How Well-Run Boards Make Decisions

All about the Article• The structural changes which are happening in the governing

body of the small as well as large corporations.

• The regulations and rules which are incorporated in the corporate governance and the directors have to comply with them.

• Importance of delegation of authority and bifurcation of decision making process.

• Followed by the three cases and Conclusion at the end.

Drawing the Right Decision-Making LinesAnnual Calendars- Now days, the organizations have started making schedules for the major topics the Board must consider.Committee Charters- Development of charters in order to define the decision for which the board committees are responsible.Decision Protocols- There are different protocols of taking decisions which varies from company to company. These basically identifies the criteria to determine the decisions which are to be taken by the directors and which are to be shifted to the Middle level of management.

• Description of the decisions which are to be submit for board considerations at the time of contingencies like-

o Regulatory issueso Competitor moveso Technical glitches

This part highly also varies from company to company.

Creating Corporate Governance

Companies work according to these guidelines that what are the decisions which are coming under the span of directors and how those decisions should be made.

• Mary Cantrell, CEO of Universal Investments faced problem regarding investing in diamond mining companies.

• She asked board of directors to give recommendations.

• John Shore, Universal’s diamond fund manager itself was worried about the astonishing growth.

• After several months of study and intense discussion with the directors, the board decided to continue investing in diamond, but to expand to other precious stones, metals or even coal.

• The board took different decision with what was produced in-front of them. They also took customers in consideration.

Digging for Diamonds at Universal Investments

• Decisions entailing even relatively modest resources should be taken to the board if they are of strategic significance, because they touch on the firm’s core values

• Even when directors have the opportunity and resources to carefully vet the underlying issues, the board can bring invaluable insight and analysis to bear that is not otherwise available, resulting in a better company decision than management would have made on its own.

Key Principles Learnt

• Boeing was designing a new aircraft.

• Thousands of decisions to be taken ranging from big ones to small ones, financial to strategic

• Together, they could mean the difference between the airplane’s success and failure

• Reaching the final design could cost billions of dollars.

• In order to ensure board scrutiny, management broke the overall design decision into smaller pieces and had the board weigh in at three critical go or no-go points in the development of the plane.

Designing Boeing’s 787 Aircraft

• Key points to decide upon-i. This task required that the board accurately appraise the future of

airline travel.ii. Airbus A380 was on the premise that a superjumbo, with 555 seats in a

three-class configuration (and 853 if all in coach), would be more appealing than ordinary jetliners to the carriers in crowded hub-and-spoke airports.

iii. Boeing was banking on a different view of the future. The company believed that the traditional hub-and-spoke system was breaking down, as passengers increasingly demanded direct service between two points.

iv. The 787 promised just that: Long-haul, point-to-point service for 20% less cost because of its new weight-saving technologies and its more modest capacity of 200 to 300 seats.

• Points raised by the Boardi. Was the hub-and-spoke scheme really destined to disappear? ii. Was the point-to-point scenario economically feasible for airlines?

1. To review and approve a multibillion-dollar budget and a timeline for the aircraft’s development

• Key points to decide upon-i. To authorize such sales calls, the board had to be confident that Boeing

could manufacture the 787 with the promised performance at the promised price by the promised date.

ii. The new airliner was to be built with a higher percentage of lightweight, high-strength composite materials that would allow for lower costs and increased creature comforts, like higher humidity (the composite would not corrode with greater moisture).

iii. But the board was not entirely certain that the company could successfully mould the composites into the larger and more complex sections envisioned for the 787.

• Points raised by the BoardDirectors required executives to present compelling evidence that the 787 could indeed be built with composites and priced competitively against what Airbus was expected to offer.

2. Whether the time was right to allow sales managers to discuss the aircraft’s specifications with the airlines.

• Key points to decide upon-i. It require Boeing to commit additional billions of dollars to the

project.ii. To be convinced that customers would in fact like what they

saw.iii. Then the sales team would be unleashed to secure the written

orders upon which the big bet rested; once signed, those orders called for stiff penalties, if Boeing failed to deliver as promised.

• Points raised by the BoardThe directors pressed management for a detailed production plan and proof that anticipated engine suppliers General Electric and Rolls-Royce could create the required thrust at an acceptable price.

3. To give the final go-ahead for production of the aircraft

• The directors insisted on monitoring both manufacturing progress and order flow.

• Engineers coded their key production stages red, yellow, or green, and directors pressed them to explain why anything other than green remained.

Steps taken after launch

• Management should divide large strategic decisions into smaller pieces that the board can address sequentially, so the board can give each piece detailed attention before approaching the next milestone.

• Directors must remain vigilant after making their decisions, following up with management to ensure that they are effectively implemented and that the many secondary decisions stemming from the primary decisions are dealt with as well.

Key Principles learnt

• In June 2002, Edward D. Breen replaced Dennis Kozlowski, after he was imprisoned for fraud and sales tax evasion.

• Kozlowski acquired around 900 companies. He was focused on acquiring rather than consolidating.

• Breen wanted to disinvest from weak assets and John A. Krol, the new lead director agree to the point.

• Around 130 units were recognized as weak assets by Martina Hund-Mejean, Tyco’s new treasurer.

• The board of directors asked for financial and strategic pros & cons of disposing of each unit.

Shedding Assets at Tyco International

• The list shrinked down to 48 units & shedding process was then started.

• Martina kept the directors informed about the divestment with it’s pros and cons.

• Now the board members also agreed to the team.

• Directors played a strategic role, reviewing each of the proposal instead of just rubber stamping.

Shedding Assets at Tyco International

• Ongoing/Current information should be shared with the board of directors.

• Directors should helpfully review management proposals before saying . yes or no

Key Principles learnt

• Improved decision making can be generative as well as protective.

• Good decisions about strategy and products can move a business to the next performance level.

• Directors should be casted as investor-elected monitors of management, installed to ensure that executives make good decisions or are swiftly replaced.

• A customized set of guidelines should be created that will promote effective board decision making—the essence of good governance.

Conclusion

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