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Ideas for Leaders #037

Avoiding Flawed Decisions: A Finance Manager's Role

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Key Concept

Finance executives are particularly well-positioned to help organizations improve their decision-making and introduce more rational decisions-making processes. In particular they are in a position to help management teams learn to identify ‘red flags’ and adopt extra safeguards against them. 

Idea Summary

Rational and objective thinking is not the only influence on the decision-making process. Recognising this, the authors set out to research why good leaders often make flawed decisions, at times dragging their organizations down. According to them, finance managers play an important role, being “savvier” at managing rational thinking and the inevitable personal biases of senior executives.

They highlight that the finance function runs up and down the layers of the organization, providing an excellent network for understanding red flag conditions that may be at play in any decision. In fact, finance managers are typically part of the decision-making group, and can therefore generate extra challenge and debate. They also frequently have the lead responsibility in monitoring performance, and the CFO is typically one of the most important executive officers sitting on the governance board.

The authors reveal two types of bias in particular that can lead to errors of judgement:

  1. Misleading experiences and/or misleading prejudgements: here, they point to pattern recognition (i.e. the complex process that integrates information from many parts of the brain to make assumptions based in prior experiences) as something that can lead to flawed decisions. This is particularly so when these experiences and judgements are not relevant to the current situation, such as new challenges and opportunities. Examples given of misleading experiences and prejudgements influencing decisions include RBS’s former CEO Fred Goodwin and Steve Russell, the CEO of Boots between 2000 and 2004.
  2. Inappropriate self-interest and/or inappropriate attachments: emotions can produce inappropriate motivations when our self-interests become misaligned. Self-interest is only one for of emotional attachment; attachments to people, organizations and/or things can also distort decisions.

Further commenting on these biases, they suggest that flawed decisions almost always have, at their heart, one or two decision makers who make errors of judgement. However, such errors are not in themselves enough to produce a flawed decision - that will only result when the decision process that supports and challenges the key decision maker(s) also fails.

Business Application

In terms of practical advice, the authors highlight that finance managers need to be able to spot the potential biases outlined above, and where they exists, they should review the decision process and decide whether additional safeguards are needed to counterbalance any distorted thinking that might arise.

As for what these ‘safeguards’ may include, they point to four categories in which they can be grouped:

  1. Experience, data and analysis: for example, market research or a consultant study can be commissioned.
  2. Debate and challenge: this can range from simply chatting through an issue with friends/colleagues, to forming a decision group within the organization.
  3. Monitoring: for example, setting clear milestones, monitoring performance and adjusting accordingly.
  4. Governance: it is vital that there be a level above the decision-maker - be it the board or an executive committee - that has real power and insight.
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Authors

Institutions

Source

Idea conceived

  • 2010

Idea posted

  • January 2013

DOI number

10.13007/037

Subject

Real Time Analytics