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January 20th, 2017

Decision rights: Who has the authority?

Our previous blog post discussed the pros and cons that are associated with distributed leadership. One of the facets of distributed leadership promotes, initiative and leadership responsibilities at all levels of a firm. In order to do this, everyone from front-line workers to upper management must have a clear understanding of what decisions they do, and do not have authority over.

This post delves more deeply into understanding why this concept of so called “decision rights” is important, and examines the methods and practices behind successfully establishing, and implementing the authority behind a person’s decision rights.

 

Job titles and the ladder of corporate hierarchy have been traditionally linked with decision rights, with the assumption being that the higher the pay grade, the more empowered a person is to make decisions. However, even if your organization does not subscribe to the idea of distributed leadership, there are still going to be instances in which your employees will need to make decisions. Therefore, they need to have a clear understanding of which decisions and actions to take the lead on themselves, and which to bring to the attention of their superiors.

 

Decision rights is a difficult practice to get right. Michael C. Jensen and William H. Meckling (1992) state, “allocating decision rights in ways that maximize organizational performance is an extraordinarily difficult and controversial management task.” Often leaders either do not want to relinquish decision-making power because they see it as theirs. Or, it is their own cognitive bias that distorts their judgments and knowledge as being superior to others. However, it is important to overcome these barriers, because the benefits of doing so have been linked to profound improvements in employee satisfaction, the everyday operations of the business, and the bottom line.

One of the most important benefits of decision rights is encountered in its absence and a decision is moved away from the frontlines of an organization, resulting in the unnecessary time that is added to how long it takes to execute the answer. Because of this, in order to be effective and efficient in executing business strategies, accomplishing goals, and mitigating risks, decision authority needs to be put in the hands of the person who possesses the most relevant information.

When this is not implemented correctly, and upper-management or executive level leaders are involved in decisions that are not aligned with their knowledge base, a huge amount of wasted time, money and resources are incurred. Not every problem or judgment is appropriate to bring to the attention of the CEO. A report by Deloitte (2011) states that “Decision rights are closely related to governance… [but] go beyond the standard approach to governance, cataloguing critical decisions that must be made, identifying who is closest to the relevant information that will help them make these decisions, and documenting who will ultimately be accountable for the decisions that are made.”

Another benefit to distributed leadership is that an employee’s satisfaction increases when they have higher levels of purpose through understanding what is expected of them, these expectations can then be worked towards and delivered on a regular basis.

 

Creating a framework for decision rights allocation

 

Decision rights are important in companies of all sizes, but even more so as the size and complexity of an organization increases. Peter Jacobs (2005) argues that “how effective an organization is at making high-quality decisions consistent with its mission and objectives… is a prime determinant of its ability to compete in the marketplace.” Finding the right balance between standardization and agility is critical.

Decision making authority is a constantly changing aspect of a firm. Below are examples of when a company should examine and potentially change their framework and policies.

 

Triggers signalling the need for change

 

In almost any enterprise, in order to achieve effective and fast execution, collaboration and collective decision-making is essential. Having decision rights that are clearly defined will help drive an organization’s efficiency, accountability, and empower employees at all levels of the firm to make the best decisions possible when necessary. When executed correctly, there seems to be no end to the benefits of properly allocated decision rights. A company’s human capital is arguably one of its most valuable assets, and utilizing this competitive advantage to its fullest extent helps enable companies to thrive in the marketplace.

 

 

 

 

 

Sources used for this post:

 

Athey, S., & Roberts, J. (2001). Organizational design: Decision rights and incentive contracts. The American Economic Review91(2), 200-205.

Deloitte, (2011). It's Your Decision. Deloitte.

Jacobs, P. (2005). Decision Rights: Who Gives the Green Light? [online] HBS Working Knowledge. Available at: http://hbswk.hbs.edu/item/decision-rights-who-gives-

the-green-light [Accessed 7 Apr. 2016].

Jensen, M. C., & Meckling, W. H. (1992). Specific and general knowledge and organizational structure