What Interests Do Stakeholders Have in Decision Governance?
Anyone contributing to or living with decision outcomes is a stakeholder in decision governance. How decision governance works will depend and influence the interests of these stakeholders.
If we know who the stakeholders are, when designing decision governance, then we need to know their interests, so that we can make sure these are met through the decision process. For example, if some stakeholders require insight into all information used for decision making, then we can design governance to ensure they have the right to access this information, or we can choose not to do so, and consciously take the risk that their interests will not be met.
This text is part of the series on the design of decision governance. Decision Governance refers to values, principles, practices designed to improve the quality of decisions. Find all texts on decision governance here, including “What is Decision Governance?” here.
When decision governance stakeholders are known (see the text here), making and changing decision governance requires us to understand and predict interests of these stakeholders in decisions that we are aiming to govern. If we ignore their interests, we take the risk that the decision governance will lead to decisions that do not satisfy their interests, or if they do, this is only by accident.
A stakeholder’s interests refers to a variety of information about what a stakeholder considers to be desirable during decision making, and as outcomes of decisions. Interests covers information about
- preferences over options that may be considered during decision making
- options to exclude altogether from decision making
- preferences over risks
- properties of desirable outcomes
- preferences over outcomes
- preferences over decision guidelines, rules, processes, that is, over parameters of decision governance
- all of the above as a function of preferences of other stakeholders, i.e., I will prefer X if they prefer Y, otherwise I’m fine with Z – of the like
- incentives that stakeholders as a function of their actions during decision making, and depending on the outcomes of decisions
Although the list is long, there will be more and less important interests, and the effort should be invested mainly to identify what matters, rather than be comprehensive. What matters will depend on
- their past behavior, or what mattered before you considered changing how decisions are made and what their roles were
- tests or pilots that you put in place to test your hypotheses about what matters to them
- you can always ask them, but actions may differ from what they say, and it is common that much will be missed
Example: Decisions about the level of risk associated with financial instruments in the subprime mortgage crisis
In the text on who stakeholders may be, here, the example I used the subprime mortgage crisis of 2007–2008 as an example, and specifically the decision process that leads to the evaluation of risk of collateralized debt obligations (CDO). It is worth reading that text first. Table 1 is a summary of incentives of various stakeholders in that decision process, and consequently stakeholders for its governance.
| Table 1: Incentives of various stakeholders involved in the evaluation of risk of collateralized debt obligations in the subprime mortgage crisis of 2007-2008. | ||
| Stakeholder | Incentive if CDO Risk Increases | Incentive if CDO Risk Decreases |
| Investment Banks | Suppress or downplay risk to maintain liquidity and market confidence. | Issue more CDOs to generate short-term profits from higher sales. |
| Credit Rating Agencies | Provide accurate ratings, protecting long-term credibility. | Issue favorable ratings to keep clients satisfied and maintain business. |
| Hedge Funds and Short Sellers | Bet against the market via CDS to profit from CDO downgrades. | Limited interest due to fewer short-selling opportunities. |
| Borrowers (Homeowners) | Fewer loan offers but safer financial outcomes, reducing foreclosures. | Access more loans, often at unsustainable terms, increasing foreclosure risk. |
| Regulators and Agencies | Increase oversight to prevent systemic collapse. | Maintain minimal intervention, trusting market self-regulation. |
| Institutional Investors | Pull back investments to reduce exposure to volatile assets. | Invest heavily in CDOs, seeking high returns from low-risk products. |
| Consumer Advocacy Groups | Push for stricter regulations and consumer protections. | Limited ability to raise concerns in a seemingly stable market. |
| Mortgage Brokers and Originators | Shift to safer loans, reducing sales volume. | Push more risky loans to meet targets and earn commissions. |
For each stakeholder, we can see the parameters that may be worth considering when designing decision governance. For example, we can design processes which emphasize or deemphasize risk, require longer term versus shorter term realization of outcomes, and so on.
References and Further Reading
- Mitchell, R. K., Agle, B. R., & Wood, D. J. (1997). Toward a theory of stakeholder identification and salience: Defining the principle of who and what really counts. Academy of Management Review, 22(4), 853–886.
- Donaldson, T., & Preston, L. E. (1995). “The Stakeholder Theory of the Corporation: Concepts, Evidence, and Implications.” Academy of Management Review, 20(1), 65-91.
- Freeman, R. E., Wicks, A. C., & Parmar, B. (2004). “Stakeholder Theory and ‘The Corporate Objective Revisited.’” Organization Science, 15(3), 364-369.
- Jensen, M. C. (2002). “Value Maximization, Stakeholder Theory, and the Corporate Objective Function.” Business Ethics Quarterly, 12(2), 235-256.