The Quality of Judgment

The Oxford Dictionaries offers three meanings of the term “Judgment” -- two of which are relevant to this column and to a long article I am working on right now for a Shared Assessments Board Risk Report this spring: “a formal utterance of an authoritative opinion” and “the capacity for judging or the exercise of this capacity.”  

Though the longer article will focus on describing all desirable qualities for a board director, with corporate examples of the failure of Judgment on boards of directors, Judgment is the most important of those qualities because it requires expertise.  It is a synthesis of the same steps we take in performing risk assessments that are designed to produce better outcomes, usually backed by research data, the phases are risk identification, risk analysis, and risk evaluation, followed by management of the risk itself. 

Misidentification of a risk is often a failure to identify the type of risk it represents. Examples of those types could be found on almost any matter that is presented to a board of directors for a decision (vote):  what else besides budget needs to be considered in this phase? Some of the commonest types of risk that might apply are health and safety, operational, political, regulatory, and the natural risk environment.

In the second phase, risk analysis, a careless analysis or interpretation of its likelihood and consequence can lead to unfortunate board Judgments on how to treat the risk.  Here the amount of actual data may vary but is one component of the overall analysis. Without going into detail, I would argue that the Boeing 737MAX crisis is a case study in both misidentification of the risk and careless analysis of consequence.

In the third phase, risk evaluation, threats, including variation and uncertainty are compared with the firm’s risk tolerance.  Risk tolerance at Washington Mutual Bank evolved in the last several years of the firm’s existence to be high, and it is not at all clear that its board of directors, mostly generalists, received either good data or clear analysis from management during the financial crisis.  Risk tolerance at Wells Fargo seemed to stay high through all the firm’s deceptive practices across different business units, despite agreements reached with a raft of regulators and two CEO turnovers.  The Securities & Exchange Commission in fact stepped in to restrict the firms’ growth until problems were fixed, and suggested some members of the board be replaced with experienced risk executives. 

In all three corporate examples I’ve mentioned, the first definition of Judgment (“formal utterance of an authoritative opinion) appears to be missing from the records we have.  Uninformed directors were assured by management that the downturn in fortunes was temporary (Washington Mutual), that a mitigation had been created and applied (Wells Fargo), or that the management team was adequately dealing with a complex set of factors that included safety and engineering design (Boeing). 

So why is the quality of Judgment so important?  I’ve described why I thought it is an important quality for a board member to have, but where else is Judgment needed?  Media presents us daily with examples of federal and corporate leadership “failures of Judgment.”  And inside institutions that engage in shared governance, everyone needs to render Judgment on issues that are larger than themselves or their individual roles for the good of the institution. 

In some situations, it’s clear that the board members are not pre-educated about the company, agency, or institution, and are hesitant to push back upon the material they are receiving.  Perhaps at times they also worry about being perceived as “too nosy.” When board members simply rubber stamp management proposals without questions, there is a price that is almost always paid, whether in terms of finance or reputation.  To render good Judgments, board members need to be informed, to pay attention to the competitive landscape surrounding the firm, and to read widely on what major challenges that are facing firms or institutions, and to ask often hard questions of management. 

So you don’t think this applies to you because you’re not a corporate board member?  You might want to look again at the process I am describing for making an informed Judgment. The lack of informed Judgment is a more general problem that affects the entire range of public behavior.  In his third critique, “The Critique of the Power of Judgment,” Immanuel Kant recognizes that judgment is a power and is directly connected to what we regard as common sense.