Boardroom Basics: Defining the Decision
- May 26, 2016
In the fourth post of our Boardroom Basics blog series, we will discuss the need for corporate directors to adopt a formalized strategy for decision making. Directors may assume that their diverse set of skills, collective wisdom, past accomplishments (individually and as a group), and competitive nature qualify them to rely on intuition. Unfortunately, decisions made without proper consideration or on the fly can lead to potentially negative consequences. By implementing a decision-making structure, directors can ensure that their decisions are thoughtful and thorough.
The National Association of Corporate Directors proposes that directors should employ a two-part approach to decision making: defining the decision and executing that decision. In this post we will focus on defining the decision, which the NACD believes is most important.
The first question a board should ask when initiating the decision-making process is “what is the problem that this decision will solve?” When possible, board members should ponder this question individually before board meetings, and should be prepared to discuss when the board next convenes. Directors should also consider whether doing nothing is an option, as it may be that the problem is beyond the scope of the board’s authority, or is being handled by another actor (i.e., management).
Board members should then begin to analyze the problem at hand. They should start by understanding what assumptions may be contributing to the issue, and if those assumptions are accurate. One way directors can gauge those assumptions (and associated facts) is by assigning a probability to them, which allows board members to objectively view all of the inputs needed.
Next, board members should examine the importance of the decision they are making. This will help determine the amount of time and resources required to make a decision, and whether or not that decision needs to be made at all. Board members should then move consider the following:
- What are the best and worst case scenarios resulting from their decision?
- What are the consequences for the company and associated stakeholders if everything goes exactly right?
- Conversely, what are the consequences if things go terribly wrong?
This analysis will outline the various implications of their decision.
Finally, directors should consider the timing of the decision. As most items under board consideration are structured and recurring, it is relatively simple to assign a date and time to finalize decisions. However, if a crisis should arrive, directors will not have much lead time (if any) to make key decisions; so, they should be prepared to complete the analysis portion of their decision-making structure in an abbreviated period of time.
After completing the above mentioned steps, directors should feel confident in the definition of the problem they are facing. They will then be prepared to shift into the second part of the decision making process – execution.