Making Risky and Important Decisions

A Leader's Guide

Ruth Murray-Webster, David Hillson

• Publisher: Auerbach Publications
• Year: 2021
• Print ISBN: 9781032010786
• eBook ISBN: 9781000393255
• Edition: 1
• Topic: Business
• Subtopic: Decision Making
• Index: Business

This book offers a practical insight to leaders who need to make good decisions in risky and important situations. The authors describe a process for making risk-intelligent decisions, explaining complex ideas simply, and mapping a route through the myriad interrelated influences when groups make decisions that matter. The approach puts the decision maker—you—at the center and explains how you can think and act differently to make better decisions more of the time. The book shows how to

• Determine the appropriate level of risk

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• Make decisions in uncertain and turbulent conditions

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• Understand how risks are perceived to identify them accurately

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• Develop new behaviors to improve decision-making

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Making Risky and Important Decisions: A Leader's Guide builds on earlier ground-breaking publications from these two recognized thought leaders. Their first book together, Understanding and Managing Risk Attitude, brought together the language of risk and risk-taking with the language of emotional intelligence and emotional literacy. Managing Group Risk Attitude followed, and focused on decision-making groups, creating new insights and frameworks. Both books are positioned as specialist textbooks, despite their relevance to real-world situations. A Short Guide to Risk Appetite brought together the concepts of risk appetite and risk attitude into one place for the first time, cutting through confusing terminology and confused thinking to create a practical way of understanding "how much risk is too much risk."

This latest installment from Ruth Murray-Webster and David Hillson takes the breadth of their previous work, adds new insights and thinking, and distills it into a highly usable guide for hard-pressed leaders.

Chapter 1

Doing Better

As a leader, a large part of your role is to make decisions. Sometimes you will make decisions alone, other times as part of a decision-making group with your senior operations team, as part of project governance, or with your board or trustees. Decisiveness—the ability to make decisions quickly and effectively—is a highly valued trait of leaders in many cultures, and most leaders accept the challenge (and maybe the burden) of taking decisions with and on behalf of their organization.

There are many models and approaches to decision making, but the general consensus is that decision making is about choosing from a number of options or alternatives and doing so as rationally as possible.

The different options you have available for a decision will all have pros and cons in relation to your objectives. Some of those pros and cons will be facts now, others will be uncertain but would have an impact on your objectives if they occurred: risks. Throughout this book, when we use the term risk, we are talking about “uncertainties that matter” (Hillson, 2003). Many things are uncertain, but whether those uncertainties occur would not matter to our objectives and the decision in hand. Some uncertainties would matter if they occurred, leading either to a negative impact on objectives and the decision (threats, or downside risks) or to a positive impact on objectives and the decision (opportunities, or upside risks).

A “good” decision takes into account both what’s known (facts) and what’s uncertain (risks) at the point of making the decision. As a result, the choice of what to do and what not to do is made with “eyes open,” acknowledging the context for making the decision (e.g., how urgent it is or the people who will be impacted) and with a commitment to action from the team. That action may be to do something differently, or to continue as before: without commitment the decision can only be good in theory, not in practice.

You know all this, but you also know that underneath these simple statements is much complexity, that gaining agreement on objectives is not always easy, that identifying and evaluating the range of options and alternatives takes time to do well, and that, even faced with great information about facts and risks, the way forward is not always obvious to everyone.

It’s easy to be a great decision maker in hindsight. We are not going to spend time in this book unpicking past decisions and saying what was great or what could have been done differently. Our objective is to help you hone your skills with foresight: to help you navigate your complex world and discharge your responsibilities in the best way you can.

1.1 All Decisions Are Equal, but Some Are More Equal than Others

Borrowing an idea from George Orwell’s Animal Farm novel (1945), all decisions are equal in that they are important to the people involved at the point of making the decision and committing to action. The decision may be personal, it may be to vary a routine pattern of past decisions, it may be tactical to achieve a short-term goal, or it may be strategic with longer-term implications for many people. The core principles are the same—you need to understand:

• Objectives: What is at stake? How will you measure success?
• Context: What is the environment or wider system into which this decision fits?
• Options: The “change nothing” baseline plus the implications of other alternatives.
• Commitment to action: Of yourself and your team.

We say that some decisions are “more equal than others” because they are particularly risky and important. You need to understand the same four points listed above, but doing so is much more complex, and the stakes are higher—for you, your team, your stakeholders.

Decisions are risky and important when:

• The impact on strategic or long-term operational objectives is significant.
• The context is complex, unstable, or changing.
• There is a significant amount of risk associated with different options, and comparing options and their impact on objectives is not straightforward.
• There is no guarantee of commitment from the people who you need to support in order to implement the chosen outcome.

There are many decisions you will make as a leader that do not meet these criteria. Sometimes the impact of the decision on objectives is not very consequential. Often the data on variables (facts or risks) are not extensive and can be easily processed and/or are well understood by a diverse group of decision makers. Although the guidance in this book can be applied to all decisions, in practice only a subset of decisions will be important enough to warrant your close attention.

For those particularly risky and important decisions, those that are “more equal than others,” this book will help you to lead the decision-making process with greater knowledge of the pitfalls and greater insight into how you can lead to get the best possible decision in the situation.

1.2 Four Key Questions

In order to get the best possible decision in a risky and important situation, you need to be able to answer the following questions:

• How much risk is too much risk for my organization?
• How is my personal view influencing my judgment?
• How can I balance reason and intuition?
• How can I inspire and embed the behaviors needed to build an effective culture?

1.2.1 How Much Risk is Too Much Risk for My Organization?

In the past decade, the language of risk appetite and risk capacity has gained a far greater prominence than in previous years. For example, directors and trustees on the boards of listed companies (Financial Reporting Council, 2014) and registered charities (The Charity Commission, 2017) in the UK are required to express the appetite to take risk to pursue shareholder and stakeholder value. Other jurisdictions have similar requirements. Increasingly, value is expressed using the concept of the “triple bottom line”: profit, people, and planet (Slaper & Hall, 2011). Risk appetite is therefore not just about how much money you are prepared to chance, but about defining tolerable levels of performance for non-financial objectives in tricky areas such as ethics and sustainability.

If the capacity to bear risk is seen in purely financial terms, it becomes about the strength of the balance sheet and credit ratings with lenders. In a triple-bottom-line world, risk capacity is also about reputation. How much stakeholder trust do you have? What are the bounds of your “licence to operate” with the public?

These are tough questions that you need to be able to answer to make a good decision in a risky and important situation. Many organizations struggle to express risk appetite and risk capacity in a meaningful way. Boards discuss and sign off on statements and build in criteria to risk policies and procedures, but operationalizing these in a meaningful way to support decision making is a difficult task for many executive and senior teams. In Chapter 2 we build up a model that enables you to consider how risk appetite and risk capacity fit alongside other decision variables and where you can make choices about how informed to be at the point of taking the decision.

1.2.2 How Is My Personal View Influencing My Judgment?

There’s good news and bad news about the human brain when it comes to risky decision making. We are created and have evolved as a species to be efficient when we need to make routine decisions. Once you’ve learned how to cross the road safely, you do it without much conscious thought. When you’ve decided to trust a particular person, you don’t question their objectives and intentions every day. When you’ve built up a track record of success at work, maybe you start to believe that you are good at this and can handle most situations. Is that rational?

Behavioral economists and risk psychologists have demonstrated time and again that we are far from rational when it comes to making judgments and choices in the face of uncertainty. There is a big literature on this, a few Nobel prizes, and some great readable books. Appendix A provides a list of our favorite further reading, linking the work of other authors into what we say here.

Our own previous work also forms a foundation for this book, as described in Appendix B. For example, in our books on risk attitude (Hillson & Murray-Webster, 2007; Murray-Webster & Hillson, 2008), we addressed the multiple influences on our personal perceptions of risky and important situations.

We elaborate on this in Chapter 3, helping you to consider how judgments become biased so you can then do something about it. For now, consider how your views and judgments are shaped by things such as:

• Past experience
• Past success
• Recency of information
• Who the data
• How information was the was told
• Your desire for harmony in the team
• Your feelings about people or your personal goals

1.2.3 How Can I Balance Reason and Intuition?

We are a species that “feels” as much as we “think.” You have a psychological preference for the degree to which you are drawn to data, facts, rationality—the ability to see, hear, taste, touch, or smell something— compared to the degree to which you are drawn to intuition, disputed/ contested “facts,” possibilities, and maybe a “sixth sense.” No person is either fully rational or completely intuitive. Differences are good and can create value if harnessed. If you only listen to people like you, what are you missing?

To balance reason and intuition, everyone needs to acknowledge what they bring to the situation (positive or negative baggage, future aspirations), appreciate what others bring, assess the situation, and act in a way that helps the decision at hand in its context. That may be to intervene, to assert your own viewpoint and try to change the direction of travel, or to accept things as they are.

This is the most difficult part of decision making for many leaders, particularly if you are working in a culture in which everyone looks to you to be a single decisive voice—or you feel that’s what you should be doing. The decisions you make impact you, your employees, customers, investors, regulators, etc. Making good decisions in difficult situations is no small feat, because these types of decisions involve change, uncertainty, anxiety, stress, and sometimes the unfavorable reactions of others. Often leaders are reluctant to overtly acknowledge these difficulties, preferring to just say, “It’s the way it is.” We believe it’s important to acknowledge the challenges and strive to continually improve in this area, because the stakes for organizations are high when sub-optimal decisions are made.

In Chapter 4 we consider what it takes to be competent as an individual decision maker, and we explore the features of a functioning decision-making group. Chapter 5 then provides a process that will help you to improve the outcome of your decision by intentionally addressing hidden influences.

1.2.4 How Can I Inspire and Embed the Behaviors Needed to Build an Effective Culture?

“No man is an Island, entire of itself every man is apiece of the Continent, a part of the main.” (Donne, 1624)

There are many definitions of culture, and applications to organizations (from families to churches to companies) to nations and ethnicities. Culture is part of the context for any decision, because it shapes the expectations and behaviors of others in response to the decis...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Dedication
• Table of Contents
• List of Figures and Tables
• Foreword
• Preface
• About the Authors
• Chapter 1: Doing Better
• Chapter 2: Intelligent Process
• Chapter 3: Perception Is Reality
• Chapter 4: Value from Difference
• Chapter 5: Intentional Choices
• Chapter 6: Shaping Risk Culture
• Chapter 7: “Yes, but …”
• Chapter 8: You Can Do It!
• Appendix A : Recommended Further Reading
• Appendix B: Further Reading from the Authors
• Glossary
• Index