Page 153 - COSO Guidance

Enhancing Board Oversight: Avoiding Judgment Traps and Biases | 5

Common Judgment Traps

One of the most common judgment traps that individuals and consensus. A key take-away is that groups need to beware
groups fall into is the tendency to want to immediately solve of early consensus for important judgments; it is often a
a problem, to appear decisive by making a quick judgment. sign of a surprisingly common judgment trap. Instead, group
In a group setting, this rush to solve is often manifested interactions should be designed and conducted to stimulate
as a tendency to strive toward quick compromise and and encourage the expression of different perspectives.
early consensus. Ineffective compromises are sometimes The board of directors is a key component of the control
reached in order to avoid conflict, rather than foster a environment, including setting the tone at the top (see
healthy consideration of opposing views. Groups tend to COSO’s Internal Control—Integrated Framework, 1992).
produce better judgments when diversity of thought is not As such, it is important for the board to function effectively
only tolerated but explicitly and specifically encouraged. and avoid groupthink and other group tendencies that can
Alfred Sloan, former chairman of the board of General present obstacles to sound judgment processes.
Motors, stated the following at the end of a meeting with the
company’s board of directors,
4
I take it we are all in complete agreement on the decision
here…. Then I propose we postpone further discussion “An audit committee where everybody is happy and likes each
of this matter until our next meeting to give ourselves other is an audit committee that makes me nervous.”
time to develop disagreement and perhaps gain some – Michael Schrage (MIT Sloan School of Management)
understanding of what the decision is all about.
Mr. Sloan saw the lack of conflicting views as a sign that
the group did not fully appreciate the underlying problem or
fundamental objectives. Most of the time, decision makers do not even realize when
they have fallen into the “rush to solve” trap. This tendency
is a trap because people fall into it unaware and, as a result,
One-third of audit committee members surveyed unknowingly develop a limited view of the problem that
indicate that they believe unhealthy groupthink they are addressing, the objectives that they are trying to
tendencies influence their meetings. achieve, and the available alternatives. In other words, if
we rush to get to a solution, we are likely to underinvest in
– KPMG Audit Committee Institute (2011 survey) the vital early steps of a good judgment process. People
falling into this trap often go with one of the first workable
alternatives offered or that come to mind. By underinvesting
Some seriously flawed judgments with calamitous in the first step of defining the problem and identifying
outcomes have been attributed to the set of group decision fundamental objectives, people sometimes solve the wrong
behaviors known as groupthink, including the ill-fated problem or settle for a suboptimal outcome. It is important
decision to launch the Challenger space shuttle in cold to remember that a judgment can only be as good as the
conditions in 1986. Members of a group who are subject best alternative considered. You will notice in the ABC
to groupthink behaviors tend to suppress their own views Manufacturing Inc. acquisition example that the tendency
for various reasons (for example, they may assume that to rush to solve can be exacerbated by external or self-
consensus in the group signals good judgment). This imposed deadlines.
behavior may be especially true in cases when a board
has a prominent member who expresses his or her views We often fall into the trap of inheriting or accepting an
early. Such a scenario can enhance the group’s tendency incomplete problem definition and can then fall into the
toward narrow thinking, suppression of divergent views, common trap of doing an absolutely excellent job of solving
and partially considered judgments. Interestingly, overly the wrong problem. An example of initially working on an
cohesive groups begin to believe that they have reached a incomplete problem definition would be a snack company
fail-safe conclusion when consensus is achieved; in other trying to take market share from the market leader. The
words, quick agreement among like-thinking members of market leader sells snacks in interesting, retro-shaped
a group can lead to extreme overconfidence among the packages. The company seeking to gain market share
group members. Fostering healthy debate and avoiding considers the shape to be the key competitive advantage;
early consensus is key to avoiding unhealthy tendencies thus, its early attempts to take market share are focused
toward suppression of views or early, potentially premature almost exclusively on developing a more eye-catching

4 See Drucker, 1967.

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