Category Archives: Board of Directors

Early Birds Make the Best Decisions

Board Meeting.

Image via Wikipedia

A fascinating piece by John Tierney in the NY Times explored the concept of “Decision Fatigue,” concluding that people faced with making a number of decisions do so less well as the day wears on.

In studies with Roy Baumeister, a clear correlation was shown between the quality of decisions made at a point in time and the number/difficulty of decisions subjects had been required to make beforehand.

These studies explain the anomalies in, for example, parole being granted to prisoners by a parole board – those whose applications were heard at the start of the day, or immediately following a break for nourishment, were considerably more likely to succeed that those whose applications were heard at the end of a session, or just before a break.

Car salesmen were able to increase the value of the options taken with vehicles simply by altering the order in which the options were presented: once decision fatigue started to come into play, the buyers were more inclined to simply go with the recommended/default choice, even when it was more expensive and, potentially, less suitable for their needs.

Supermarkets have long had their ‘impulse racks’ at the checkout counters, but the real reasons these work has only recently been understood – shoppers are fatigued from all the decision-making during the shopping process and so are less able to rationally decide against a tempting treat when this is put in front of them.

What transpires from the studies is that the process of decision making depletes glucose levels in the brain and that this affects the way the brain works. In essence, some areas of the brain will work better for longer: the reward centre area continues to function well, while that controlling impulses weakens. So, our buyer who has been through a number of decisions in deciding on options for the new car will look at fewer and fewer factors in coming to a decision and be more prone to impulse – for example, “those leather seats look great.”

Interestingly, it was shown that replenishment of the glucose levels quickly restored decision-making ability, so if our buyer chewed on some sweets during the process he/she might well save some money. Of course, using sweet substances for instant glucose replenishment is just a temporary solution as the glucose derived from sugar is quickly used up – that from complex carbohydrates and proteins providing a steadier supply over time – but it certainly can help in tough situations.

If you need a decision from your boss, choose your time carefully, and maybe soften him/her up with a piece of chocolate at the start of the meeting so the glucose can be absorbed before asking for a decision, unless of course the decision you want is one that does not require change to an existing situation – in which case low glucose levels will favour the status quo.

The bottom line seems to be that you should make your biggest decisions at the start of the day (assuming you have breakfast, of course!) or after a healthy meal. In board and management meetings where there are many decisions to be taken, ensure the participants are suitably nourished and their glucose levels are maintained. As the article recommended – don’t make decisions on restructuring the business at 4pm…

 

Capitalism – What the Future Holds

Wall Street

Image by Mirka23 via Flickr

The world is in a state of flux.

With the economic downturn lingering far longer than most people expected, governments are under growing pressure to kick-start economies. However, a growing number of countries with looming debt crises and a consequent unwillingness or inability of governments to spend more money hampers this.  And, as the northern hemisphere weather warms up, we can expect to see growing numbers of demonstrations by people wanting jobs or, at least, a reduction in job cuts.

All of which leads to the question – is the capitalist system doomed?

I don’t believe for a moment that this is the case – history shows that capitalism is the most effective way for countries and people to grow their wealth – but I do think we’re going to see some far-reaching changes.

Back in September 2009, I suggested in my post, “The Perils of Quarteritis” that the short-term thinking so prevalent in recent years had contributed significantly to the crash, and that businesses would move to a longer-term, more strategic model.

The March 2011 edition of Harvard Business Review has a wonderful paper, “Capitalism for the Long Term,” by Dominic Barton, Global Managing Director of McKinsey & Company where documents his findings from 18 months of research and hundreds of meetings with business and government leaders. In this paper, Barton makes 3 points to support his conclusion that capitalism must survive, but that it needs to change, too:

  1. A return to longer-term thinking by companies, investors and politicians alike – he refers to this as “The Tyranny of Short-Termism” (my version was Quarteritis).
  2. That there is no difference between serving the interests of shareholders and of stakeholders – in spite of a more recent belief that serving stakeholders made shareholders poorer, managing for long-term value growth benefits not only stakeholders and society but shareholders, too.
  3. Company executives and boards need to act more like owners, not temporary care-takers – as by doing so they will naturally look to the long-term and so benefit the company, its shareholders, its stakeholders and society as a whole.

Basically, it all comes down to taking a longer-term view of business (as well as the economy, in the case of government) and a consequent change in leadership style, too – see my post of November 2009, “Leadership for the New Business World.”

This longer-term thinking and more inclusive leadership approach will ultimately be to the benefit of all – investors, executives, employees and society as a whole.

What do you think?

Update (31Mar11): Read the Leadership Interview with James Quigley of Deloittes, just out at N2growth.com – leadership is about trust and looking to long-term sustainability.

Can Mergers & Acquisitions be More Successful?

Board meeting room

Image via Wikipedia

Why is it that although many companies, and almost all large ones, grow through mergers and acquisitions, most of these result in a decline in overall value, rather than the envisaged increase?

In the lead-up to such activity – the “engagement period” if you like – shareholders are shown clearly the benefits that the merger or acquisition will bring: lower overall costs, great (combined) market share, stronger sales teams, more experienced management in the combined entity, and so on. All of which is supposed to lead to greater overall value for the shareholders – a case of the proverbial 1+1 resulting in a good deal more than 2.

The reality is, far too often, startlingly different with 1+1 adding up to a good deal less than 2. In other words, significant shareholder value is lost in the process.

Naturally, there are many reasons for this decline in value – most commonly those resulting from a attempt to merge two very different corporate cultures and the consequent fall-out. And much of this happens in the board room.

I’ve seen many cases of incompatible cultures clashing in boardrooms, although I’m fortunate to have avoided this first-hand. Too often, the newly constituted board in an M&A situation will have directors drawn from the two companies proportionate to the value of each part in the transaction and so the acquirer will seek to dominate the acquiree, even when the reason for the acquisition (as is often the case) is that the latter has qualities the former believes is missing from its own company. The result is the departure of the very expertise being acquired and the consequent drop in overall value.

It seems to me that there is one reasonably simple way to increase the likelihood of success – and that is to increase the size of the overall board with the appointment of further Independent Non-Executive Directors (NEDs) when companies are undertaking mergers and acquisitions.

The Corporate Governance Code states “Except for smaller companies, at least half the Board, excluding the Chairman, should comprise Non-Executive Directors determined by the Board to be independent. A smaller company should have at least two independent Non-Executive Directors.”  But how many companies actually carry this through?

Should this strong recommendation not be even more strictly adhered to during the M&A process? Bringing a substantial body of independent, experienced NEDs to a board can reduce the level of infighting and help to ensure that the talent/expertise being acquired stays in the transaction.

As we see the global economy slowly recovering, we can expect to see a strong increase in M&A activity as companies seek to assure their future positions while values are still relatively low. This is the time for boards of companies – large and small alike – to become more independent.

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