In recent times, it has often been pointed out that a board can look great “on paper” in terms of quality and independence of membership, risk auditing and the like, but without a healthy culture it can fail nonetheless.

When talking about a healthy board culture, commentators often define it in terms of a culture in which everyone feels free to speak up, to question and challenge. Whist I agree that this is one strong piece of evidence for healthy board culture; I think that there are more fundamental elements that need to be considered first.

Questioning and challenge are vital, yes. But a healthy board culture is also one in which questioning and challenging is productive. Pointless nit-picking and bickering serves no-one. So what makes questioning and challenge either positive or negative? Here is my suggestion.

I believe that we need to demand that boards are agreed as to their basic role; to represent the best interests of all their organisation’s legal and moral owners in achieving organisational success and safety. In the context of that agreement, all questioning and challenge becomes positive because the issues on the table are about defining and ensuring owners’ best interests in terms of the definition and safe delivery of success. In other words all the questioning and challenge is about how do we do our agreed job better and everyone has a duty to express their opinion.

On the other hand, in my experience, it is when a board is not agreed as to its basic role, that questioning and challenge tend to muddy the waters rather than move things forward. Take, for example, boards in which the Chair feels that ultimately he or she is the CEO’s boss, but the other board members don’t, or boards in which several board members believe that everything must revolve around the needs of a particular group of owners and the others don’t, or board in which half the members believe the board is just there to advise and the other half believe it is there to direct. Such boards may work their way through their agendas in the most diligent of fashion, questioning and challenging as they go, but the results are most unlikely to be satisfactory because everyone is coming at things from a personal perspective without any common filter.

Perhaps that is the real starting point for establishing a healthy board culture, getting agreement that everyone is there to do their best to use one fundamental filter; the best interests of all their organisation’s owners.

By Stacy Sjogren

Organizational governing boards are well situated to play a pivotal role in fostering accountability and transparency in organizations. Their work on behalf of owners means they can translate owner values and desired outcomes into organizational expectations and their proximity to management means they understand how the organization functions. It is as in that nexus that a board can successfully address organizational accountability — or not.

Countless examples of a lack of governance accountability have birthed a plethora of governmental regulations and well-intentioned agencies geared toward helping boards figure out what it means to be transparent, “deliver” transparency and prove that they are using their resources responsibly. The intention of these efforts — whether it is the carrot of a seal of approval or the stick of non-compliance to a regulation – makes for more accountable organizations. That’s a good thing.

The challenge for boards striving toward excellence is to determine which standards, best practices, guidelines, etc. contribute to better accountability and transparency without sacrificing role clarity and the quality of the board’s governance process. This is especially important for boards that have committed to Policy Governance as their governance approach.

Policy Governance’s very design provides a built-in system of owner accountability. So how does it compare to the accountability standards established by one of those organizations established to encourage and assist accountability and transparency based on a traditional approach to the governance process? I have provided a methodical comparison of just such a set of standards to Policy Governance in a recent white paper, “Are the Charities Review Council’s Accountability Standards and Policy Governance Compatible?” You are invited to explore this topic more fully with this real example of possible compatibility on my website (Resources) page.

By Vijay Mistri

It is of no surprise to any of us that laws and regulations regarding the governance of for-profit and non-profit organisations are becoming ever more stringent in the wake of the collapse of giants such as Enron, WorldCom, Northern Rock and scandals such as those that have hit the Red Cross.

The Sarbanes-Oxley Act in the USA and the newly revised Combined Code in the UK are two examples of the ever-growing number of codes and ever-changing requirements around the world with which organisations must cope. As a result, many organisations are finding themselves diverting their focus onto regulation and compliance issues rather than focussing on the performance issues that can make the biggest difference in their ability to compete in the real world.

Regulations mean more paperwork at board level and penalties, fines and prison sentences are now a reality for board members exhibiting negligent practices. More and more board directors find themselves cornered, confused, trying to do too much in too little time and forced into placing increasing reliance on the CEO and staff to decide what needs to be done. These situations make them vulnerable to accusations that they are merely accepting what others in the organisation have to say when in fact it is the board that directly carries the ultimate accountability.

The Solution

Boards should create policies empowering the CEO to make his or her own decisions but within certain parameters which are initially set by the board. The cumulative responsibility for all staff is vested in the CEO – in other words the summation of responsibilities of everyone in the organisation. Empowering the CEO is very much in the board’s interest. The board wants the organisation to succeed and a CEO who is strapped down or constantly second-guessed is stripped of the ability to succeed.

However, the board does need not only to define what they wish the CEO to produce but also the limits of their CEO’s power to be sure that the organisation’s methods, activities and conduct stay within ethical, legal and prudential parameters. In the Policy Governance framework created by John Carver, the policies that define what the board wants the organisation to produce are usually called “Ends” and the policies that define the boundaries are usually called “Executive Limitations”. Together, these policies ensure that the board fulfils its assigned task of translating legal and moral owners’ wishes into company performance through proper control of the CEO. Operating in this manner creates a clear distinction as to who needs to do what.

The CEO is accountable to the whole board (not to individual board members or the Chair) for:

1. Achieving the external effect as defined in the board’s Ends policies and
2. Not violating the board’s Executive Limitations policies.

Board policies that limit executive means typically relate to personnel treatment, compensation and benefits, ongoing financial health and condition, asset protection, budgeting and other operational activities. Executive Limitations policies set out the board’s risk management framework and, as such, it is important that they are:

1. comprehensive – ensuring that all areas of risk are covered – both known and unknown
2. sufficiently concise to enable rigorous yet cost-effective monitoring

The development of policy under this system enables this through:

1. having the board create every policy at the broadest level first before going on level-by-level to define further specifics
2. strictly confining limitations to those things that the board feels that it must prohibit for risk management purposes

This keeps a board away from micromanaging the organisation and frees more time to focus on the leadership issues involved in making outcome choices.

Risk Monitoring

The board can only assure organisational safety through sound policies and the rigorous monitoring of each policy that it creates to govern business and ethical risk. Having created Executive Limitations policies down to the level of specificity to which they believe they must go in order to fulfil their obligation to the organisation’s legal and moral owners, the board requires the CEO to operate the organisation within any reasonable interpretation of their policy language.

The board then determines the monitoring method and monitoring frequency for each policy. The most usual monitoring method is by CEO report but the board can also use external inspection or internal direct inspection by the board itself or a board committee. The frequency of monitoring is dependent on what the board finds appropriate and can be annually, bi annually, quarterly or monthly.

Boards usually require monitoring reports to be circulated to all board members well in advance of board meetings. Monitoring reports always:

• Restate the provisions of each policy being monitored
• Set out the interpretation the CEO has made of each policy provision (in terms of what its fulfilment would look like in practice) and anything the CEO wishes to say to support the reasonableness of that interpretation.
• Cite data that demonstrates the CEO’s compliance, or not, with the interpretation of the policy.

Having viewed a monitoring report, the board may:

• Accept or reject the CEO’s interpretation as being reasonable – (according to the any reasonable person test, rather than individual board member preferences)
• Accept or reject the data provided as being sufficient to establish compliance

Should the board choose to reject the interpretation or data, they can ask for more information by a certain date, ask for proof of compliance by a certain date, or institute disciplinary measures where they feel such are required.

On occasion the board may find that the CEO’s interpretation meets the ‘any reasonable interpretation’ test but reveals that the board’s policy language is open to interpretations that the board regards as unacceptable. In such instances, the board will wish to review and consider altering the language in their policy.

Summary

In conclusion, boards achieve owners’ expectations as well as meet all regulatory compliance requirements through brief but powerful policies. Using the ‘go till we say stop’ system of delegation gives the CEO sufficient flexibility and empowerment to accomplish the board’s outcomes. Meanwhile, it ensures that the board has full control over that for which it is accountable. CEO evaluation becomes a straightforward assessment of the regular monitoring reports submitted over the year. A full set of properly crafted Executive Limitations policies provide a risk management framework suitable for governors rather than managers that encompass all board worries concerning organisational safety and enable a whole new level of transparency. Boards today must be more conscious than ever of the need for good risk management and tools of Executive Limitations and monitoring are uniquely designed for the job.

About the Author

Vijay Mistri is the CEO and founder of www.rentadirector.com . He can be reached at  vijay at-sign rentadirector.com. His profile at this site is here.

I have been thinking a lot about change recently and its impact on organisations and their boards. A recent chain of events involving a client I had been hoping to work with for over a year has fuelled that thought – a lot!

A few short weeks ago, the client contacted me. They had been through an enormous period of change and uncertainty but, the Chair reported, “things seem to have settled down now and we are ready to move ahead and look at how best to govern for the future”. I was booked to do a half-day workshop. A few days before the workshop it became clear that, as a result of major changes in government thinking, the organisation’s role was in doubt. A few days after the workshop it became clear that the organisation has no future, the government is abolishing it.

Of course not every organisation is subject to that amount of change but the fact remains that change has become a way of life for most. How are boards to respond? I believe that the first thing is that boards need to recognise that they do not have to be mere victims. Boards have the power to rise above the fray and create the signposts that can help their organisations navigate through all the complexity and chaos that can be created by external events. If boards do not use that power but simply react to individual events I believe that they often become part of the problem by adding further layers of complexity rather than creating a consistent framework within which change can be managed without throwing the organisation off course.

I have written an article on this subject called “Governing Change from the Boardroom” which you can see by going to www.goodtogovern.com. If you have comments on this article I would love to see them here.

To try it out, with no advance planning, Sherry Jennings and Robert Ballantyne picked the topic of The Role of the Governing Board, and discussed it for about 20 minutes.

This, then, was the first ever broadcast of Better Governing. You are welcome to view the recording… and let us know what you think of our new baby project. This initiative is still in the experimental stage. In the future we plan to announce when we will broadcast, and viewers will be invited to participate with comments and questions in the chat-room. Sometimes our chat-room will be populated by members of the Governance Corporation as chat-room monitors.

Susan Mogensen

Susan Mogensen has a perspective on this that could save your organization lots of money, and more importantly: save time.

This short audio broadcast will take less than 5 minutes. Click on this link:

Susan Mogensen – Board Approvals

I am all for board assessment but only against criteria that board’s have agreed to be in their owners’ best interests. Others may have opinions but they are not the final arbiters – only owners are.

Policy Governance may seem almost like a fairy tale in the promise it offers to get the board out of day-to-day managing and into discussing the future. PG requires a paradigm shift from thinking about what is to what can be. It also requires the board to shift from thinking about activities to an orientation about delivering results.

I’m in touch with some board members who “get” Policy Governance and they all report that they bring Policy Governance principles to every board on which they serve. Whether trade association or arts council or school board, there is no denying the power of the model. But, it’s only for organizations that truly want to do more, that want to be cutting edge and competitive, that want to be on the forefront of leading positive change in the communities they serve, that see the future as full of possibilities instead of problems.

A couple of years ago I attended a workshop at the American Society of Association Executives about “managing” the board. The workshop was filled to capacity and I heard over and over the same old complaints (that I’ve been hearing for nearly 20 years) about board micromanagment or lack of engagement or the board not knowing what their job is. Why aren’t we doing anything to change this?
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The definition of insanity is doing the same thing over and over again and expecting different results. The only way to get different results is to move beyond the traditional governance (and management concepts masquerading as governance) and try something new.
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A colleague recently attended a corporate governance conference. In the room, they were discussing the state of governance today. She said she felt like “here we are in the age of aerospace and I was listening to people talk about flight in terms of what feathers to use and which glue works best.”

What she is talking about (I think) is we’re content with a randomly selected mixture of “best practices” instead of a comprehensive model. Usually, “best practices” evolve from problem-solving or “fixing” something rather than creating lasting, sustainable change. The paradigm is still prescriptive solutions.  ”Take two aspirin and your headache will go away.”

If you want sustainable organizational change, you need a process, not a

If you’re using Policy Governance effectively, it is almost magic. But the magic doesn’t happen without education or preparation or work or practice. And it certainly doesn’t happen at random. Or by putting a band-aid on it and wishing and hoping the problem will go away.

Governance should not be a random collection of whatever seems to work best at the time. Or by following the latest fad. Governance excellence is intentional.

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