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.
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:
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.
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:
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