Shyamal Majumdar: Bringing quality to decisions

THE HUMAN FACTOR

When a leading American company went bust in 2001, the first to get the marching orders were the CEO and the finance director.

The sack orders were predictable "" almost a routine development "" as latest data show that the rate of CEO dismissals in the US has increased by 170 per cent from 1995 to 2003.

But what attracted attention was the response of one of the board members of the company. Asked to explain the charges of financial improprieties, the director said he did not know that the company was taking such risky decisions.

This I-did-not-know approach of company board members is something that worries leading consultants like Carl Spetzler, chairman of Strategic Decisions Group (SDG), a leading consulting firm in the US.

Spetzler, whose California-based company has made a major foray into India, says most board members do not hold themselves responsible for the strategic decisions of a corporation.

Rather they believe that the CEO has this responsibility and that, ultimately, the board's choice is to select the right CEO. Boards have sometimes been held accountable for these decisions post facto, but only in egregious cases.

This position, however, is seriously flawed. Since the board selects the CEO, it usually supports him till it is too late. Further, most boards have good visibility only into current or lagging indicators of business performance.

Boards are also usually well "managed" by the CEO. If all this sounds too familiar in the case of Indian companies too, read on.

Spetzler, who along with his two senior colleagues at SDG presented a path-breaking paper on "bringing quality to board decisions" at a Harvard Business School Publishing Conference, says the days of mercurial CEOs are over and the solution lies in a collaborative engagement of boards in a few truly strategic decisions rather than the approval role in which most boards now operate.

In the "approver" role, the board is presented with a recommendation, and the only alternatives are to accept or reject it. In such a situation, while the management sees the situation as win or lose, the board's ability to contribute to the real decision is limited.

An "independent" director, for instance, is normally provided a briefing book shortly before a board meeting. He has a couple of hours, or at most a couple of days, to decide on an issue for which he is dependent on information provided by the management.

The result: the board either accepts the recommendation after a meaningless discussion (commonly practised in Indian companies) or rejects them summarily. Both the options obviously have serious limitations.

So what is the way out? Listen to Spetzler. He recommends a BDQ (board decision quality) model "" a collaborative approach with the following elements.

The board and the CEO agree on the strategic agenda for the coming year: The management communicates its sense of the most pressing issues to be addressed over the year.

The key to developing this agenda is that managements and the board raise the questions, while the management is not yet expected to have the answers.

Spetzler, however, says the culture in many boardrooms makes this difficult, since "strong leadership" is expected to have all the answers.

The CEO and the board clearly and jointly designate BDQ items: The board reviews the strategic agenda and identifies which issues need to be addressed as "decision quality" items.

"One of the great inhibitors of effective board decision-making is the lack of clear differentiation in the agenda," says Spetzler in his paper.

For BDQ items, the board engages in a structured dialogue with management about the decision: The dialogue can take place in a week (in the case of urgent transaction) or months (in the case of a significant change in strategy or large capital commitments.

By agreeing on the frame and the alternatives first, the board is able to develop and compare the alternatives.

While BDQ seems like a simple and straightforward solution to the problem of informed decision-making, it is not an easy adjustment for most boards and CEOs because it is a big cultural change.

For a CEO to come and say that he does not know what he should do and he wants the board's help goes against the conventional wisdom that a CEO must be a strong and decisive leader.

Besides, a collaborative decision-making process is perceived to be too slow in a fast changing business environment where speed is the key.

Spetzler recognises these problems, but says companies have no way out but to drop the old mindset that controlling leadership is strong leadership.

In any case, most boards already approach the selection of a CEO with something like a BDQ process. They make sure they have alternatives, and carefully compare their choices.

"What we are asking for is an extension of this process in other spheres of decision-making," he says. Some food for thought for Indian companies.