number one as a top 20 CEO competency.
What is evidence-based practice?
Decisions about important problems or opportunities and their likely solution should be based on the best available evidence. E.g. GP practice
What are the four sources of evidence-based practice?
- Professional expertise should not be ignored and should indeed be drawn on
- Internal organisational data
- Scientific research
- Local context (key stakeholders and their values and concerns
Evidence-based practice recommends a six-step process that provides a lens through which to make decisions using the four 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 the evidence into the decision-making process
- Assessing: evaluating the outcome of the decision taken
Following the evidence-based process will therefore lead to an increasing likelihood of a favourable outcome
Bias arises due to the two different ways we think as human beings. What are the two types of thinking and how do they impact decision-making?
- System One thinking is fast, emotional, low effort, automatic and unconscious. We use this when brushing our teeth, drive our usual route home, etc.
- System Two thinking is slow, effortful, conscious and deliberate. We engage this system when we learn a new skill, talk in a second non-fluent language, and when we park in a tight parking space
We are hardwired to make System One decisions, which is useful for most everyday decisions but unfortunately not so good for larger and complicated decisions. The benefit of System One thinking is the ability to make up contextual stories to provide an energy-efficient and constant representation of the world around us – this mental shortcut is known as cognitive bias
To mitigate bias, we must encourage the decision-makers to become aware of their system 1 thinking and to consciously step into system 2 thinking.
Give some examples of different types of bias.
- Groupthink: Janis (1982) – overriding desire for consensus and unanimity, leading to poor decision-making in cohesive groups due to suppression of internal dissent and consequent inadequate evaluation
- Confirmation bias: our tendency to interpret and search for information consistent with our prior beliefs, discounting contrary evidence
- Anchoring effect: our tendency to rely too heavily on, or to overemphasise, one trait or piece of information (often the first piece of information presented to us)
- Hindsight bias: our tendency to see past events as being more predictable than they were before the event occurred, and therefore to believe that events in the future are more predictable than they are
- Availability bias: our tendency to make decisions influenced by events or experiences that immediately come to our mind or are easily accessible
- Loss aversion: our tendency to prefer avoiding losses than to acquiring gains
- Sunk costs fallacy: our tendency not to accept our decisions as wrong and therefore to throw good money after bad
- Framing effect: our tendency to draw different conclusions from exactly the same information presented in different ways e.g. would you prefer an 85% fat free meal or a 15% fat meal?
- Metacognitive bias: our tendency to believe we are immune from all biases
Name some methods of mitigating bias.
- 12 question-checklist from Kahneman et al in the Harvard Business Review article on ‘Before you make the big decision’.
- utilise the FRC tips as summarised by Brendan (including seeking advice from experts, taking large decisions in stages, deliberately introducing a devil’s advocate)
- use a form of evidence-based decision making
- WRAP framework
- involve more women in decision making
- Joseph Braddaco’s 5 grey questions
What is the WRAP technique?
Decisive: How to Make Better Choices in Life and Work (2013)
* Widen your options – break out of a narrow frame and expand the set of options that are being considered - simple technique of finding someone who has solved your problem previously e.g. spend 20 minutes doing an internet search using keywords that relate to a particular decision
* Reality-test your assumptions – fight confirmation bias and ensure that you are gathering information that you can trust – use ‘disconfirming questions’ such as ‘What is the biggest obstacle you see to what we are trying to do’ or ‘if we failed, why do you think it will be’ instead of ‘what do you think’
* Attain some distance before deciding – resist the disrupting influence of short term emotion and ensure that you make a decision based on your core priorities – consider the 10/10/10 rule- ‘how will we feel about it 10 minutes/months/years from now’ – perspective gained, especially from second and third questions, enables the decision-maker to notice how much emotion is invested in the decision and to evaluate the importance
* Prepare to be wrong – aim is to avoid being overconfident about the way our decisions unfold and take the opportunity to plan for both good and bad potential scenarios – pre-mortem and pre-parade – pre-mortem is to imagine a future where the decision has become a disaster and then brainstorm why this has occurred and share ideas. Pre-parade is to imagine success – again, brainstorm why this has occurred and share ideas – this type of polarised thinking helps groups bring to the surface initially unconsidered key issues
What did Herbert Simon say were the three phases of decision-making?
- Intelligence – searching the environment for conditions calling for a decision - search for USP?
- Design – inventing, developing and analysing possible courses of action
- Choice – selecting a particular course of action from those available
What did Manet’s research on ‘bias in the boardroom’ conclude?
- Bias in the boardroom is inevitable and frequently underestimated
- Bias plays a significant role in board decision-making
- Bias particularly undermines the perceived benefits of independent directors
- Governance regulation needs to emphasise the effects of bias on decision-making and mandate the use of de-biasing procedures
What is board-decision making?
Boardroom decision-making is the ultimate outcome and measure of boardroom dynamics.
It is possible to analyse boardroom decision-making in terms of either its process or its outcome.
Kahneman and Tversky contrasted the rational decision-making model (Herbert Simon) with the behavioural decision-making model. What is this?
One that is predictably irrational and hugely impacted by both individual psychology and group social dynamics
Outline some factors that can improve board decision making processes
- board structure - size, meeting regularity
- board diversity - cover blind spots
- culture - seek collective and humble leaders
- stakeholders to be involved in decision making
