Module 6 Discussion - Essay PDF

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Should decision management and decision control be separated? As part of your discussion, provide a real-world example (or provide a fictitious example) of a firm where the control (correctly) resides with the same individual as well as an example of a firm where the control is (correctly) separated. Decision management encompasses the initiation and implementation of decisions (Brickley, Smith, & Zimmerman, 2016, p. 332), by utilizing a method or collection of methods for developing and simplifying actions. The objective of decision management is to strengthen the decision-making process by using all existing information to improve the accuracy, continuity, and resilience of decisions and to make good choices considering potential risks and time constraints (Rouse, 2012). Decision making uses resources such as business rules, business intelligence, continuous improvement (kaizen), artificial intelligence and predictive analysis. If decision-makers are not owners, splitting decision management and decision control power reduces conflicts of interest. It is not wise to give an employee both decision management and decision control, especially for the same decision; it may be to the detriment of the company and beneficial to the employee. “Suppose a firm links the CEO’s bonus to earnings and the CEO plans to retire in two years. The CEO might reduce the firm’s research and development budget to boost earnings this year and next. Five years down the road, earnings will suffer from no new products coming on stream (Brickley et al., 2016, p. 5). The CEO had both decision management and decision control. Rather than lookout for what was in the best interest of the company, the CEO thought about himself. At the highest level, this indicates that an individual with a senior decision management authority (CEO) should also not be allowed to exercise the highest-level decision control authority. When the CEO presides over the board of directors, it compromises board independence since there is no longer a distinction between “decision management and decision control" (Fama and Jensen 1983, p. 314).

Provide a real-world example (or provide a fictitious example) of a firm where the control (correctly) resides with the same individual. In April 2012, the Wall Street Journal launched a series of articles on the London Whale, whose massive trading losses severely damaged JPM's public image for risk management. The London Whale was the name given to a JPM trader who had assumed a rather significant, risky role in collateralized debt securities with total decision control. As losses from his role began to appear, JPM's Dimon described them as a "Tempest in the Teapot "— words that he would instantly regret. On May 10, JPM confirmed a loss of about $2 billion owing to Whale trading (this loss later increased to more than $4 billion). A fundamental principle in allocating decision rights is to separate decision management from decision control unless the decision-maker also owns the firm (Brickley et al., 2016, p. 399). Dimon realized that the losses and harm to JPM's credibility were immense. JPM unveiled a combination of actions aimed at further delineating decision management and decision control for their trading activities. JPM awarded higher authority to managers in charge of risk, legal and compliance, which signified that business leaders can no longer veto them. Reputational concerns act as a powerful force to motivate contract compliance (Brickley et al., 2016, p. 348). Firms that differentiate decision management from decision control will be able to minimize the ability of lower levels of management to undertake discretionary policies that are contrary to the interests of shareholders. In the Honda Motor Company, initially, decision-making was very centralized. Mr. Honda made absolutely all product and design decisions, while his partner, Takeo Fujisawa, made financial and marketing decisions. Jensen (1998) suggests that owners who understand their structural needs will lessen the cost of decisionmaking that impacts their market. Also, a decentralized decision with greater control of the decision by the owner would give more validity to the decision itself.

After Honda retired in 1973, his successors embraced a more democratic decision-making method. Significant decision-making authority was distributed between approximately 30 senior executives. Research and development engineers had unilateral control over the design of new vehicles. An empowered employee might have explicit rights to initiate and implement decisions (Brickley et al., 2016, p. 398). Under the Honda System, the business grew and flourished. By the late 1980s, Honda's momentum had stopped, and earnings had decreased. Honda lost market share in the Japanese car market, dropping from third to fourth behind Mitsubishi, Nissan, and Toyota (Brickley et al., 2016, p. 332). Elements of Honda's dilemma was that it failed to react to changing taste on the Japanese auto market. “however, there is still an important role for managers to ratify and monitor decisions” (Brickley et al., 2016, p. 398). Most Japanese buyers wanted to buy sporty cars with distinctive styling, but Honda focused on making four-door family sedans. Unfortunately, the guys in R&D became complacent and lost the passion they initially brought to the job. “When you are at the top of your game and have beaten the competition, you have a right to believe you can remain ahead. However, the complacency comes in when you assume that the game itself will not change and that new competitors will not come after you. Arrogance is very much part of the problem; it is what creates complacency” (Gupta, 2015). R&D at Honda should have concentrated on being more innovative and continuously thinking about what they should do differently or better over the next three to five years, also thinking about what their customers would want to drive, but also thinking about how a newcomer could enter and completely disrupt their game. Their emphasis should have been on enhancing current business as part of the company's usual strategic planning process, and they should have worked out how Honda could become a disruptor. Finally, rather than spend all their time in meetings, senior management should not have

allowed R&D to have total decision management and decision control, they should have been more involved and should have had a tremendous amount of decision control to make sure R&D was being as innovative as its competitors.

References Brickley, J., Smith, C., & Zimmerman, J. (2016). Managerial economics and organizational architecture. (6th ed.). McGraw-Hill, New York. Evans, Jo; Weir, Charlie. (1995) Decision processes, monitoring, incentives, and large firm performance in the UK, Management Decision; Vol. 33, Iss. 6, p. 32, London DOI:10.1108/00251749510087632 Fosberg, Richard H. (1999) Leadership structure and CEO compensation, American Business Review; Vol. 17, Iss. 1, p. 50-56, West Haven Gupta, Anil, K. (2015) When complacency and arrogance rule, retrieved February 7, 2020, from https://cims.ncsu.edu/when-complacency-and-arrogancerule/ Jensen M., Meckling W. (1976) Theory of the firm: Managerial behavior, agency costs and ownership structure, Journal of Financial Economics, vol. 3, iss. 4, pp. 305-360 Rouse, Margaret (2012) Decision management, retrieved from https://whatis.techtarget.com/definition/decisionmanagement...