Forced simplifications for complex decisions: a trap?
When I started my first job, over twenty years ago, an experienced manager told me: a committee is needed in order to approve the purchase of a dozen pencils but nobody controls whether this valve is opened an thousands of tons of a valuable product are damaged. This conversation was part of the introduction I was subject to when I was appointed as a “technologist” in an oil refinery of a multinational company. Back then, I could not quite contextualize the comment, but it certainly affected me in the way my mentor expected: from that moment on, I always was very careful about opening and closing valves.
The anecdote is a clear illustration of how some risks lie in the technical and operational core of a business, whose existence and nature cannot be understood by the legal or financial experts. It requires those who exercise comptroller activities to receive the pertinent expertise and have the willingness to penetrate the surface of corporate records.
I wonder how different should the process of the government be regarding the loyalty of the executives in relation to its shareholders, whether it is a privately owned company publicly listed or a state-owned company
I was fortunate to face very varied challenges in the twenty years that followed and I left the field to settle in boardrooms and carry out complex transactions. The most fascinating transition is the one I am currently facing, leaving my career in the aforementioned multinational business to become part of a state-sponsored project. I note that the same confidence and uncertainty issues regarding the establishment and implementation of control systems are present, and I wonder how different should the process of the government be regarding the loyalty of the executives in relation to the shareholders, whether it is a privately owned company publicly listed or a state-owned company. I have been thinking about this issue for several years, since I started maintaining business relations with state enterprises in my role as a negotiator from the private sphere.
It is impossible to establish confidence between the shareholder/citizen and the agent when the information and capacity asymmetry is absolute
In both cases there is an agent that must be controlled, that the government and business systems seek to align with the shareholder through incentives. These agents will have goals and objectives, mainly for the short-term. In one case it must work in order to show results on the stock exchange, in the other by completing critical objectives of the public administration. Apart from the short-term approach, the articulation of objectives is also subject to the consideration regarding communication challenges. In complex problems and strategies aimed at managing uncertainties and achieving the commitment between several needs (economic, social, environmental), it is common to use simplifications that are easy to communicate and parameters that can easily be measured. This dialogue-limitation between the shareholder and his agent prevents the creation of the perfect transparency in order to intelligently analyze the management. The gap between what is relevant and what can be easily understood seems to be directly proportional to the complexity and uncertainty marking the process. The challenge of aligning the shareholder or the citizen with the agent is important in both areas.
It is in the field of uncertainty management where I find significant differences between the private and public sphere. I would like to clarify that this consideration is independent of the appetite for risk strategy that an organization might adopt. In other words, an organization can correctly manage uncertainty whether it has appetite for risk or it completely tries to avoid it. The decision maker of a state-owned enterprise works in a system that hinders performance in high-uncertainty scenarios, particularly in systems where laws favor formal aspects over substantive issues. I refer to the limited possibilities to renegotiate, based on a mutual agreement, condition agreements on future events, exploit information asymmetry as a legitimate commercial advantage, etc.; all being efficient tools but highly restricted by the regulations governing the acquisition of state-owned bodies. I am convinced that many opportunities are missed because of this. According to the extensive literature on game theory and negotiation, the greatest gains during a creation and valued distribution process that takes place during a negotiation are obtained by modifying the scope of an agreement or even by manipulating the rules governing the agreement. It would be heresy to mention some of the possibilities when defining a strategy to conduct a public tender!
Should there be no limits? Of course there must be limits! But the control approach cannot be purely transactional, as illustrated by my story. Confidence plays an important role here. It is impossible to establish confidence between the shareholder/citizen and the agent when the information and capacity asymmetry is absolute. That is the reason for which I defend shareholder and citizen activism, social informed control regarding out public and private institutions, citizen education (to which the industry and the academic sphere should contribute by fostering quality analysis and debates), with fair consequences for wrong decisions made by the agents –recognizing that in a context of uncertainty the outcome cannot be forecasted; organizations can only act based on limited information, putting careful consideration towards the potential worst scenario and courageously knowing that it could actually become a reality–.
[testimonial author=”Marta Jara – ” avatar=”https://www.uno-magazine.com/wp-content/uploads/2013/07/marta-jara.jpg” role=”General Manager of Gas Sayago” link=”https://www.uno-magazine.com/staff/marta-jara/ “]
Chemical Engineer, she graduated at the University of Buenos Aires and completed her Master’s Degree in Strategic Financial Management at the Kingston University (UK). After a long international career at Shell, mainly focused at the Latin American market, she was asked to lead the GNL del Plata project in Uruguay. During the Presidency of Shell Mexico, she played a prominent role leading the energy and corporate sectors and held an important executive position in important departments of the Mexican Council for Foreign Trade, Investment and Technology and the British Chamber of Commerce, where she developed and directed a Corporate Mentoring program.@martajaraotero[/testimonial]
