Parts III & IV
Organizations exist to amass and coordinate/deploy resources. They are structured to make the best strategic decisions accordingly. Organizational hierarchy is meant to help that decision-making process. The higher up the ranking, the more decision-making power the individual usually has. This dynamic creates corporate dangers that the Board should watch out for and help monitor and prevent.
Let’s look at three.
7. Authority Bias
Most of us are wired, to some degree, to associate rank with expertise, knowledge, experience, and even wisdom. We give authority figures a certain amount of deference and respect accordingly. When it comes to opinions, observations, predictions, analyses, and decisions, this means that we tend to afford those higher-ups with better insights, more accurate assessments, and purer understanding.
There’s nothing wrong leaning on those who have more experience, broader perspective, accomplishments, and well-honed skills. They’ve likely risen through the ranks for excellent reasons. But problems arise when that authority figure is given a “blank check” for their expertise, and their opinion gets counted for more than it is worth.
Authority bias can be dangerous when the authority figure is far removed from the issue or information. For example, a CEO at the HQ may have a less relevant understanding of the factory worker’s challenges, salesforce or call center workers, or ten or more organizational layers below. Making decisions based on that limited understanding could lead to disastrous results.
a. Many of the best organizations flip that decision-making around with what’s called the Inverted Pyramid. In this case, decision-making is pushed to the flat edge of the pyramid as much as possible, while executives are there to provide guidance, ask the right questions, and “learn.”
b. Omit hierarchy and organize days in the field or the shop floor or the incoming complaints department to get an immediate sense of the reality unfiltered, “naked.” It can be done by the CEO and, or the Board Members.
c. Albeit intricate, another technique I have used several times to overcome this type of bias with great results, is called “Skip-One-Level.” It involves a series of consecutive meetings between the Director and minus two levels below, skipping the manager directly responsible for any given group. Properly handled, it usually ends up with great, relatively unbiased discovery.
8. Self-Serving Bias
Information is gold for decision-making. Yet, there is a risk in over-estimating the organization’s ability to assess the value of data. We tend to see what we want to see and make decisions accordingly.
For example, perhaps the organization is assessing its sales or revenue numbers for the quarter. Unfortunately, the direction is more ambiguous than clear. So how do you interpret it? The tendency is to use that information to reinforce or support the decisions you “want” to make, which may not reflect actual reality.
Another danger is taking more responsibility for success than failure or ascribing more responsibility for failure than success to another group. So, if your group hits its numbers, you tend to believe that’s because of something you did. But if your group misses its numbers, that’s because of something that happened to you.
In contrast, when a rival department gets good marks, it’s easy to say that’s because they got a lucky break or circumstances influenced those results.
This sort of bias can lead to a lot of confused thinking, which the Board must do its best to weed out or avoid.
a. Decouple decision-making from its outputs. Evaluate thoroughly the former and reward it accordingly. Study the misfit between poor outcomes stemming from the right decisions and correct.
b. Peer coaching can also diminish the self-serving bias, assuming sound listening capability.
9. The Dunning-Kreuger Effect
The best leaders I know, recognize that they are not experts or the most skilled people. They strive to be the least qualified or least expert in a given situation by surrounding themselves with the best. Other leaders, however, tend to believe they are knowledgeable, skilled, or informed merely because they are successful.
As a result, a CEO or SVP might assume superior knowledge or understanding even though their particular experience is irrelevant, technical, and said to stand on “Mount Stupid.” This can lead them to discount, or de-value others’ opinions or views, or they do not feel driven to seek alternative perspectives. Donald Trump is a representative example of such grandiose (mis)behavior.
On the other hand, experts understand the complexity or nuances of a particular set of facts or situations. The way to real expertise passes from humility and realization of inadequacies, and devaluation of their current own knowledge or capacity.
An enlightening example comes from the famous quote of the great Greek philosopher Socrates “I know that I know nothing.”
Bottom line, it is not an unusual case for wrong people making the wrong decisions.
a. Boards can bridge this overconfidence -” macho” type of gap with appreciative inquiry technique (strength-based coaching)
b. The “devil’s advocate” role from the Chairman or any other Board Member is a method of disclosing data inadequacies and refocus the discussions on facts rather than opinions
As you can see from these three examples, there are many traps around biases associated with hierarchy and success. A Board can do much good in an organization by instilling a culture, structure, and workflow processes that support more accurate assessment, better information flow, and better decision making.
More cognitive biases for Boards.
It’s easy to know that change is necessary when a crisis comes. The Board will play a massive role in helping the CEO navigate the uncertainty. The danger however is an over-reaction to the situation, resulting in the abandoning of what might still work for the promise of something new or different.
I always advise organizations in times of crisis to get very clear on their purpose — even if that means coming up with a new purpose to help the organization survive in the short term. The Board can do much good by making sure that happens. When the purpose is set, the organization has a way to evaluate big decisions with less confusion.
It’s harder to know that an organization needs to change direction before a crisis comes. The natural tendency is to stay the course until something terrible happens. How do you develop a better sense of the need for change along the way?
10. Status Quo Bias
So many of the organization’s strategies, processes, and plans assume the status quo without realizing it. Even projections of the future believe that trend lines will continue. And it is deeply human; people don’t like changes. Steady-state condition is the expected one both for organizations and organisms. Of course, nature has developed biological mechanisms for humans that we rely on during crisis, the mind goes on autopilot; the so-called Kahneman “System 1 thinking”, fast reactive, instinctive, often in combination with a spike in cortisol levels in the brain. The world can change dramatically, or a trend line can veer off its expected path.
GE spent so much time as one of America’s most dominant companies that it became complacent about its own businesses. When the 2008 great recession hit, GE was way over-extended on its banking business and lost much of its value overnight. It might have seen that danger coming if it had been less stuck on the status quo path. This bias is very similar to the Plan Continuation Fallacy.
a. Intentionally plug-in two or three independent events to check the effect on your primary plan (e.g., natural disasters, supply chain disruption, and the like). It’s a kind of a stress test. Can you cope? How would the figures alter? Think of a stall scenario. Operations stop. Can you repurpose it? It’s a sort of a planning drill. What if… then … Are we ready?
b. Annually or biennially run premortem exercises. It is a collective exercise taking individual (and therefore unbiased) inputs of critical individuals. The CEO or the Board describes a horrible hypothetical scenario as a starter in writing. Members of the management are asked to complete the story of what happened and why. The curated summary of all responses can reveal all the hidden, yet unspoken, pain points or strategic choices’ soft spots.
11. The Sunk Cost Fallacy
It’s so easy for an organization to stay committed to a plan, objective, or strategy just because it has invested significant resources, time, and prestige into a decision. Organizations will even do this in the face of compelling data that undercuts the original decision. Economists are calling it “Sunk Cost” and it is an emotional trap. There is a lot of accumulated energy on past choices, vested interests, handlers or decision-makers are exposed and therefore it becomes tough to start from a clean slate.
Three years ago, Amazon, Berkshire Hathaway, and JPMorgan Chase invested in a joint venture called Haven that promised to help reinvent US healthcare. They put a lot of brand capital into the idea, hired big-time talent to lead it, and got much attention from pundits and industry competitors. Recently, they announced the joint venture would fold after failing to have any impact.
Some organizations would hesitate to make that decision and keep the venture going. Instead, Amazon, in particular, took what it learned and used it to inform its other healthcare venture, Amazon Pharmacy.
a. When it comes to significant decisions, Boards can recommend to the CEO to allocate a Team B — clean of baggage — in parallel with Team A to prepare the proposal or the rationale. It is a way to minimize bias and look at everything with a fresh eye.
b. Separate the decision from its output. It is a way to alleviate the guilt associated with the sunk cost. After all, a lousy output in the past could have been a result of a sound decision-making process. Therefore, hard feelings are eliminated indeed, and such a fallacy would not occur.
12. The Availability Cascade
Organizations can be incredibly stubborn about the status quo and those sunk costs when the CEO and the Board have done much work selling a strategy or a vision. Pretty soon it gains momentum because so many people in the organization are on-board and invested emotionally.
This view gains even more traction as it gets repeated and reinforced over time. When that happens, it’s easy for critical managers and leaders throughout the organization to become immune to any data indicating the strategy might be wrong. A kind of groupthink sets in. It is similar to Social Media algorithms. You are continuously fed a stream of information that is tightly aligned with your exact likes and preferences. The end result is you omit seeing or experiencing ideas outside of your bubble.
a. Work on a very diverse Board composition, frequently (i.e., every three years) refreshed with new members. Rotate members in the Committees too.
b. Ask external advice periodically to mitigate the risks of corporate myopia.
These fallacies or biases call for the Board to confront assumptions or think around the current path or long-standing assumptions. The Board can help a lot by identifying these assumptions or beliefs and then challenging them with What If scenarios.
What if the market collapses?
What if new regulations suddenly blow up your sales strategy?
What if a global pandemic hit?