Policy

A policy is a deliberate system of guidelines designed to guide decisions. Its main purpose is to help an organization achieve rational outcomes. You can think of a policy as a formal statement of intent. Once this intent is decided, it is implemented through specific procedures or protocols. Policies are usually adopted by a governance body within a group. This could be a government, a large business, or even a single individual.

Policies function differently depending on whether the decision is objective or subjective. An objective policy is operational in nature and can be tested with facts. For example, a password policy provides clear rules that are easy to verify. A subjective policy assists management with decisions based on various relative factors. A work-life balance policy is an example of this type. These are much harder to test objectively because they involve human judgment.

It is important to distinguish policy from laws or rules. A law can compel or prohibit specific behaviors. For instance, a law requires citizens to pay income taxes. A policy, however, merely guides actions toward a desired outcome. Policies can be understood as political, managerial, financial, or administrative mechanisms. They are arranged specifically to reach explicit goals. In the field of corporate finance, a critical accounting policy is especially important. These policies have a high subjective element and a material impact on financial statements.

Many experts argue that policies should be evidence-based. To claim a policy is evidence-based, three specific conditions must be met. First, the organization must possess comparative evidence. This means they must show how the policy performs against at least one alternative. Second, the evidence must support the policy based on the organization's specific preferences. Third, the organization must provide a sound account of how that evidence and those preferences support the claim.

Creating and managing a policy often follows a process known as the policy cycle. This is a tool used in political science to analyze how policies develop. Harold Lasswell developed an early version of this theory. His model included seven distinct stages: intelligence, promotion, prescription, invocation, application, termination, and appraisal.

Another influential scholar, James E. Anderson, proposed a five-stage model in 1974. His model includes agenda setting, policy formulation, decision-making, implementation, and evaluation. Many researchers still use Anderson's framework today, even though some scholars argue it is oversimplified.

Another detailed version of this cycle comes from Peter Bridgman and Glyn Davis. Their eight-step model includes issue identification, policy analysis, and consultation. It also includes instrument development, building coalitions, program design, implementation, and evaluation. This model is considered iterative, meaning it repeats itself. The final stage of evaluation often leads back to the first stage of problem definition.

This creates a continuous loop of learning and adjustment.

Policies are dynamic and can lead to unintended consequences. Because societies and governments are complex adaptive systems, changes can cause counterintuitive results. For example, a government might raise taxes to increase total revenue. However, this could actually reduce revenue if it causes capital flight. In California, the government used policy to increase the use of hybrid cars. They provided $1,500 in tax credits and allowed hybrid drivers to use high-occupancy vehicle lanes. This shows how specific incentives can successfully drive a desired change.

Finally, most policies are shared through official written documents. These documents often include a purpose statement to explain the goal. They also contain an applicability and scope statement to define who is affected. This helps focus the policy on specific targets to avoid unintended results. Other sections include an effective date and a list of responsibilities. These sections ensure that the necessary parties know exactly how to carry out the policy.