How good leaders make hard decisions

"Executives who make decisions on the information available to them are the best leaders."
Zeger Degraeve, Dean of Melbourne Business School and the Faculty of Business at the University of Melbourne

I tell this story to my MBA students and executive clients to illustrate the point that results are not always the end game. In the art of decision-making, a successful leader is one who can justify the decision or objective, quantifiable grounds at the time the decision is made, not at the point where results are yielded. In a culture where success is too often equated to outcomes, this can be a hard lesson. Let me explain.

On a daily basis, leaders are asked to make decisions ranging from relatively simple ones to major strategic choices having the potential to affect the future of the organisation. The success of those decisions is often judged in the future, through measures such as revenue, share prices, profit and market share.

However, these measures are very often irrelevant. Because they occur in the future over which the decision maker has very little control, they have little bearing on the quality of the decision made at an earlier point in time.

For example, if an unexpected financial crisis or catastrophic weather event have had major impacts on an organisation's profitability, can you actually say a decision made at an earlier point in time could have taken into account these factors?

FOUR KEY POINTS

My research over the past two decades has clearly shown executives who make decisions on the information available to them are the best leaders. That information consists of four key ingredients:

• The experience and informed intuition of the decision-maker
• Giving rise to consideration of the alternatives (ie. what they can feasibly do)
• Consideration of the consequences of each decision (ie. what they have to watch out for)
• Objective criteria (ie. what they are trying to achieve).
  
  

Intuition in this case it not a nebulous concept – it is grounded in the experience of the decision maker based on past history.

However, this process is only part of the story. A successful leader is someone who is then able to communicate the process to his team and take on board their feedback, thereby making use of their experience and intuition.

This allows the decision to be discussed, challenged and refined. It ensures a thorough analysis of all the facts and appropriate consideration of the risks. In addition to better decisions grounded in relevant information, it also ensures support from the rest of the organisation so everyone is committed to the decision and its implementation.

At this point in my class, many of the executives will ask, “how can you separate the results from the decision? After all, that's how we are judged."

The answer to this is simple: if you base the success of the decision solely on the results, you stand to do much damage to the culture of the organisation

A decision made properly and with due process can through bad luck or other external factors lead to adverse results. If the organisation penalises the decision maker it effectively is sending out the message that it doesn't value courageous decisions or innovation or appropriate risk taking.

It stifles entrepreneurship and, in the long run, the organisation loses its best talent and will become obsolete.

TWO PATHS TO BETTER RESULTS

Of course, results are not irrelevant. An organisation that has consistently made good decisions can still go out of business. However, organisations can do two things to achieve, on average, better results.

First, they can implement good process and ensure managers at all levels of the organisation can learn to become better business executives. They can learn the process of decision making, learn how to be better at execution and build their business via the knowledge, experience and informed intuition that is inherent in decision-making and execution.

This can be gained from targeted education and training programs such as an MBA. Out of this, managers will find that they are becoming better, more thoughtful business leaders — more aware and better informed about what they are doing.

Second, there is risk inherent in any single business project, division, product, market, service and delivery channel. Diversification is a way of managing this risk. By having multiple products, markets, services and delivery channels, an organisation diversifies its risk.

Some projects and businesses will be successful; others might be less successful; still others might fail. That is why the CEO is held responsible for the overall results of the enterprise and is judged by the average of all (both good and bad) results inside the corporation.

However, going down the organisational hierarchical chain, those managing the divisions, departments, teams and projects become less and less diversified.

It is a bad CEO who enforces the requirement for everyone in the company to deliver good results all the time. This is unreasonable and ineffective.

Down the organisational hierarchy, many managers are in charge of single products, single markets, a single delivery channel or a single service. As a consequence, they are exposed to the inherent risk associated with these single business projects.

Many CEOs have not understood this very well. It is a bad CEO who does not shield his or her managers from the risk inherent in their less-diversified projects and who do not recognise quality of process as being more important than the occasional bad result.

Professor Zeger Degraeve is Dean of Melbourne Business School and the Faculty of Business at the University of Melbourne.