Your company needs to long-range forecast? Don’t depend on a single person!

Companies try to forecast the future. For example, a printer company tries to forecast the future demand of printers. Based on their forecasts, they make planning decisions. Thus, decisions are made in the face of uncertainty.

The more power you give to a single individual in the face of complexity and uncertainty, the more likely it is that bad decisions will get made.

Conversely, decisions made by aggregating the collective wisdom of a diverse group of people will outperform even the smartest person most of the time.

— Paraphrasing The Wisdom of Crowds by James Suroweicki

Paradox: Embracing Decentralization while Hailing the CEO as Corporate Savior

Some companies claim to embrace decentralization and bottom-up mechanisms and yet they then turn around and treat their CEO as superheroes and as the “corporate savior.”

CEOs are given massive salaries and are hyped as the one person who will lead the company to prosperity.

The problem is that people actually believe the hype, taking it on faith that putting the right individual at the top is the key to corporate success.

What’s perplexing about this faith is how little evidence there is that a single individual can consistently make superior forecasts or strategic decisions in the face of a genuine uncertainty.

If companies were to truly embrace the virtues of decentralization then the CEO would have a much smaller role (and paid much less) and there would be more emphasis on collective decision-making.

— Extracted from The Wisdom of Crowds by James Suroweicki

Aligning worker and corporate interests

Here are two approaches to solve the problem of aligning worker interests with the corporate interests:

1. Home owners are, in general, more likely to take good care of their property than renters are. Similarly, workers who have an ownership in a company are more likely to be interested and productive than if they simply “work there.” Give workers stock options.
2. When someone else makes all the decisions (about how to solve a problem, which alternative to take, etc.) then workers have no incentive to be creative and are not motivated. Give workers real decision-making power.

— Extracted from The Wisdom of Crowds by James Suroweicki

To have good decision-making, give people closest to the problem decision-making power

I think that these can safely be considered to be “laws”:

1. Individuals closest to a problem have the most accurate and complete information about the problem.
2. The further removed an individual is from a problem — by time, space, rank — the less information and the less accurate information he has about the problem.
3. Good decision-making requires accurate and complete information.

Therefore:

• To have good decision-making, give people closest to the problem the power to make decisions. For example, give decision-making power to those people on the factory floor.
• Avoid centralizing decision-making power to a few individuals at the top of a hierarchy.

Unless people know what the truth is, it’s unlikely they’ll make the right decision

“Unless people know what the truth is, it’s unlikely they’ll make the right decision.” [Wisdom of Crowds by James Suroweicki]

If employees see problems and keep it to themselves, it leaves an organization without knowing the truth, and thus unlikely to make the right decisions and stunts organizational learning. For example:

“Those nurses whom doctors and administrators saw as most talented unwittingly caused the same mistakes to happen over and over. These “ideal” nurses quietly adjust to inadequate materials without complaint, silently correct others’ mistakes without confronting error-makers, create the impression that they never fail, and find ways to quietly do the job without questioning flawed practices. These nurses get sterling evaluations, but their silence and ability to disguise and work around problems undermine organizational learning. Rather than these smart silent types, hospitals would serve patients better if they brought in noisy types instead.”

— Hard Facts by Jeffrey Pfeffer and Robert I. Sutton

Democracy doesn’t mean endless discussion, it means a wider distribution of decision-making power

During the 20th century organizations wanted to include more workers in the decision-making process. That is, organizations wanted to be more democratic.

To accomplish this, organizations formed lots of committees and groups for workers to participate in.

However, the actual decisions were still made at the top.

Democracy doesn’t mean endless discussion. Democracy means a wider distribution of decision-making power.

— Extracted from The Wisdom of Crowds by James Suroweicki

Consensus + Management Hierarchy = Poor Decision-Making

The idea that top-down organizations are oppressive and damaging, and that workers should be given more decision-making power is well-known to managers.

To involve as many employees as possible in the decision-making process, management forms lots of teams and committees, comprised of a variety of workers.

Thus, before a CEO makes any decision, the issue makes its way through each layer of management hierarchy. At each level the issue is vetted by a committee.

Each committee resolves the issue by reaching consensus (lowest common denominator).

As the issue bubbles up through the hierarchy the opinions and ideas become more and more watered-down.  By the time it reaches the CEO there is little innovation or diversity left.

Paradoxically, in trying to make the decision-making process as inclusive as possible, companies actually make top executives more — not less — insulated from the real opinions of the workers.

Layers of management, coupled with a “can’t we all get along” (consensus) attitude is a recipe for poor decision-making at the top.

— Extracted from The Wisdom of Crowds by James Suroweicki

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Here is a related blog: Consensus versus Collective Decision-Making