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

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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

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has reached 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

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global market turmoil at that time. Furthermore, this new price will not alleviate the impact

on Maybank's 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

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when making an investment decision.Instead there are many different cognitive (mental) and

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

Guewa-Lesny discussed above is in line and can be used to explain Maybank’s 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).

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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 Maybank’s 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 Maybank’s 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 Maybank’s offer 4.7 times over the book

value of Temasek’s 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

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shareholders, 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

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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 Maybank’s 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 organization’s 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 Maybank’s 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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REFERENCE :

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%3d

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from http://biz.thestar.com.my/news/story.asp?file=/2008/10/8/business/

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Ji-Hyun (2010,December 23) Asiana makes bold investment in business class seats,

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http://www.bloomberg.com/apps/news?pid=newsarchive&sid=agqOx7Hi3sl8

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20764659&sec=business

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