BUSINESS DECISION MAKING

Short evaluation of a major decision made in an organization in the banking industry (Maybank Malaysia) that has caused a strong impact on the organisation's performance including the decision making process, the models and the impact on the organisation's performance.

BY AHMADRAWI (MALAYSIA) The writer can be contacted at : scholars.assist@gmail.com

BY AHMADRAWI (MALAYSIA) The writer can be contacted at : scholars.assist@gmail.com

INTRODUCTION Decision making is a critical process practised at management level. All organizations involved in decision making in order to survive in their business, to expand their business empire or to overcome problems that occurred in the business activities. The main purpose of an organization decision-making process is to achieve its organizational goals, either in the long or short run. Before making a right decision, the organization must also take into consideration all the possibilities as well as risks that may arise when such decision is made. Various aspects such as human resource, financial and legal aspects should be considered before any decision making is concluded. A failure to calculate any risks can derail the organization from its prime objectives. This paper will evaluatE on the decision making process, the models chosen as well as the impact on the performance of one of the most established financial institutions in Malaysia, Maybank. DISCUSSION In the Malaysian banking sector, Maybank is a prominent financial institution and stands as the Best Domestic Private Banking entity from Asiamoney Annual Private Banking Poll 2010 as well as winning the Euromoney Award for the Malaysia Best Private Banking Services Overall. Apart from that Maybank also received numerous awards and recognitions for its efficiency in customer affair and corporate relation. Maybank also have financial services subsidiaries created under its wings such as Aseambankers Malaysia Berhad, Mayban Trustees Bhd, Maybank Securities Sdn. Bhd, Maybank General Assurance Bhd, Maybank Islamic Berhad which make Maybank group as one of the most successful financial firms operating in Malaysia. Today, it operates more than 450 branches and more than 2,500 ATM machines nationwide. It was in mid 1980's when Maybank penetrated the international market by opening its branches in both Singapore and Indonesia. Since then, its expansion has reached 2

Southeast Asian, Europe and other parts of the world. A remarkable Maybank's tagline is that, We focus on capturing growth opportunities in high growth while taking a proactive and conservative approach to capital management by continuing to establish our presence in high growth markets (Maybank, 2011). Obviously, decision making process is at the core of Maybank's business growth and expansion activities. One of the most significant decisions made by Maybank was the buying over of PT Bank Internasional Indonesia (BII) in year 2008. Sidhu (March 27, 2008) reported in the Star that the buying of BII has increased the Maybank's growth prospects in Indonesia. For Maybank itself, the decision making process can be traced back to the year 2004 when it decided to join the bid for PT Bank Permata as a way of business penetration into Indonesian's financial market. Though Maybank was unsuccessful in 2004 bid, the acquisition of BII in 2008 proves that Maybank is keen to share its financial expertise at international level. BII is one of the largest bank in Indonesia and as of September 30, 2010, the bank is worth RM19.1 billion in customer deposits and RM25 billion in assets. It is listed in Bursa Efek Indonesia (Jakarta Stock Exchange) and operate an extensive Indonesia-wide financial network with 303 branch including five Islamic banking branch and 893 ATM machines.BII is also active in the SME, merchant banking and wealth management to high net worth individuals and organizations.It Also operates overseas branches in Mauritius,Mumbai and the Cayman Islands (BII,2011). The decision to buy over BII was a very tough decision to be made and indeed the decision had drawn an intense controversy within the stock market and banking circle. During initial negotiation, the purchase price was agreed between Maybank and others BII two shareholders, Singapore's Fullerton Financial Holdings Pte Ltd and South Korea's Kookmin Bank, at RM8.6billion. However, an intervention by Bank Negara Malaysia had finalised the purchase deal by Maybank over BII for a discounted price amounting to RM4.26billion (Raj, 2008). Not only that, strong objection against the taking over of BII by Maybank was also made by the Minority Shareholders Watchdog Group (MSWG) where they were in the opinion that the taking over decision was not profitable for Maybank, even with a discounted price because the deal was still expensive. Its MSWG chief executive director Abdul Wahab Jaafar Sidek was quoted as saying that MSWG strongly disapproves the transaction given the global market turmoil at that time. Furthermore, this new price will not alleviate the impact on Maybank's 3

financial condition at that time. This statement portrayed their worry against the decision taken by Maybank during the uncertainty of economic climate, not only in Malaysia also the uncertainties surrounding the world economy (Chow, 2008).

A short discussion on theoretical framework of investment decision making process from behavioral finance perspective is apt here before we discuss further Maybank decision to invest in BII. There are two primary decision making models namely the rational model and the bounded rationality model.According to the rational model (also called the classical model), the decision maker use the strategy of optimizing i.e. selecting the best possible alternative/action from several alternatives/actions. While according to bounded rationality model (also called the administrative model) the decision maker use the strategy of satisficing i.e. selecting the first alternative that meets the minimum criteria which sometimes lead to suboptimal decision (Lussier, 2009, p.91). In the field of behavioral finance literature are abound with theories on how people (individual and experts alike) make investment decision. In a study by Goszczynska and Guewa-Lesny (2000 as cited in Ricciardi, 2010,p.141) the two researchers posed a key question to respondents from three Polish banks to analyze their decision making process in making an investment decision. The respondents were 113 expert investment executive and 108 novice investment executive. The results of the study shows no significance difference between the expert and novice executives.From the study, the researchers submits that in arriving at their investment decision, majority of respondents (60%) considers three factors in the process of arriving at their decision namely, 1) certainty of profit from the investment, 2) familiarity of risks involved in the investment and 3) fear of immediate loss. The first factor, certainty of profit, includes (qualitative/subjective) issues such as trust, amount of profit, income certainty and independent judgment The second factor, familiarity of risks involved issues such as controllability, knowledge and accessability of information.The third factor i.e. fear of immediate loss deals with loss postponement, anxiety of loss and the loss aversion nature of human. Behavioral finance literature also discloses that people are not always behaving rationally when making an investment decision.Instead there are many different cognitive (mental) and 4

affective (emotional) influencing factors that distorts individuals rationality in their decision making process.These influencing factors include over confidence, loss aversion, familiarity bias,expert knowledge and perceived control (Ricciardi,2010,p.142). The decision making process take the investors to assess a potential opportunity based on their experiences, beliefs and available information in which they develop different courses of action and then use subjective judgments to determine a final choice (Ricciardi,2008b as cited in Ricciardi, 2010,p. 142) However, this paper submits that based on the available literature on Maybank takeover of BII, the decision was arrived at rationally and findings of the study by Goszczynska and GuewaLesny discussed above is in line and can be used to explain Maybanks decision. It is submitted that alaong the way to the succesfull takeover, there were a lot of alternative for Maybank, for example, they can discontinue their intention to acquire BII. But it appears that taking BII over was the best alternative at that point of time. In arriving rationally at the decision, tt appears that Maybank's had utilized its vast corporate experiences and financial capacity that it owned at that time(second factor in Goszczynska and Guewa-Lesny above). Maybank also considered the opportunity available when BII's interest was offered to be sold by Temasek. For Maybank, if the opportunity was ignored, they might not obtained another better offer since their last bid in 2004 for PT Bank Permata (anxiety of loss if action is not taken i.e. the third factor in . Goszczynska and Guewa-Lesny study above).

Management theorists have developed outlines of decision making process which must be observed carefully in order to obtain the desired results or goals (Kumar and Sharma,2000,p. 245). Those elements would be elaborated in explaining Maybanks decision making process in the BII takeover. Firstly, concept of best decision which expound that best decisions are always decision which are arrived at rationally. Rational decision making requires intelligence, insight and great experience. Considering Maybanks long and illustrious history in the financial sector, their familiarity with the regions financial sectors environments and the cumulative experience of its management, this paper submits that the decision to takeover BII is a natural and rational progression for a bank poised to be regional financial giant.Maybank offered USD2.7 billion offer to buy controlling stake from Temasek Holdings Pte which at that time according to analyst makes Maybanks offer 4.7 times over the book value of Temaseks share.However, the rational behinds Maybank insistence for takeover was a strong presence in under penetrated country with an instance 230 nationwide branches in the world fourth most populous country.(Permatasari & Ghosh, 2008, September 26)

The rational was explained by its President and Chief Executive Officer, Datuk Seri Abdul Wahid Omar in an interview that given the fact that the bank (Maybank) wanted to expand its market beyond Malaysia and that Indonesia is a very important market and that we need a suitable vehicle and BII was the only one available, we have to pay market price. In the evaluation done by the board, there was a certain range of valuation which was acceptable. Given the competitive environment, obviously the price was at the upper end of the range. Given the scarcity of a suitable vehicle, what that means was, by paying a premium on the purchase, you will expect a longer period before the investment becomes accretive. So I think that was a position the board was prepared to take. A short term pain for the first few years before recouping the gains(Gabriel and Say, 2008,August 30).

Second, environment of decision making process. Formal structure and the organizational environment of the company exert great influence on decision making. Some believe in rigid centralization and some are in decentralization. While key decisions are taken by the top executive routine decisions are left to the numerous departmental heads. As for Maybank, the decision-making,though done by the top management, involved listening to various point of proposals and views. Though there were proposals from their consultant, minority shareholders, 6

economic experts, even Bank Negara Malaysia, the final decision vested on the board controlled by the majority shareholders. Apparently every decision concluded would take into consideration all the interests regardless whether it is from the suppliers, investors, consumers, shareholders and economic reviewers.

Third, the timing of decision making must be right and decision should be made at the time when they are needed most. But the timing must be looked at from the perspective of the organization and not outsiders. At the time Maybank was pursuing BII takeover, the world economy situation was not very encouraging, but Maybank was very insistence nevertheless.

Fourth, the participation of employees is also vital where there are several advantages if this element is taken into account by the management of the organisation when making huge decision. Among the advantages are it ensures the loyalty of the employees and arouses the feeling of belongingness with the company, the decisions are superior in quality, the issuance of directions to the employees become easier and effective, it also develops sound human and industrial relations between the management and employees, and it helps in increasing the efficiency of the organisiation, which helps in attaining its goals. In Maybank, the support from its employees proves that the organization had received a good and undivided participation from its people so it can drive towards its corporate objectives.

Every decision made by an organisation will have its impact resulting either positive or negative outcomes. It never happened that an organisation aims to fail in their decision but it always occur that they need to re-adjust their decision according to current situation. The major objectives of a business firm are to gain profit and to expand as big as possible. In the process, the company may face various obstacles or challenges that perhaps alter their priorities, at least for the time being. The bold decision made by Maybank during the world economy uncertainty in year 2008 is not an isolated case. Several global business players had shown that plenty of bold decisions were concluded by them despite of tonnes of criticisms. For instances, Kamprad of IKEA had decided to penetrate Russian's market though he had to spend 10 year income in order to sustain IKEA's business, South Korea's Asiana Airlines invested $15 million in introducing 7

new business class seats and aircrafts in a bid to strengthen its reputation as a global carrier while others world airlines are cutting their costs (Ji-hyun,2010,December 23). Indeed immediately after the takeover Maybank had started feeling the crunch. Based on financial report issued by Maybank in August 2009, its pre-tax profits dropped from RM4.09 billion last financial year to RM1.67 billion for the financial year ended 30 June 2009. It stated that the lower profit was largely due to, among others, its investment in BII which had costs them RM1.62 billion. As for financial year 2010, its pre-tax profit was increased to RM5.37 billion as all key business segments and rapid growth in Indonesia has improved tremendously. It appears that the decision made by Maybank has positive and direct impact on the entire Maybank group's income, its employees' benefit, its investors' returns, shareholders' dividends and as well as to Malaysia economic growth as a whole.As had been said by Maybanks CEO quoted above (the drop in profit) is a short term pain for the first few years before recouping the gains. CONCLUSION As the conclusion, decision making is a crucial function of the management team of any business. Management team business decision will affect the business organizations sales projection, annual profit calculation, turnover and even their employees, suppliers, investors and financiers as well. As such, the use of the appropriate decision making process will greatly help in arriving at the right decision. As the Maybanks case study shows, some decision might look suboptimal at first, but as long as it is made rationally, the decision is more likely than not be proven right in the long run.

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