Sunday, March 18, 2012

Enhancing Board Oversight by Challenging Traps and Biases in Professional Judgment - Part 3 of 3

As previously mentioned (see Part 1 and Part 2), the Committee of Sponsoring Organizations of the Treadway Commission (COSO) has released a thought paper called Enhancing Board Oversight: Avoiding Judgment Traps and Biases. COSO recognizes the vital role of consistent, high-quality professional judgment as management and boards of directors execute and oversee an entity’s enterprise risk management, internal control and fraud deterrence efforts.

COSO stresses that “Professional judgment is increasingly important as board members fulfill their responsibilities related to effective oversight of management’s strategic planning, execution, fraud prevention and risk management processes. Even seasoned board members can improve the consistency and soundness of their judgment by being aware of common judgment traps and by following a good judgment process.” Such a process can help avoid threats to good judgment and mitigate the biases associated with common judgment tendencies (see Exhibit 3 below, drawn from page 16 of the COSO Paper).


Exhibit 2 (on page 14 of the Paper) summarizes the traps and tendencies. Exhibit 4 (on page 18 of the Paper) outlines actions that boards can consider at each of the five steps of the judgment process presented in Exhibit 1 (see Part 2).

Many board-level judgments are made in group settings and, although group judgments are often better than individual judgment, group judgments can fall victim to narrow thinking; suppression of divergent views; and, consequently, shallow judgment processes. Some common tendencies in individual judgment that can lead to bias in board-level decisions are the overconfidence tendency, the confirmation tendency, the anchoring tendency and the availability tendency.

Awareness of the common threats to good judgment is the key initial step in improving judgment. Board members can use the insights summarized in this thought paper to test and improve the consistency and quality of management’s judgment processes and outcomes by rigorously challenging perspectives and assumptions via open and frank discussions. Such discussions can include consideration of judgment traps, simplifying tendencies and alternative viewpoints. Board members who are aware of traps and tendencies that limit the quality of judgment can use these insights to challenge management’s judgments and more effectively fulfill their oversight role.