Improving the Board decision making process

4 min read
Jun 18, 2021 12:00:00 AM

In most organisations, many important decisions are made every day. In established organisations most of these are delegated to the executive team to be made within a of pre-established corporate policy, procedure and decision criteria.

Decisions that boards make are likely to have strategic significance and be ‘material’ within the scale of the organisation. Decisions are also introduced at a board meeting because boards address complex, uncertain issues that carry significant risk. The mere fact that decisions appear in front of the board should signify its importance.

Effective decision making at the board member level typically follows a familiar pattern. To illustrate that let’s say there is a long-established operation that no longer appears to be the best use of corporate time and resources. However, It is of enough significance that it requires a board's decision to close it down. Management may have expressed their concern to the board in a preliminary way, but the board has not given it any concentrated attention.

In the meantime, as it should, the management team has gone through an iterative evaluation process to review a range of considerations. For the sake of this example, the team concluded that the operation must be closed down. The next step would be to put a paper with this recommendation to the board of directors for discussion. However, In many cases, the team’s conclusion may be suspect, having been badly affected by different cognitive biases.

 These are described by Daniel Kahneman (of Thinking Fast and Slow fame) and two collaborators in a recent article. [1]They point to issues such as:

Excessive coherence

Getting this kind of issue to the board of directors typically involves the progressive development by management of an ‘impression’ or ‘mental model’ of what the board decision should be. Unfortunately, this mental model is usually simpler and more coherent than the reality of the situation. Team members also bring a range of prior assumptions to bear on the information available. These assumptions influence the questions used to interrogate that information. As a consequence, it is increasingly likely that those prior assumptions will be confirmed.

A ‘quick and sticky’ quality - First impressions & the decision making process

First impressions are likely to have a disproportionate impact on a final assessment. Mental models form rapidly - often on the basis of limited evidence - and are altered only slowly. In this example, management had doubts about this operation before the evaluation even started.

Biased weighting

These mental models often fail to give each pertinent factor the weight it deserves. Consequently, important pieces of information are discounted and factors that are less relevant are given more weight than they deserve.

Excessive coherence would have encouraged the management team to confirm an impression that was much less nuanced and less ambiguous than the reality. This bias would have had an even greater impact if, from the outset, the managers had worked together on developing a recommendation for the board rather than looking at the situation independently and forming their own views first.

As the team’s preference emerged, the perceived benefits would likely have been exaggerated and its possible consequences underestimated. Once an initial impression was made– which typically happens quite fast- this would probably have been reinforced by managers asking leading questions that supported their preliminary view. It is likely several team members would have interpreted one or more ambiguous facts in the light of their pre-existing attitudes (‘confirmation' bias).

Another bias (‘availability’ bias) means they would probably have also given extra weight to new, more obvious and readily available information. Associated is an over-emphasised, short-term and perhaps self-serving consideration of the kind often related to an economic or financial agenda.

All of these decisions are made before reaching the board. The rapidly compounding deficiencies of the evaluative process previously described would be replicated, perhaps even more quickly, at the board level. It also has a head start by being ‘anchored’ by management’s recommendation.  

It requires a considerable amount of compelling new evidence for people to back away from an initial judgement in error. The further down the track it is, the more difficult it is to retreat from. As this example shows, boards need to work towards making effective decisions, where they have more confidence.

 Kahneman and co. contend that a well-structured technique is less susceptible to this kind of bias and ‘noise’. What they call their mediating assessments protocol (MAP), has the following features:

·   ensure the key attributes that are critical to the evaluation are defined in advance

·   participants make evidence rather than opinion-based assessments of each attribute, evaluating and scoring one feature attribute at a time

·   they make ‘mediating assessments’ independently so that board members are not influenced by others who will contribute to the final decision

·   only once a complete profile of these individually developed assessments is available are the decision-making board members allowed to come together for a discussion about the composite picture and work towards effective decision making.

 These processes temper the effects of bias by impeding the premature formation of a mental model of the ‘right decision’. It also increases the transparency of the processes as the board of directors' decision making process ensures everyone is informed of all the options simultaneously.

This approach has some critical implications for the chair, directors and management roles regarding decisions that the board must ultimately make (i.e. not ‘rubber-stamped’). It suggests, for example, that management should not come to the board with a recommendation. Instead, what the management team should produce for the board is their initial assessment of each of the key attributes so that the board can vote on the agenda without bias. Ideally, boards would agree with these attributes before managers began their review, giving the board a better chance at effective decision making. The board would debate issue by issue at the board meeting with management to reach finality on those issues-specific assessments. This would help the board see the composite picture, review the options, and make a decision.

 As Kahneman, Lovallo and Sibony state, decision making is about the ‘distillation of complexity into a way forward’. Boards want and need to make good business decisions based on unbiased information. Therefore, when finding are introduced at board meetings, they should be put through a thorough process, be as free of bias as possible, and be given the depth of attention required.

[1]Daniel Kahneman, Dan Lovallo, and Olivier Sibony. 'A Structured Approach to Strategic Decisions'. MIT Sloan Management Review, Spring 2019, pp.67-73

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