Brief Description of the Behavioral Mechanics of the ad hoc Decision Audit

 

The ad hoc Decision Audit™ engagement is an intervention strategy that audits the informational, analytical and judgmental components of the complex decision making tasks that accrue to directors and officers as they go about attempting to discharge their fiduciary responsibilities to the corporation.

 

The behavioral mechanics of the Decision Audit™ engagement are partitioned into three distinct stages: 1) Diagnostic, 2) Compliance Elicitation, and 3) Documentation and Attestation.

All three stages of the service are analytically driven by the Decision Audit™ Technology –  a decision science-based intellectual technology which serves as a value creation architecture for directing the evaluation of various informational, analytical and judgmental elements of the deliberative exercises which accrue to decision makers throughout the “concept to completion” span of corporate activities leading to the board’s ultimate adoption of a considered plan of action.

 

Stated a different way, when management proposes a Plan of Action (e.g., an acquisition, a product divestiture, a securities offering or a new CEO compensation plan) – to be approved by the Board – the Board’s task is to evaluate the quality of that plan and to press management to make it better or, alternatively, to consider a different course of action. All of the corporate activities that led to the creation of that plan become appropriate fodder for analysis and review. Guided by the Decision Audit Technology, the Decision Auditors help the board by evaluating the informational, the analytic and judgemental components of management’s Plan of Action.

The ad hoc Decision Audit may be best understood by comparing it with the well-known devil’s advocacy exercise. Each of us at some time or another has helped a friend or colleague troubleshoot an idea or plan by playing Devil’s Advocate with that person. By adopting the perspective that every imaginable feature of an idea or plan is objectionable for some reason or another – we facilitate our colleague’s re-thinking and usually improving the quality of his plan. Likewise, the ad hoc Decision Audit is a formal Devil’s Advocacy exercise “on steroids” – because the familiar troubleshooting protocol is conferred on a decision science platform – specifically the twin disciplines of behavioral decision theory (the descriptive component) and decision analysis (the normative component). This means that the level of analysis is much deeper and more thorough than with an informal devil’s advocacy exercise.

There is a further distinction with the ad hoc Decision Audit that is prompted by the nature of the relationship between the directors and management of the corporation. The decision auditors do not play Devil’s Advocate with the directors – rather, the Decision Auditors animate and support the directors as they engage management with devil’s advocacy-driven challenges of the Contemplated Plan of Action. The entire purpose of the Decision Audit is to cause the directors to hold management accountable to the highest standards of decision making in reviewing and revising the Contemplated Plan of Action. The Compliance Elicitation Stage is about creating the conditions necessary and sufficient for the board to elicit compliance from the management team.

“Yes” – substantive challenges to the scope and detail of Management’s Game Plan does introduce an adversarial flavor to the board meeting. Adversarial gambits, however, are not intrinsically hostile. Board meeting ambience should be adversarial - in a collegial way – rather than too cozy or too submissive to management’s agenda and episodic bravado. Animated, studied challenges to management’s thinking and preferred course of action … represent the essence of how a serious board must discharge its fiduciary duties. The ad hoc Decision Audit facilitates the directors’ ability to mount and sustain those substantive challenges. The result of this refereed decision environment – instantiated by the action of the ad hoc Decision Audit – is an elevation of the decision making practices of these fiduciaries.  In fact, the compliance standard engineered into the protocols of the ad hoc Decision Audit is at the optimizing level.   This means that the board will have driven an optimizing decision making process and that, as a consequence, any decision-product that issues from that optimizing process will be a refereed, no-regret decision – i.e., an optimizing decision.

The Decision Audit™ Engagement is uniquely distinguished from other governance advisory services.  Importantly, the engagement is an ad hoc rather than a post hoc exercise, conducted during the deliberative process before irreversible decisions have been rendered and human and capital assets have been irrevocably committed.  Consequently, the Decision Audit™ engagement is not simply a review and confirmation of what has transpired “behind closed doors.”  It is dynamic and pro-active, serving as a powerful internal control function.

By deployment of decision science-based review and accountability mechanisms behaviorally engineered into the audit, the Decision Audit Engagement Team can authoritatively issue an opinion letter (attest statement) which certifies to the various stakeholders of the client organization that the directors and officers have executed the decision making chores of corporate leadership in compliance with the highest standards of complex decision making promulgated by the body of work that constitutes contemporary decision science.  This caps the Documentation and Attestation Stage of the ad hoc Decision Audit.

Expeditious Delivery.  Since corporate decision makers must constantly address momentary windows of economic opportunity, every agenda of deliberative inquiry and methodical dissent must be clearly compatible with the prevailing Zeitgeist of swift, authoritative action.  Consequently, the Decision Audit™ engagement was designed for expeditious delivery.  The Williams Act of 1968 was invoked as a benchmark of response timeliness, permitting two calendar weeks for a board to respond to a hostile takeover offer.  Accordingly, the engagement can be initiated and completed within ten working days when rapid turnaround time is desirable.

Client Confidentiality.  A further distinguishing feature of the Decision Audit™ engagement is the comprehensive and redundant nature of the security protocols adopted to prevent inadvertent disclosure of proprietary client data.  By incorporating procedures used by the Department of Defense in conjunction with those recommended by the National Computer Security Center and Federal Information Processing Standards, the client is afforded the same levels of confidentiality practiced by the United States Department of Defense and its agencies.

Surveying this innovation from 35,000 feet – what comes into focus is a remediation methodology for boardroom decision making that elicits a threshold of fiduciary decision making performance that is difficult for aggrieved stakeholders, including dissident shareholders or politically motivated regulators, to challenge. This means that – aside from the occasional manifestation of Murphy’s Law - the directors, officers and other corporate fiduciaries participating in the decision making process will never lose a fiduciary lawsuit brought against them for alleged violation of their fiduciary duty of care or their duty of good faith. Importantly, because the refereed decision environment is instantiated, monitored and groomed in real time by independent, third party decision making experts – the recording and attestation of the board’s performance becomes a formidable protection for the participating directors.

 

It’s like examining a residential property after the hurricane has hit – and then underwriting … with complete knowledge of the extent of the damage. (Remember – with fiduciary performance – the liability is about proximal damage, viz., the decision making process and terminal decision-product – not about the distal damage, e.g., the financial loss or erosion in share-price or compromise of competitive advantage.) By using a “heads-up” approach that indemnifies only pre-sanitized, no-risk events – the Decision Audit provider distinguishes itself from legacy D & O underwriting as a new genre of risk management protection for directors, officers and other implicated corporate fiduciaries.

 

The Achilles Heel of traditional D & O liability insurance has been the “catch-all” characteristic of the traditional D & O policy, viz., the unconscionably dangerous condition that any action or event that occurs - which appears to be the fault of the directors and officers (the fiduciaries) - gets marked as a violation of either the fiduciary duty of care or the duty of loyalty.   In a claims-made policy with the “catch-all” characteristic – loss-ratios are virtually uncontrollable – regardless of the experience of the underwriter.

 

The product performance indemnification available to CLIENTs contingent upon their compliance with the FIG ad hoc Decision AuditTM eliminates all of those troublesome liability elements that adhere to D & O liability insurance products.

 

Our early successes in defending client-boards targeted by care regime litigation persuaded us that we would be on solid ground in guaranteeing the quality of our boardroom work. Similar to a product warranty - a product performance indemnification is provided - contingent upon the target decision making process having been properly “scrubbed and sanitized” by the evaluative and remediative metrics of the ad hoc Decision AuditTM. This indemnification feature provides attorneys’ costs and any court-adjudicated settlement amount up to the limit of a client’s D & O liability deductible or $25 million - whichever is greater.

 

Inclusion of the product performance indemnification for fulfills two purposes. First, if a consumer’s Maytag washer breaks down or blows up and damages the family laundry room – there will be an expectation that the damages should be covered by the Maytag Product Warranty. We understand that people are more likely to buy a product or service they don’t fully understand … if there is some kind of warranty or performance guarantee provided.

 

The second reason for offering the indemnification may be more important, however. One of the common occurrences in the management consulting business is the client that pays a six or seven figure consulting fee for an outside firm to study a problem and develop a solution. At the completion of the engagement – the client decides not to apply the recommended solution. This choice, of course, may be a well-reasoned judgment by the client.

 

The issues are different when the task is constructing an optimizing decision making process – in service of proper discharge of the board’s fiduciary duties. The board is constrained to “do it right” – to make the best possible decision for the corporation. To do any less is, by definition, to risk compromising its fiduciary responsibility. But how can a service provider, in this case – Fiduciary Guaranty Corporation of America – the ad hoc Decision Audit provider – “require” the client to comply with the Decision Audit protocols? The Decision Audit provider has no way to impose a “requirement” that the client must comply with the protocols of the refereed decision environment.  The provider can, however, provide a positive incentive for client compliance. In this case, when the client earns an unqualified opinion on the attest statement following the completion of the engagement – that unqualified opinion triggers the issue of the product performance indemnification.  The very positive aspect of having legal costs and millions of dollars in court-adjudicated damages paid for by the Decision Audit provider becomes a dominant stimulus control factor in the boardroom.