Companies of all sizes have different processes for making board decisions. Whilst the article below and downloadable template is written by our industry expert, Graeme Nahkies, it is not intended that it be used ad-nauseum for all board related decisions, but rather for those critical decisions that require much deeper thought and consideration.
Let’s get started
Let’s look at how the more structured approach to decision-making advocated by Kahneman et al might be undertaken in practice. For illustrative purposes we can look at how a decision about whether or not to close a currently unprofitable manufacturing plant might be handled.
Many, if not most decisions at the board level concern one-off decisions like this. They come to the board because the decision is more complex than a simple financial analysis might suggest. The challenge for the decision-making process in this example, therefore, is to ensure that all relevant considerations are assessed on their merits before the board draws each of these strands together, assesses the composite evidence and makes a final decision.
Step 1: Agree relevant considerations
Ideally this would be done jointly between board and management so that the board has a chance to frame the decision it is taking responsibility for. In a case like a potential plant closure, considerations might include:
· fit with company strategy and policy
· market prospects for the plant’s current products;
· medium and longer term financial projections, potential alternative uses of the plant
· capital availability (e.g. for plant upgrading, retooling for an alternative product mix, etc.)
· best alternative uses of the capital
· labour force implications, implications for other aspects of the company’s operations, and community impact considerations.
Step 2: Initial management analysis
Once relevant considerations are determined, the management team would be tasked with preparing what would be, in effect, separate reports (evidence/research-based as far as possible) on the merits of each of these considerations separately. Each of the considerations would be rated separately(and perhaps individually in the first instance) according to the strength of the evidence in arguing for or against the plant closure.
Step 3: Individual director assessments
The report to the board would be segmented by each of the considerations (Kahneman, et al. characterise these as separate ‘chapters’ to the report). This would be received by each director who in preparation for the meeting would make a personal assessment of the management analysis and proposed rating.
Step 4: Composite board assessment
The board would working progressively through each consideration starting with each director in turn confirming or proposing an alternative rating. Once these individual ratings were all tabled (ensuring every director has a voice) the board would determine a collective view before proceeding to the next consideration, and so on until all considerations have been separately assessed on their merits according to the evidence adduced.
Step 5: Decision
The board is now fully equipped look at the overall picture and reach a conclusion based on the weight of all the evidence including any new information or considerations that emerged from the board’s dialogue. The final decision is likely to be based on the board’s relative weighting of the most significant considerations.
Worked example and template
To help you understand and apply this methodology, the following worked example might be useful both as an illustration and as a template for your own structured decision-making process. By forcing analysis of each of a set of previously agreed considerations separately (both by topic and participant in the process) it ensures each is evaluated on its own inherent merits, not judged against a preferred (and unconsciously biased) outcome prematurely promoted, for example, by the loudest or most motivated voice(s) around the table. The process also ensures that there is no doubt final judgement on the decision sits with the board. The board has not been forced to rubber-stamp (or reject) a management recommendation but it has still had access to management’s best thinking.
Note that this example illustrates that the process of structured decision making does not produce a formulaic decision that simply ‘drops out’ of the analysis. The board does, however, have a far deeper understanding, and a picture that is more comprehensive and nuanced, and less biased, when it must finally decide for or against plant closure.