How to make decisions like a (good) CEO
Chief executives get paid for the judgment they bring to decision-making. But many prevaricate out of fear of getting things wrong.
You might think that chief executives get paid hefty salaries because of their superior ability to make critical decisions by synthesising reams of data and facts.
But that is a long way from the truth, argues leadership expert Margot Faraci. CEOs get paid for the judgment they bring to decision-making.
“We can all go to spreadsheet and we can all read a deck and we can all have arguments around what’s wrong and what’s right,” Faraci says.
“When you’re being paid to lead, there are only so many facts that are going to help you and there are always countervailing facts too.
“You can’t make decisions without evidence, but it’s only going to take you so far.”
Judgment is required.
Chaotic systems
What many executives fail to understand is that business is largely a chaotic system, where there are many components that interact with each other. The challenge for decision-makers is that the behaviour of chaotic systems is difficult to model because of dependencies, competition, relationships and other types of interactions between the many parts. One plus one will not necessarily add up to two, which tends not to be something that formal education teaches.
“In chaotic systems, you’re just going to have to make a call,” Faraci says.
The majority of business decisions are chaotic, says the former National Bank of Australia executive.
“I think any business decision which involves a prediction [is chaotic], which is every business decision,” she says.
Take an acquisition. A CEO looking to buy a company can look at a huge amount of data, such as borrowing costs, interest rates, balance sheets, profit and loss accounts, property prices and staff numbers. But then they need to consider the quality of the leadership team in the company potentially being acquired, the outlook for the sector, possible sources of disruption and the reaction of investors, among other variables. None of it is cut and dried.
Hiring and firing staff is similarly chaotic in nature. Take the latter.
A leader can look at an employee’s performance metrics, taking in results from 360-degree assessments and the like, but context is also relevant. How long has the team member been in the job for? Were expectations of them clearly laid out? Are there extenuating circumstances, such as a change in market conditions, that should be taken into account?
The metrics are just a starting point. Ultimately, a judgment call is required.
Lifting the lid
Occasionally, the lid is lifted on how decisions can be made differently between people who have the same information.
During the Sydney hostage siege in December 2014, which centred on the Lindt Cafe at Martin Place, companies in the surrounding area took different courses of action.
A listed property company directed its people out of the CBD within 90 minutes, chartering emergency ferries. A major power company gave its people a choice of whether to stay or leave, assuring staff that the management would support their decision. Leaders at other companies prevaricated, consulting incident management policies and the like.
The protagonists in the companies who acted swiftly did not have more facts than any others. They acted on impulse.
Another example was during the pandemic, when national governments with access to the same (incomplete) information about the spread of COVID-19 took different paths when it came to ordering vaccines.
Talking to BOSS in early 2020, former Commonwealth Bank director and AMP CEO Andrew Mohl warned that instinct was particularly critical when decisions had to be made in a hurry.
The need for instinct
“I think when you’ve got to move quickly and you wait until all the analysis has come together to work out what to do, it’s too late,” Mohl told BOSS.
“You are going to have to move on instinct, and experience and wisdom.”
Faraci argues that when executives prevaricate about making business decisions, it is often because they do not understand that they must make a call in a chaotic environment, or that they lack the confidence to back themselves.
“It’s fear that’s holding people back. It’s fear of getting it wrong.”
Faraci has three recommendations for executives who find themselves unable to make decisions because they don’t feel they have all the necessary facts.
The first is to be self-aware. Understand that you need to make a decision without all data, and there is nothing unusual about that.
“Every time you ask for more information, check in with yourself. Why are you doing that?” Faraci says.
The second recommendation is to surround yourself with people who will call you out and tell you that you have sufficient information on which to base a decision.
The third is to set yourself a deadline for the decision.
“You might say to your board: ‘We’re going to make a call on this by June,’ even if it terrifies you, just to put a bomb under yourself.”
