Generally, a board will refer to decision making in the governance charter, e.g:
For major decisions reserved to the board, the board acknowledges the value of a systematic and deliberate approach:
- For expenditure-related decisions and decisions in non-financial areas defined as ‘significant’, it will set out the main steps it will take before reaching its decision.
- One such step will be to define the criteria by which it will evaluate alternatives.
- The board will conduct a formal post-implementation evaluation of decisions covered by this policy.
Be clear what is meant by ‘main steps’, ‘setting criteria’ and ‘post-implementation evaluation’.
The Decision Process
Processes will vary depending on the organisation and the scale and type of decision. Design any process with solid principles in mind.
The process itself is vital—it matters more than analysis by a factor of six. [1] You can get a great result from a poor process, but this may be a one-off—and is called luck!
It is also possible to run a great process and get an indifferent result. This will provide a framework for reflection, learning and improving the chance of success next time. Analysis is not unimportant, but a good process is likely to weed out poor analysis.
Perfect decisions don’t exist. Gaining absolute certainty can be time consuming and costly. The challenge for those making decisions is to ensure that the process is designed to:
..achieve sufficient certainty (on an informed basis) when not everything about a decision is known [2]
Levels of Decisions
Not all decisions are the same. This is a good model for assigning levels of importance:
Housekeeping/routine
Straightforward and not material. Likely no discussion required. Can be placed within the consent agenda. [3]
Example: a change in signing authority.
Expectations of management—a simple formal request.
Binary or simple confirmation
Limited complexity. Needs some due diligence and a short conversation; typically, yes/ no.
Example: extending a lease.
Expectations of management—short paper and brief presentation.
Multivariate and or subjective
Chair is actively involved, seeking alignment on the key variables to be assessed and their relative importance; informally canvassing directors to ask what information they need to make the decision. Management should be aware of the assessment factors. The chair actively guides the conversation: seeking clarification; checking for understanding; seeking input; looking for cracks in the case.
Example: business acquisition (but not betting the farm).
Expectations of management—full decision paper and supporting materials (see below).
Fundamental or mission critical decisions
High complexity or ‘bet the farm’ decisions. Possibly no consensus on key decision variables. Likely to be close to the heart of organisational purpose and or values. These decisions take time and may need more than one session. Full consensus may not be reached. A good process at this level may lead to solutions or mitigations not contemplated at the start.
Example: end a long-standing section of the business and major pivot to another strategic approach.
Expectations of management—full decision papers; substantial background material; and probably third-party perspectives brought to the board (see below).
Many similar frameworks exist. Some add crisis decisions to the model, requiring rapid decisions on imperfect information. It is relatively straightforward to take the outline above and turn it into a formal decision framework that works in your context.
Decision Process
This process offered by McKinsey & Co [4] can be applied even in small organisations. It has four key elements:
- Frame the decision—define the problem or opportunity and set clear objectives
- Gather information—collect relevant data and insights from diverse sources
- Evaluate alternatives—generate and assess options against decision criteria
- Make the decision—choose the best option and develop an action plan.
Frame the decision
If I had an hour to solve a problem and my life depended on the solution, I would spend the first 55 minutes determining the proper question to ask, for once I know the proper question, I could solve the problem in less than five minutes.
This quote, attributed to Einstein, makes it clear that analysis is the key driver of success.
Major decisions should have a demonstrable connection to the outcomes framed in the board’s statement of intent. Any proposal should refer to an opportunity to progress an outcome or address a matter impeding that progress. Being clear about intended change is a necessary precursor to setting evaluation criteria. It should be clear on timing: why is this necessary now and not in six months or next year?
What is required: Nature of the opportunity or problem being addressed. Clear link to the board’s outcomes. Clear statement of the intended positive change from the action proposed and what success will look like. Clarity and reasoning on timing.
Gather information
Directors should read about issues core to the organisation’s mission and strategy. That is part of the board as a learning entity and there a planned process will ensure the board is knowledgeable in critical areas. That knowledge is necessary to test and challenge major proposals.
But management will be doing the lifting on information gathering to frame the decision. Management should expect directors to constructively challenge the information and assumptions underlying a proposal. This is a useful list for checking:
Is this information…
- recent - up to date on current trends
- relevant - pertinent to the proposal
- credible - from reputable sources
- reliable - accurate and consistent
- complete - covers all relevant factors
- free from - bias from neutral sources?
Any credible divergent opinions should be included. Equally, knowledge gaps should be made clear, and any assumptions outlined.
Management is expected to synthesise information, not throw it at the board in a great lump of data. They should offer an informed opinion based on the material gathered but provide necessary links for directors to interrogate source material if desired.
What is required: Analysis of available information. Management is expected to offer opinion and to make clear the following: sources and utility (as above) of information; who was consulted; obvious knowledge gaps; contrary opinions; any assumptions made; and areas of uncertainty.
Evaluate alternatives
There is a common axiom, ‘just considering one more alternative doubles the chance of success’—known as the Rule of Three or the Three-Option Rule. This suggests that having three options to choose from increases the likelihood of making a successful choice.
Strategist Roger Martin [5] suggests that doing nothing (status quo) should always be one of the options on the table, as organisations can insist on action regardless of necessity.
So, the board should make clear how many options it wishes to consider, including the do-nothing option.
One approach to generating alternatives, if possible, is to have separate teams—with no crossover—working on the same issue. Daniel Kahneman supports this approach [6, 7] noting that separate teams can help mitigate biases by bringing different perspectives and approaches to the table. He also suggests separating the process of generating ideas from the evaluation of them.
The board needs to make clear on what basis the proposals are to be evaluated. Without this clarity, management is basically working in the dark. Let’s say this is a purchase of an existing business.
Evaluation could include considering:
- impact on the relevant strategic outcome
- options to achieve the same outcome
- adherence to organisational values
- financial forward projections and assumptions
- risk assessment
- quality of supporting information
- trends in this market sector
- capacity and capability to implement.
- working in partnership with others
- any opportunity costs or potential downsides.
What is required: More than one approach, including the consequences of doing nothing; analysis against the board’s pre-stated criteria; associated financial and risk analysis; how success will be measured; and impact on the organisation.
Make the decision
Despite getting all the above correct, boards may still make poor decisions. The role of the chair is vital. Gaining full consensus is not always necessary. Before a major decision-making moment, considerable preparation will make sure everyone has the information they need. If the decision is in a specialist area, someone other than the chair may be best to lead the discussion, with the chair coming in towards the end to bring the threads together. This is, of course, where diversity of thought is required. Every director who wishes to contribute should have the chance to do so with no one person dominating the conversation.
The debate should be tough on the ideas but not on the people presenting them. Side tracks, anecdotes, reiteration, hobby horse behaviour and verbal meandering should be minimised.
The decision—if not by consensus—is by vote and checked to ensure that it:
- is legal
- is consistent with board policy and strategic direction
- is ethical
- has been examined for potential risk; and
- is consistent with directors’ fiduciary duties and duty of care.
For a significant decision, the board minute should record the decision, how it was reached (e.g., by vote or by consensus), and a brief summary of the key issues and points of view leading to the final decision.
The chair should then check with the chief executive that the board’s direction to management on this matter is clear and the team has all the guidance they need to proceed.
It is not mandatory to decide on the day. In fact, pauses in the process can lead to better decisions. If the board feels uncertainty or see gaps in the information, it is perfectly acceptable to delay, seek clarification and further reflect.
Alfred P Sloan, long time President and chair of General Motors offered this useful thought just when his colleagues thought it was time to decide: [8]
Gentlemen, I take it we are all in complete agreement on the decision here. Then I propose we postpone further discussion of this matter until our next meeting, to give ourselves time to develop disagreement and perhaps gain understanding of what the decision is all about.
Decision Evaluation
It is useful to reflect on the decision process at the end of the meeting, possibly with a simple check list:
- Did we receive all the information we needed/requested?
- Was it well presented and organised in a way that helped the process?
- Did everyone who wanted to, join the discussion?
- Have we missed anything?
- Are we clear around the success measures?
Ultimately, whatever is decided upon should have a positive impact on desired outcomes. How that contribution is to be assessed should be clear in the proposal itself and revisited on an agreed basis. If projections and the real world prove to be at variance, then reflection and learning follows: What happened? What did we miss? Was something flawed in our thinking? Even if things go far better than projected it is worth trying to understand what factors contributed to the great result.
Decision Papers
Papers should reflect the points listed above—particularly the outcome being advanced and how success is measured—together with the analysis suggested.
There is a good discussion on decision papers here and a guide to board papers in general here.
NOTES
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This article is adapted from material written for SportNZ. It is reproduced with their kind permission.
References
- McKinsey Quarterly. The case for behavioural strategy. March 2020
- Estall, R. Purdy, G. Deciding. A guide to better decisions making. Sufficient Certainty Pty Ltd. 2020
- A grouping of agenda items that do not need discussion. Often approved as one item.
- McKinsey & Company. (2010). Making great decisions.
- Martin, R. (2015). The Strategic Leader's Road Map. Harvard Business Review, 93(6)
- Kahneman, D., & Lovallo, D. (1993). Timid choices and bold forecasts: A cognitive perspective on risk taking. Management Science, 39(1
- Kahneman, D., & Klein, G. (2009). Conditions for intuitive expertise: A failure to disagree. American Psychologist, 64(6)
- Cited in Drucker, P. F. (1954). The practice of management. Harper & Row.
