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Behind closed doors: decision making in the board room

Tuesday, February 16, 2016 - 15:33

By Hamish Williams

It’s best to point out up front that boards are not made up of super humans, impervious to bad judgment and in possession of unlimited access to information. Every decision, no matter how well informed is made with a great deal of uncertainty. A decision that may seem like a “good” decision one day may contribute to an unfavourable outcome in the long term due to unforeseen and uncontrollable factors.

The difference between good and bad decisions made by boards is best measured by the actual process undertaken as opposed to the final outcomes. The board’s output is its decisions, so a good decision making process that produces good decisions is the best measure of the effectiveness of a board.

To rise to the level of C-Suite and above, managers need to have made consistently good decisions and it unfortunately only takes one bad decision to potentially fall from grace. At the board level, decisions are made on the basis of analysis and information provided to them by chief executives as well as their own experience and knowledge. The goal is to create an environment where directors can feel free to challenge one another, as well as the CEO and senior executives, leading to more considered decision making.

Decisions that need to be made can be routine such as confirming new meeting dates and approving minutes. The majority are non-routine and contain a mix of controversial and non-controversial decisions, important decisions such as appointing a new CEO or unnecessary decisions such as those that should be made by the CEO. Decisions will also come with a mix of risk when a decision is made with incomplete information or certainty when a decision is made based on solid facts.

The board decision-making process is heavily reliant on:

  • the board’s experience
  • the complexity of the issue under discussion
  • the information provided by management
  • the time available to make the decision

While decisions can often be made in a more timely manner by individuals, high level and complex decisions are able to leverage the greatest advantage of a board which is decision making in a group. Decision making in a group is a source of strength in four main ways:

  • it provides a check and balance against individual biases
  • it brings diverse perspectives so that more information is available for informing decisions
  • greater alternatives generated and diverse thinking styles present during evaluation
  • more people adds increased legitimacy and acceptance of the end decision

Carl Spetzler lectures on decision-making at Stanford University and he says to reach quality decisions, six basic requirements must be met.

  1. The right frame – What is actually being decided? What isn’t being decided? Boards need to be clear on which problem they are actually trying to solve.
  2. Clarity about what you want – Which consequences do you actually care about? Does the decision align with the organisation’s values?
  3. Creative alternatives – developing creative and achievable alternatives will ensure the final decision is of the highest quality.
  4. Gathering the right information - including information about uncertainty, which is essential for choosing the best alternative.
  5. Reasoning – which includes what is known and what is not.
  6. Commitment – how are you going to make the decision actually happen?

Spetzler suggests that a board exhibits high-level decision-making abilities when it:

  • makes high quality decisions on a regular basis
  • has decision-making procedures and a toolbox of decision analytic techniques
  • has decision makers who clearly understand their roles and are willing to contribute to the decision making process
  • is a learning-oriented board that strives to learn and improve its decision capabilities

While board directors aren’t appointed to their role for their ability to see into the future, there is an expectation that they understand the value they are intended to be providing to the decision-making process of an organisation. A history of good decision making as well as a willingness to abide by an organisation’s values will ensure that a board has the right people around the table for making the right decisions ultimately.

AIM’s Governance Foundations for Senior Managers and Executives program will enable you to effectively support your organisation’s board in the performance of its key functions including the crucial areas of strategy, risk and compliance. Beginning with an explanation of what corporate governance is and why it’s important for executives, the program explains how corporate governance can improve the current role of management in dealing with boards while touching on the contemporary issues facing boards today.

Whether you’re a seasoned executive or new to the responsibility, you’ll emerge from this two-day program with greater insights into what your board needs. You’ll have the ability to provide active and informed guidance to directors, enabling them to make better decisions.