Moving Corporate Culture, Moving Boundaries
Organizations don't all suffer equally from distortions and deceptions; some are better at using tools and techniques to limit their impact and at creating a culture of constructive debate and healthy decision making.
December 2012 | by Dr. John Bhadoria
Corporate leaders can improve an organization's decision-making ability by identifying the prevalent biases and using the relevant tools to shape a productive decision-making culture. Corporate leaders should first consider which decisions are truly strategic, as well as when and where they are made. Applying process safeguards to key meetings in formal strategic-planning exercises is tempting but not necessarily appropriate. Often the real strategic decision making takes place in other forums, such as research committees.
After targeting the crucial decision-making processes, executives should examine them with two goals in mind: determining the company's exposure to human error and pinpointing the real problems. A decision-making safeguard that is useful in one setting could be counterproductive in another—say, because it reinforces a high level of risk aversion by enforcing hard targets for new projects. An objective analysis of past decisions can be a first step: does the company often make overoptimistic projections, for example?
Tools Against Distortions and Deceptions
Once companies undertake this diagnostic process, they can introduce tools that limit the risk of distortions and deceptions. One way of tempering optimism is to track the expectations of individuals against actual outcomes in order to examine the processes that underlie strategic decisions. Companies should review these processes if forecasts and results differ significantly. They can also provide feedback where necessary and show clearly that they remember forecasts, reward realism, and frown on over optimism.
A more resource-intensive way of avoiding overoptimistic decisions is to supplement an initial assessment with an independent second opinion. Many companies try to do so by assigning important decisions to committees—for instance, the investment committees of investment firms. If the members have the time and willingness to challenge proposals this approach is effective, but committees depend on the facts brought before them. Some private equity firms address that problem by systematically taking a fresh look: after a partner has supervised a company for a few years, a different partner evaluates it anew. A fresh pair of eyes with no emotional connections can sometimes see things that escape the notice of more knowledgeable colleagues.
Loss aversion, magnified by career-motivated self-censorship of "risky" proposals, has its roots in explicit and implicit organizational incentives. Lower-level managers typically encounter more but smaller risks, so organizations can embed a higher tolerance for them in certain systems—for instance, by using different criteria for the financial analysis of larger and smaller projects.
Financial incentives also can be used to counter distortions and related principal-agent problems. Many companies, for example, find that operating-unit managers tend to optimize short-term performance at the expense of long-term corporate health, partly because their compensation is tied to the former and partly because they might well have moved on by the time long-term decisions bear fruit. Some companies address this problem through "balanced scorecards" that take both dimensions into account. Others tie compensation to the performance of an executive's current and previous business units.
Another technique is to request that managers show more of their cards: some companies, for instance, demand that investment recommendations include alternatives, or "next-best" ideas. This approach is useful not only to calibrate the level of a manager's risk aversion but also to spot opportunities that a manager might otherwise consider insufficiently safe to present to senior management.
Finally, the radical way of counteracting the loss aversion of managers is to take risk out of their hands by creating internal venture funds for risky but worthwhile projects or by sheltering such projects in separate organizations, such as those IBM sets up to pursue "emerging business opportunities." The advantage is that norms can change much more easily in small groups than in companies.
Fostering a Culture of Open Debate
It is essential to realize that these tools are just tools. Their effectiveness ultimately depends on the quality of the resulting discussions, which can't be effective unless the organization has a culture of reasonably open and objective debate.
Shaping such a culture starts at the top, as one chief executive discovered. This CEO was eager to encourage debate on the strategic plans of his company's divisions but didn't want to put his direct reports under pressure by publicly challenging them himself. He therefore created a process intended to make all division heads challenge one another in open debate. These managers refrained from voicing any real dissent, however, so the result was a dull and pointless exercise. Later, they made it clear that they had seen no upside in challenging their peers, given the company's non-confrontational culture and rigid organizational silos.
One way to initiate a culture of constructive debate is for the CEO and the top team to reflect collectively on past decisions. A willingness to ask how they emerged—in effect, holding a conversation about conversations—shows that the company can learn from its mistakes. Another prerequisite of good strategic decision making is the ability to "frame" conversations in order to ensure that the right questions get asked and answered. One key principle, for instance, is clearly distinguishing a discussion meant to reach a decision from one meant to align the team, to increase its commitment, or to support a project champion. This elementary but often overlooked distinction may also change the composition of the group that attends discussions intended to reach decisions.
Once it becomes clear that a meeting has been called to reach a decision, framing the discussion involves understanding the criteria for reaching it and knowing how far the range of options can be expanded, especially if the decision is important and unusual. Thus a well-framed debate includes a set of proposed criteria for making the decision and, when appropriate, an effort to demonstrate their relevance by providing examples and analogies. Some companies also set ground rules, such as the order in which participants voice their opinions or a ban on purely anecdotal arguments or on arguments that invoke a person's reputation rather than the facts.
Companies can't afford to ignore the human factor in the making of strategic decisions. They can greatly improve their chances of making good ones by becoming more aware of the way cognitive biases can mislead them, by reviewing their decision-making processes, and by establishing a culture of constructive debate.