52 Understanding Rational Decision Making
Much like U.S. presidents oversee the plans and performance of their top military com-manders, an organization’s board of directors oversees the plans and performance of its top
management team.^8 When top management does not meet the performance objectives set by
the board, board members may decide to replace the CEO,^9 much like Lincoln soon replaced
General McClellan.
In addition to overseeing the fi rm’s past performance, board members oversee the fi rm’s mission,competitive strategy, and operating plans.^10 But unlike Lincoln, board members can usually trigger
change in management’s strategy by simply expressing their concerns about it.^11 Related oversight
responsibilities of board members include setting strategic parameters, monitoring strategic coher-
ence, and evaluating consistency among management’s proposed strategies.^12 In addition, board
members see themselves as responsible for overseeing the risks taken on by management, including
legal, geopolitical, and reputational risks.^13
The following list of questions subsumes many of the criteria identifi ed previously and providesa starting point for predicting a principal’s decision criteria for any particular oversight decision.
The list can also serve as an outline for the documents and presentations agents produce in order to
elicit oversight decisions from principals.
- What is the organization’s or project’s past performance?
- What are the reasons for that performance?
- What are the financial objectives for the future?
- What is the competitive strategy for meeting those objectives?
- What is the action plan for implementing the strategy?
- What are the contingency plans for mitigating risks?
In addition to agents’ answers to the previous questions, principals in both for-profi t andnon-profi t organizations may also require benchmark information about the organization’s or
project’s historical performance, the average performance in the industry, alternative strate-
gies and plans, as well as competing fi rms’ and projects’ fi nancial results, strategies, and plans.^14
Research fi nds that most annual reports do a good job of describing the fi rm’s past performance,
explaining the reasons for the fi rm’s past performance, and communicating the fi rm’s objectives
and plans for the future, but they rarely benchmark the fi rm’s plans and performance against
those of the competitors.^15
Table 2.3 displays some of the think-aloud comments made by two experienced audience mem-bers (a Ph.D. in fi nance and a Ph.D. in business policy, both with high-level corporate experience)
4th.In fact, would it not be less valuable, in this, that it would break no great
line of the enemy's communications, while mine would?5th.In case of disaster, would not a safe retreat be more difficultby your plan
than by mine?Yours truly,A. LINCOLN