Financial Executive - December 2009

PROFESSIONAL DEVELOPMENT: CRITICAL THINKING: A CRITICAL STRATEGY FOR FINANCIAL EXECUTIVES

SUSAN SCHOTT KARR 0000-00-00 00:00:00

Analytical thinking, skepticism and good judgment — are increasingly the key ingredients financial executives must add to their intellectual/ educational mix to remain competitive in a world economy that now places more emphasis on critical thinking than ever before. Indeed, executives need to hone their own ability to think creatively, critically and with curiosity to make business decisions that answer the right questions, manage risk, improve productivity and use workers’ talents effectively in an evermore global and fast-paced world. As a result, the need for more finely tuned, and razor-sharp critical thinking skills and training programs to maximize them, has come to the fore. “The essence of critical thinking is intellectual curiosity and a willingness to ask questions,” says Kathy Pearson, Ph.D., an adjunct associate professor in the Operations and Information Management Department at The Wharton School of the University of Pennsylvania. “Good critical thinking skills help us to plan for the future and to think about uncertainty.” Tony Osude, acting director of professional development at the Association of Chartered Certified Accountants (ACCA), a global accounting organization, thinks critical thinking is integral to everything accountants do, from their professional training to the execution of their professional behavior. Auditors, for example, must rely on skepticism; they can’t take everything at face value. Part of the process relies on how much further and deeper they may have to dig to determine whether financial statements are reliable and representative. Critical thinking permeates the process. Those skills will be even more essential in the future, with the potential transition to International Financial Reporting Standards (IFRS) and a greater reliance on subjectivity in applying fair value measurements and other standards. The principlesbased system demands an ability to make inferences and use sound judgment. Pearson believes the need for critical thinking training is leadership development, as people transition from middle- to senior-management roles. “There are key learning-development gaps as they move from tactical, operational work — where they used analytical models — to positions where they need to think strateGically,” she says. “This move is too complex to follow with a mathematical model.” ”Things are moving and changing so rapidly in the world that criticalthinking skills will be necessary throughout an executive’s life where the specific technical knowledge will fade away,” says JD Schramm, a senior lecturer on management at the Stanford Graduate School of Business. “It is incumbent upon us to fill that gap.” To enhance criticalthinking skill development, some universities and organizations are undertaking various initiatives. Leadership-development programs have begun to offer current and potential leaders ways to improve their skills. ACCA leadership is taking a close look at its core curriculum. Given that members are required to undertake a minimum of 40 hours of training each year to remain competent, the leadership is looking more closely at what members are required to learn. In terms of training approach, Osude says what doesn’t work is “stand-up talk and chalk.” What works, he says, are workshops, brainstorming about issues, workplace development and having a mentor or coach, looking at workplace situations, more experiential professional training, even if they are in guarded or simulated situations. The audit process is the most powerful and relevant example of the positive effects of critical-thinking training, Osude explains. As auditors spend about a month running through accounts, they must be sure all statements are provided. They need to know that claims — from the smallest expense to the largest transaction — are accurate and they must earn the trust of senior executives. There may be thousands of transactions to examine, and they need to choose the right ones. That requires auditors to apply critical analysis and sound judgment. A Shifting Training Landscape Wharton’s Executive MBA program offered a workshop in September, Critical Thinking: Real-World, Real- Time Decisions, and plans to offer it again. That reflects a change in organizational thinking. Five years ago, organizations would come to The Wharton School in search of “good old leadership-development skills,” says Pearson, academic co-director of the program. “Now, they need to build an organization to have a process that allows and demands critical thinking. Wharton gives attendees some tangible tools to implement and create a culture. “It’s all about changing a culture in an organization. It’s about training senior leadership teams, not just individuals,” says Pearson. She believes the most effective kind of training in a learning environment is to offer a strategic initiative that managers are facing in the workplace and work on it in the classroom in teams. Pearson uses a decision-process model that she and Dr. Paul Schoemaker developed at Wharton and Decision Strategies International (DSI), a management consultancy and software company. “Given that we are anchored in our past experience and see what we want to see, the first step is trying to frame a decision process or problem. ‘How do we think of different stakeholders, internally and externally?’ ” she asks students. Pearson says she would also like to see a more formalized decision-making process, by asking questions such as: “Have you framed that? Have you gotten divergent viewpoints? Have you used the devil’s advocate approach?” The Stanford Graduate School of Business is emphasizing leadership development, general management and customized education. As part of an overarching communications initiative, the university launched a course in the fall of 2007, Critical Analytical Thinking (CAT). Schramm, who directs the Mastery of Communications Initiative and the CAT Writing Program, describes CAT as the “crown jewel” of the broader initiative. All first-year MBA students are required to take the course, which includes writing and speaking components. Faced with varying business scenarios, students work first with their professors on the strength of their logic and arguments and next with writing coaches on the effectiveness of their writing. Then, they defend their arguments orally. “The two-part combination is the key to our success,” says Schramm. “In two short years, we’ve seen a palpable improvement in our students’ ability to articulate and defend their reasoning in the CAT course and in other courses they’ve taken following CAT. We’ve been excited to hear back from our employers who have commented on their improved CAT skills.” Bob Hirth, executive vice president and head of global internal audit at Protiviti Inc., a global business consulting and internal audit firm, says his company now employs a new consulting methodology. Protiviti is using case studies to challenge employees to think about problems from a different perspective. “We want people to understand that it’s not necessarily important to create a single answer, but to consider the consequences of different possible answers,” Hirth says. ACCA’s Osude says the primary drivers in improving critical thinking to meet current and future financial and accounting challenges are “uncertainty, complexity and risk.” Globalization and geopolitics, advances in technology and new corporate business models, as well as imminent regulatory and economic changes, require a deeper, more analytical approach to training a new generation of leadership. According to Osude, the biggest problem is going to be trust. That extends through the entire financial reporting supply chain, from auditors to investors determining current and future market developments to valuation agencies coming up with meaningful valuations. Trust is fragile; there is often an inclination to impose more regulation. Much depends on the understanding of risk. Leaders need to be more challenging of the system to give investors more confidence in it. “If a candidate can exercise strong critical analytical thinking skills, he or she will be able to not just respond to financial and accounting processes or decisions, but to think about and challenge them,” says Schramm. “We all benefit when the workforce has stronger critical analytical thinking.” Osude, for one, would like to see recognition that professional life and work in finance and accountancy require more that just a linear approach. “We work within an uncertain world and need to be in a position to respond to that,” he says. The Wharton School’s Pearson would prefer a greater focus on real organizational impact — rewarding employees not just for good outcomes, but also on demonstrated ability to apply a good decision-making process. Osude notes that businesses are not always good at forecasting. Forecasting, he says, “requires a different, more dynamic way of thinking and applying complex problems and risks.” Hirth sees two “blocks” to critical thinking in the U.S. The first is a cultural block. When it comes to budgeting and the financial planning, he believes there is a tendency to “plan with one eye open and one eye closed.” We have to ask ourselves, “If that’s plan A, then what is plan B?” He also believes we need to have a critical-thinking process built into schools to get over this block. The second block, he says, is generational. Younger generations of workers haven’t had enough exposure to the “downside” of business. “You can’t find the status quo anymore,” says Hirth. “We are still looking for sure footing. As a result, it’s a great time to be talking about critical thinking.” For companies, Hirth says, there’s a need to create processes that are smarter, take into account the value of critical thinking and address low-probability, highimpact risk. “Companies have protocols around things such as how to run a meeting; they should adopt a process for making decisions as well.” he says. Says Osude: “The majority of risks are the ones we don’t know about. It points out the need to be able to look in the rear-view mirror and deal with more than what is in our peripheral vision. This requires nimbleness and a different mindset.” As the economic recovery begins to take root in the United States and around the globe, companies will likely face a number of financial challenges and hurdles. Hirth believes businesses “won’t get back to a carbon copy of what we had before — we’ll get back to something different.” Today’s financial executive, he adds, “will face a whole different combination of challenges, a different package in terms of issues and risks. We must be willing to watch for it.”

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