Enhancing Judgment: Good advice from COSO
Although aimed at members of the board, Enhancing Board Oversight: Avoiding Judgment Traps and Biases has good advice for all of us. As it explains, the board has a responsibility to challenge management’s judgment. All of us have a responsibility to improve our own judgment, both at work and in our personal lives.
The authors point out, wisely, that “despite the fact that we constantly make judgments and decisions and that the demand for good judgment is high, most people receive very little formal training in what good judgment looks like or in the human tendencies that threaten good judgment.”
I like the way they define an effective judgment process as “logical, flexible, unbiased, objective, and consistent. It will utilize an appropriate amount of relevant information, and it will properly balance experience, knowledge, intuition, and emotion.”
But, as they point out, there are many “traps and tendencies” that will lead even the most experienced astray.
The authors are from KPMG and the paper understandably incorporates some of that firm’s thinking, including their “Professional Judgment Framework”. There are 5 steps in their professional judgment process:
- Define the problem and identify fundamental objectives
- Consider alternatives
- Gather and evaluate information
- Reach a conclusion
- Articulate and document rationale.
It’s not surprising that a CPA firm would express the need for documentation (smile). My surprise is that they don’t have gathering of information higher, as how else can you define the problem?
Personally, I like that they have put ‘define the problem’ first. Too many people offer solutions without taking the time to understand the true nature of the business problem that has to be solved. It is critical to take your time in doing so, and quality information is essential if you are not to define the wrong problem.
Rushing to make a decision is the first ‘trap’ the authors discuss. As the authors say, there is a tendency to want to make a decision quickly and while sometimes time is of the essence, it is often advisable to sleep on the matter first.
‘Groupthink’ is the next trap. “Members of a group who are subject to groupthink behaviors tend to suppress their own views for various reasons (for example, they may assume that consensus in the group signals good judgment).” All of us should be aware of this tendency in ourselves, and especially among our team members. Do we do our best to extract the opinions of others?
I like the discussion on “what and why” questions. However, it is important to ask these questions multiple times to get to the bottom of an issue. Research (and experience) indicates that it is necessary to ask “why” as many as 6 times before the root cause of an issue is identified.
The authors talk about “framing”. This refers to the fact that the use of metaphors and emotive language to describe a situation tends to lead you to a desired decision. I suggest a careful read of this section so that you can identify when somebody is framing the situation in a way designed to influence your decision. You may need to re-frame the matter so you can be objective. As the authors say, “A distinguishing characteristic of those who consistently make high-quality judgments is that they are frame-aware. They understand the judgment frame that they or others are using, and they are able to consider the situation through different frames, or what KPMG LLP professionals refer to as a fresh lens.”
There is also a need to identify and understand our own tendencies and biases. These can interfere with our being able to listen and be open. I am not going to discuss all of these, just suggest you read this section of the paper carefully.
By the way, it is also important to understand how people perceive you and your bias. I have been told, on different occasions and by different people that (a) I have a bias against anything from COSO, and (b) I have a bias against the ISO 31000:2009 risk management standard. Both are false, but I understand the reason – I have criticized (and praised) both. In fact, I believe that people formed these opinions based on their own bias in favor of these products and their inability to welcome constructive criticism.
Understanding how people perceive you can help you understand how they explain things to you, and that they may include some degree of over-compensation.
The COSO paper (a good one, smile) includes advice on how to mitigate these judgment traps.
But, I want to add something of my own.
There is a growing recognition that board members, executives, and managers have learned to rely on their experience in exercising judgment. To some degree, that is discussed in the paper. For example, experience breeds bias and there is a tendency to ignore information that seems contrary to your expert opinion.
But, there is also a great tendency not to seek out all the information that may be available because you have “been there and done that” and know what needs to be done.
With today’s disruptive technology (such as improved analytics, including predictive analytics, and the capability of in-memory computing to deliver analytics at blinding speed) the ability to obtain quality information has improved dramatically. This calls for a change from judgment based on ‘gut’ and a traditional level of information, to one that is based far more on detailed data.
This will not be easy for many executives and board members, who are used to having limited information. They should not be satisfied with what they got last year, but demand more – and more – until the path to success is clear.
I welcome your views and commentary.
PS – my thanks to Bob Hirth for sharing this document.