How is it that a board comprised of highly successful and intelligent business leaders, can, despite best efforts to behave rationally, fail to make sound decisions? Through a series of interactive exercises and scenarios, this program will explore gaps in the way human beings actually reason and the way we think we reason. These blind spots or biases can make for sub-optimal decisions, and we are susceptible whether we are acting as a consumer making a purchase or as a board member voting on an acquisition hiring a new CEO. We encourage fellow board members and their senior management to experience this lively and thought-provoking program together.
Our discussions will utilize your feedback to this brief survey
Please complete the survey before the December 6th program (event registration is not required to complete the survey).
DISCUSSION SUMMARY AND KEY TAKEAWAYS
HERE'S WHAT YOU MAY HAVE MISSED
Attendees at our December 6 program were introduced to Behavioral Economics and a few of the underlying biases on which it is based. The program, which was led by Joe Timko, of Ernst & Young’s Northeast Strategy Practice as our subject matter expert, and Marty Coyne, chair of the NACD New Jersey Chapter Board, used feedback from the participants through an anonymous survey completed prior to the meeting and explored gaps in the way human beings actually reason and the way that we think we reason. We learned that while we may be largely unaware of them, we all can fall prey to biases that can be detrimental to decision making, even in the Board room.
After noting several anomalies, where people did not behave in the way that was expected by traditional economic theory, Mr.Timko introduced the bias that is operating when similar populations do not make similar choices: the Framing Effect. Mr. Coyne provided real life examples from his experience where the way a question is framed at a Board meeting affected the decision outcome.
To introduce the Endowment Effect, Mr. Timko reported the results of the survey question which asked at what price you would transact on a ticket to a sold out performance by a favorite entertainer. While traditional economics says that there should be a single value for the ticket above which we would sell it and below which we would buy it, the survey results showed that the price at which we were willing to sell was 2.8 times the price at which we were willing to buy, demonstrating the Endowment Effect. It is human nature to endow objects we own and use (but not objects that we hold to exchange, such as dollar bills) with additional value. Mr. Coyne provided examples where the Endowment Effect impacted board decisionmaking.
Mr. Timko next introduced a framework for limiting the impact of biases, explaining that the roots of our biases are in the system of our brains that generates automatic, uncontrolled, effortless, fast, unconscious or skilled thought. To deal with our biases, we need to slow down and engage the deliberative, effortful, reflective, controlled, slow, self-aware and rule-following part of our brains.
The results of the survey question on choosing surgery or radiation to treat cancer showed the Framing Effect in action—framing the question in terms of mortality rather than in terms of survival resulted in dramatically different choices for surgery and radiation, even though the underlying statistics were identical.
Mr. Coyne led the participants in a discussion of their experiences with the Framing Effect in business and the board room and possible interventions to assure that important decisions are not adversely affected by it, slowing down the decision-making process, providing two frameworks to provide balance to the decision making, or providing as neutral a frame as possible.
The next survey result discussed was the effect of the Anchoring Bias: our estimates on the height of the tallest redwood tree are impacted by which anchor was provided to us. Our results were consistent with other well-documented results in various professional settings. The group discussed situations where they had experienced the Anchoring Bias, including in the settlement of litigation, in the use of peer group information by compensation committees and in M&A situations. It was pointed out that many times we choose the easy anchor rather than the right one, and that possible interventions include slowing down the decision-making process right away or overtly rejecting a proposed anchor.
The survey results on the question of which program you pick –“jobs saved” or “people laid off”-- demonstrated the Risk Aversion Bias: humans are risk averse when facing gains and risk taking when facing losses. The group discussed loss aversion in personnel decisions and ways to reduce loss aversion in M&A situations, such as having separate teams arguing for and against a transaction or using an unbiased evaluator. Mr. Timko suggested a “thought experiment” to use with a CEO who won’t sell a losing business at the value the bankers say it’s worth: Tell the CEO that last night while he/she was sleeping, you sold the business at that value BUT that you can buy it back at the same price. Ask if the CEO wants to do it—the answer is always NO.
Key takeaways from the program for board decision making suggested by Mr. Coyne were the following:
1) Be very humble –accept that your decision-making will include biases and not be all that it should be
2) Make the board’s decision-making process as strong as it can be—try to frame issues without bias and understand the viewpoints of those who disagree
3) Use two meetings to make important board decisions—don’t rush, take time to reflect on the decision-making process and allow your biases to be eliminated to the extent possible
Americas Advisory - Strategy & Customer Practices, Ernst & Young
Joe Timko is a member of Ernst & Young’s Northeast Strategy Practice, a former partner of McKinsey & Company and c-suite member of two Fortune 500 companies.
At Ernst & Young he is currently focused on serving high tech and industrial clients. His work is a mix of growth strategy, digital and operational transformation, and sales and service effectiveness.
Previously he was Chief Strategy Officer of ADP, and prior, Executive Vice President & Chief Technology & Strategy Officer for Pitney Bowes.
Joe’s consulting and technology background includes 13 years at McKinsey where he was a Partner in the Technology/Telecom and Industrial Practice, and he led engagements in business strategy, marketing and sales, M&A, turnarounds, and large scale operational transformations.
He has served as a start-up advisor and on the advisory board of ENACTUS, an education-based non-profit. He is an occasional guest lecturer in MBA programs at Columbia, UVA, Duke, UNC, and UT Austin. He lectures on topics including behavioral economics in executive decision-making, leading innovation, and strategy execution.
Joe received an MBA from Wharton, a Master of Science from Stanford, and a Bachelor of Science from Virginia Tech.
Martin M. Coyne is a board director and advisor to CEOs, boards of directors, and investors. He currently serves as lead independent director of Akamai Technologies and as a director of BioClinica and RockTech. He is also president and CEO of the NACD New Jersey Chapter. In the past, he served as a director of OpenPages and Avecia Group Plc, director and chairman of Welch Allyn, and member of the board of AdvaMed. He is the recipient of the Directorship 100 Award in 2011.
Coyne is the chairman and founder of the CEO Learning Network and the author of many articles on board governance, CEO leadership, and improving CEO relationships with their boards of directors. His book, How to Manage Your Board While Your Board Manages You, is a practical guide to help CEOs and directors work more effectively together.
Coyne has served in a variety of senior management positions at Sterling Drug and Kodak, including president of Health Imaging, president of the Commercial Business Group, and executive vice president of Eastman Kodak and group executive of the Photography Group. He left Kodak in 2003 to pursue his passion for CEO leadership development and more effective board governance.
Coyne earned a BS in Pharmacy from Fordham University and an MBA from Fairleigh Dickinson University. He also attended the Advanced Management Program at the Wharton School of Business in 1989.