How Do You Make Decisions?
The focus among leading risk thought leaders today, including at COSO, is on decision-making. For example, COSO ERM states: “From day-to-day operational decisions to the fundamental trade-offs in the boardroom, dealing with risk in these choices is a part of decision-making.”
Think about it. How can we or our organizations be successful without sound decision-making?
How can we, as practitioners, help leaders make informed and intelligent decisions that consider all the things that might happen?
Moving Away From the 'Risk' Conversation
Some years ago, Grant Purdy (the grandfather of Australia/New Zealand’s risk management standard 4360, the precursor to the global standard, ISO 31000) told me that when he is engaged to help an organization upgrade its ERM program, he doesn’t talk to management about risk. Instead, he asks: “How do you make decisions?”
Purdy has teamed up with a fellow Aussie, Roger Estall, to write "Deciding: A Guide to Even Better Decision-Making." The book is an interesting read, with some useful perspectives and advice. It will help you challenge your and others’ decision-making processes.
Over the years, both Purdy and I have been on a journey of discovery. We have both moved away from what I would call traditional risk management, recognizing that it really is not helping leaders make those all-important strategic and tactical decisions. It’s a compliance activity.
We haven’t always been in sync on our journeys, reaching points at different times. In addition, we have different background and experiences, so we sometimes use different language.
But we have always agreed far more than we disagreed. Neither of us like the word "risk" any more, but it has taken us time to get there.
For example, I talk about managing the likelihood of success instead of focusing on the potential for harm (which is unfortunately what most risk practitioners do). Purdy and Estall talk about achieving a sufficient level of certainty of the outcome of the decision.
Those are essentially the same idea. The way I think about it is that leaders (both executives and board members) are looking for an acceptable level of certainty/likelihood that they will achieve the objectives/goals of the organization. If we can help them understand where they are against their objectives and how what lies ahead might affect their success, we are adding huge value. What lies ahead is what some call "risk" or "risk and opportunity."
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Following the Assumption Trail
Purdy and Estall help us understand a number of things, including what they call a global process about making informed and intelligent decisions.
One area I like is the discussion about assumptions.
Far too often, people make assumptions without thinking of how uncertain they are. I have seen many proposals and plans that list assumptions without any thought to assessing the likelihood that they will in fact happen.
Purdy and Estall talk about the importance of understanding how critical each assumption is so that the most significant can be monitored. This way, as soon as it looks likely that an assumption will not hold, actions can be taken — including revising the decision.
As I said, it’s an interesting book and it should make you think about how you and those in leadership positions make or should make informed and intelligent decisions.
Are you concerned about the quality of decision-making? If so, what are you doing about it?
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About the Author
Norman Marks, CPA, CRMA is an evangelist for “better run business,” focusing on corporate governance, risk management, internal audit, enterprise performance, and the value of information. He is also a mentor to individuals and organizations around the world, the author of World-Class Risk Management and publishes regularly on his own blog.