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Decision rights in Financial Services
Defining the new normal
Decision rights are a component of organization design. They identify what business decisions need to be made both to drive the business and to drive alignment to strategy; who is involved in making them; and define the framework for how they will be made through operating processes and support tools.
Too smart to fail
Popular portrayals of financial services institutions leading up to the 2008 crisis emphasize behaviors of individual and corporate greed, predatory lending, vaguely defined risk appetite and minimal to non-existent monitoring of that risk tolerance threshold. In a compelling report, the Financial Crisis Inquiry Commission’s 2011 findings described the cause of the collapse as “systemic breaches in accountability at all levels.”1
When taking a closer look at the actions of executives and management within these institutions, a tangled web is revealed of unevenly distributed risk tolerance, short-term objectives trumping long-term judgment and unclear lines of responsibility for outcomes. In sum, many of the breakdowns were at their core, breakdowns in the process of organizational decision-making. In fact, the bank failures that rocked the markets in 2008 are best understood as the culmination of thousands of individual decisions made at all levels within the financial services industry. In some cases, these decisions led to the collapse of lines of business and in other cases, the wholesale failure of institutions, yielding extensive losses for clients and shareholders.
When lines of authority for decision-making are unclear, unaligned or duplicative and when the true cost of decisions are not felt by the decision-makers themselves, incremental poor choices can compound into profoundly negative outcomes. The financial crisis is a painful reminder of the compounding nature of small, individual choices that amount to much larger forces, making more effective structures for decision-making an urgent strategic imperative.
The good news is that there are a number of steps that financial institutions can take to strengthen both individual and collective decision-making and accountability internally, while responding to oversight and public opinion externally. Doing so effectively can yield immense savings – not just in terms of cost avoidance and efficiency of management processes, but in stakeholder perceptions and brand reputation as well.
Beyond the board: The C-Suite’s role in decision rights
It’s tempting to assign and transfer ultimate corporate governance authority to the board. However, it is the behaviors established in the C-suite that most readily cascade throughout the rest of the organization, allowing for the impact of bad decision-making processes to be felt as far as front line employees. At the top of the organization where the stakes are highest, decision rights are costly to ignore.
The C-Suite is responsible for establishing and executing a sound decision rights framework and for translating and cascading that framework throughout the leadership team and organization.
Every seat at the table is vested in the enterprise’s decision-making process, but where does the proverbial buck stop? Who owns each strategic-level decision? How do they gain access to the right information in a timely fashion to make those decisions? And how do they work together to improve their respective perspectives in a more informed process? Read more about Decision Rights in Financial Services.
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- Steve Hatfield, Principal, Deloitte Consulting LLP
- Hope Hughes, Director, Deloitte Consulting LLP
- Jennifer Radin, Principal, Deloitte Consulting LLP
- Robin Jones, Senior Manager, Deloitte Consulting LLP
- Tiffany McDowell, Senior Manager, Deloitte Consulting LLP