‘Ratio’-nal thinking in the boardroom

Basic units of measurement may not be immediately associated with boardroom deliberation, although the need for measurable (SMART) objectives or performance indicators is widely acknowledged – at least in theory.

Those units of measurement (also called types of data) are usually described using the NOIR acronym, and graded from simple to complex in the sequence Nominal, Ordinal, Interval and Ratio. To recap the introduction to data types we were taught at school:

Nominal: Named variables. Data may only be classified (e.g. names, labels or categories like gender or winners/losers)
Ordinal: Named and ordered variables. Data are ranked (e.g. AFL ladder, attitude survey)
Interval: Named, ordered and proportionate interval between variables. Meaningful difference between values (e.g. temperature, IQ)
Ratio: Named, ordered and proportionate interval between variables and can accommodate Absolute Zero. Meaningful zero point and ratio between values (e.g. time, dollars, growth)

Interestingly, the measurement scales or data types are able to be seen as a holarchy, or nested structure. They are not simply arranged from simple to complex, but each step up the hierarchy includes and builds on the prior levels. In that sense they also hint at describing stages of maturity, and so it should not be surprising that Jean Piaget’s Theory of Cognitive Development has children thinking logically (interval thinking) between 7 and 11 years of age (concrete operational stage), and thinking about abstract propositions (ratio thinking) from 11 years onward (formal operational stage).

The first definition of ‘ratio’ in the Shorter Oxford Dictionary is “Reason, rationale”, and so terms like ‘reasonable’ and ‘rational’, which are often used when describing the desirable qualities of board deliberation, are about the capacity of the directors (and management) to use sophisticated data and analysis i.e. ‘ratio’-nal thinking.

Another observation about the NOIR holarchy is the way it mirrors the Knowledge Management Cognitive Pyramid – as represented in the chart below. Note especially the decision risk bar on the right of this illustration.

Board deliberation will desirably promote sound judgment and shared understanding, reflecting subtle insights into the complexity of factors behind and implications of a decision to act – or not – as the case may require.

When debates are expressed in absolutist, simplistic, or polarised ways so that one view is right and all others are wrong, the parties involved are stuck at the nominal level of thinking maturity.

When the parties are preoccupied with where they rank in a field, their ordinal thinking may make them prone to other kinds of errors, as they are not addressing the ‘how’ and why’ questions that will support wise decisions.

Even using interval thinking, which provides insight into degrees of relationship, underlying systemic causal factors are not addressed, and so no lasting change is likely to arise from decision making at this level.

Governance standards require that directors apply the ‘reasonable person‘ test to their deliberations. Governance models such as the EDM model require directors to evaluate and monitor as well as deciding on directions for their organisation, and in doing so, various ratios must be taken into account, such as:

  • cost:benefit
  • risk:reward
  • stakeholder interest:influence
  • current ratio (current assets:current liabilities)
  • quick ratio (current assets – inventory:current liabilities)
  • debt to equity (total liabilities:total equity)
  • diversity or representation / participation
  • sustainability versus short term or vested interests
  • and many others

Ratio’-nal thinking is required for effective board deliberation and governance. Anything less suggests the board has work to do in assisting directors to adopt more mature deliberative skills and methods.

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