Course Organization and a Practical Decision-Making Tool

In this segment, I want to talk about the organization of the course, and then we’ll move on to talk about a very practical tool that you can use for making decisions that overlap business and the law. So the first four modules in the course are going to match the four key stakeholders with the most important legal risks. So these have been based on international surveys of number one, what are the key stakeholders? And then number two, what are the most important legal risks? So we’re going to pair the Employees stakeholder with Employment Law. We’re going to compare the Customers stakeholder with Tort and Product Liability Law, the Government stakeholder with Regulatory Law, and Investors with Intellectual Property.

This will be a way to get you thinking about the interest of the key stakeholders in a business, the stakeholders that are key to your business strategy, but also learn about the most important areas of the law, which will help you become legally savvy. After those four modules, we’ll then move to two modules that cover the final two key legal risks that have been identified in the survey. That’s Contracts and Dispute Resolution. Both of these areas involve processes that related to many stakeholders. And in the final module, we’ll focus on the Ethics Pillar, and how it links to the Law and Strategy Pillars. Within each of these modules, we’re going to focus on the mantra.

The focus is going to be helping you understand. That has become legally savvy. Number two, Understand how to Protect your business and that’s risk management. And finally, how you can Create value. And when you bring all of these three together, that creates competitive advantage. So let’s now move to this practical decision making tool that’s very useful in making business and legal decisions. This is a tool that I described in another Coursera MOOC

called Successful Negotiation: Essential Strategies and Skills. So if you’re interested in that course, here’s a link to the course, but in that course I used this example. This is sort of a primer on this key tool, which is called a decision tree, and this example relates to how you can resolve a business dispute. So here’s the example, your company has filed suit against a supplier. There’s a 50-50 chance, your attorney tells you, that your company will win. Future legal and other expenses to litigate the case, total $400,000. Now let’s assume that the defendant has just offered to settle the case for 2 million, what would be your decision? Would you accept that offer or not?

Please hit pause and write down your answer, either settle or no.

If you used this legal management tool called the decision tree, then this would be your approach in making the decision. First of all, you would try to draw a picture of the decision, and this picture looks like a tree on its side. The square in the picture represents your decision. Your decision is, do I continue the case, or do I settle? Uncertainties are represented by a circle. And here the uncertainty is will I win or will I lose. Now I found that in everyday life just this piece of the decision tree is very valuable. I find it in many meetings, the discussions go all over the place and it’s hard to focus.

And so often I’ll just take a piece of paper and I’ll diagram our key decisions and the uncertainties in the form of a decision tree. And that alone is very valuable in clarifying decisions. But in this case we’re going to go further, we’re going to plugin some numbers. And the key numbers here are that you have a 50/50 chance of winning, and that’s represented at the uncertainty node. And then if you win, you’re going to win a net of 4.2 million after you deduct your expenses. If you lose you’re going to lose $400,000, whereas if you settle, then, you could settle for $2 million.

And then the third and final step in using a decision tree is to do a simple mathematical calculation, which is to calculate the weighted average of the uncertainty. So, there’s 50% of 4.2 is 2.1. And then you deduct 50% of the $400,000 in expenses if you lose. And you come up with something called an expected value of 1.9 million. As you can see here with this decision tree that it would be a solid mathematical decision to settle the case. Now, I’m not saying that you should follow decision trees religiously in making all decisions. You have to consider your attitude toward risk, and some other factors, but at least it gives you a very useful way to think about decisions.

And it’s not only useful in resolving disputes, it’s also very useful in making business decisions. What would be your decision in this case? You’re trying to decide whether to acquire Company A, which has a $21 million value or Company B, which has a $15 million value, and the price is the same for both companies. If you just stop here, obviously, you would acquire Company A, because it’s worth more. The problem is if you acquire Company A, there’s a 90% chance the government will challenge the acquisition and a 60% chance the government will win. And if the government wins, the value of A drops to $14 million. And even if the government loses, the value drops to $19 million.

Whereas, with B, there’s not going to be a government challenge. So let’s stop right here, and hit pause, and try to decide which company you would choose to acquire, A or B? And then, after you’ve made your decision, do a decision tree of this decision and see if it matches what your intuition tells you. So hit pause, acquire A or B and then prepare a decision tree.

This is what a decision tree would look like in this decision. Your decision is acquire A or B, and there are two uncertainties. Number one, will the government challenge or not? There’s a 90% chance the government will challenge. And the other uncertainty is, if the government challenges will it win or lose? There’s a 60% chance the government will win. So after you have diagrammed your decision tree, then you can run your calculations. Fundamentally the weighted average of acquiring company A, the expected value is 16.5, and that is more than the $15 million value of company B. And here again, you’d have to take in to account your attitude toward risk.

So, I hope that this decision tree approach will be useful to you in your efforts to bring the law and business pillars together no matter what the specific stake holder involved or no matter what the specific legal issue involved. In the final segment, we’re going to talk about developing a global mindset toward decision making and toward business.