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(originally published by Booz & Company)


Getting a Return on Judgment

One major mining company achieves similar levels of insight by deploying an independent assessment team to consider any proposed investment (such as a new mine) before a decision is made. The corporate investment committee reviews the proposal in light of two views: that of the business unit seeking investment funds, and that of the independent team. This company now has an enviable record of making profitable mining investments.

2. Personal accountability. Organizations managing risk need a system in which the individual or team with the highest-quality insight is also responsible for the decision. For example, every airline captain knows that decisions about risk must be made at an appropriate level, one where the decision maker has the requisite experience and maturity. The captain may, for example, delegate specific decisions to engineering specialists or dispatchers, but the decision to fly the plane rests with him or her, not the air traffic controllers or the airline’s chief executive.

In the business world, accountability is as likely to sit with a team as with a named individual, but the logic is essentially the same. Every board member in a public corporation, and every partner in a partnership, understands his or her formal accountability. But clearly the top of the organization is not the appropriate level for many decisions; firms need to find mechanisms for pushing personal accountability down to those who are closest to the action. For example, in the banking sector this might mean replacing short-term rewards for consummated deals with a set of short-, medium-, and long-term incentives that reflect the value of the trade over time.

3. A culture that encourages employees to keep sight of the big picture. The informal norms of behavior in a firm — its culture — should support the principles of high-quality insight and personal accountability. Karl Weick of the University of Michigan has pointed out the importance of this behavior in his studies of nuclear power plants and aircraft carriers, where errors can have catastrophic consequences. In these “high reliability” organizations, individuals employed in activities such as routine maintenance understand the risks their organizations face and act accordingly. Rather than compartmentalizing every task, employees are encouraged to look across the boundaries of their jobs and to understand the implications their work has for others.

This refusal to lose sight of the big picture is a crucial aspect of personalization. For example, in 1993 the Danish pharmaceutical company Novo Nordisk failed badly in a mock audit. This led to a root-and-branch rethinking of its management processes that culminated in a new approach called the “Novo Nordisk way of management.” The firm put forth a formal statement of its “values” (accountable, ambitious, responsible, engaged with stakeholders, open and honest, ready for change) and built a set of teams to instill these values across the organization. One team, dubbed “stakeholder relations,” looks internally at dilemmas and opportunities to raise awareness of the values. Another team performs annual organizational audits, and a third group — 14 facilitators drawn from the ranks of senior management — visits units to evaluate how well they comply. A critical feature of this approach is that it is non-hierarchical: It encourages individuals at all levels to talk with the facilitators about issues that are not being taken up through the chain of command.

Evolving toward Personalization

The elements of personalization may seem familiar. But comparatively few companies exhibit them — or even get close. Instead, most corporate decision makers operate within cultures that institutionalize poor judgment. They reinforce biased and blinkered insights; they allow people to make decisions without being accountable for the consequences; and they create siloed structures in which people lose sight of the forest for the trees.

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  1. Karen Broadhurst et al., “Performing ‘Initial Assessment’: Identifying the Latent Conditions for Error at the Front-Door of Local Authority Children’s Services,” British Journal of Social Work, January 2009 (online version): More about the “critical incident” groups. 
  2. George S. Day and Paul J.H. Schoemaker, Peripheral Vision: Detecting the Weak Signals That Will Make or Break Your Company (Harvard Business Press, 2006): For developing insight. 
  3. David Demortain, “Credit Rating Agencies and the Faulty Marketing Authorization of Toxic Products,” Risk & Regulation, January 2009: Tracing formalization back to one external source.
  4. Alan Gemes and Peter T. Golder, “What Is Your Risk Appetite?s+b, November 30, 2009: An antidote for bureaucracy, through setting a collective goal for exposure.
  5. Gillian Tett, “Anthropology That Explains Varying Banking Behaviours” (registration required), Financial Times, January 18, 2008: Cultural qualities of the major banks that made it through the downturn.
  6. Max Weber, Economy and Society (University of California Press, 1978, translation of the original, Wirtschaft und Gesellschaft, 1956): Source of Max Weber’s definition of bureaucracy.
  7. Karl E. Weick and Kathleen M. Sutcliffe, Managing the Unexpected: Assuring High Performance in an Age of Complexity (Jossey-Bass, 2001): Learning from high-reliability operations.
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