Board governance best practices are once again a hot topic as reflected by the number of searches for that phrase on Google. It might have risen to the top because of so many visible failures of governance. It might also be the sheer number of people that are currently serving on corporate, nonprofit, and civic boards are now becoming ever more aware of the fact that the reason that their organization is required to have a board is because they are managing someone else’s money.
Before diving into the new 21st century best practices, it is important that you understand what board governance is and what are the foundational best practices.
What is Board Governance?
Corporations manage the investors’ money; nonprofits manage the donors’ money; and civic organizations manage the taxpayers’ money. Regardless, the boards of each of these types of organizations are tasked with protecting the interests of those whose money they are managing. In its purest form, this is the very definition of governance.
What is the Foundation of Governance Best Practices?
Arguably all modern governance practices can trace their roots to the best practices that were formed and articulated by the Cadbury Committee in the United Kingdom in December of 1992. The Cadbury Committee was commissioned by the London Stock Exchange and the accountancy profession. Their findings included….
- Independence of the Board of Directors
- Limit Conflicts of Interest
- Separate the Roles of the Board Chair and the Executive
- Establish Board Committees
- Monitor Operational and Internal Controls
Independence of the Board of Directors
The board should be made up of individuals who are independent enough, and free enough from relational or positional influences to protect interests of those whose money they were managing even when doing so would place them in opposition to the interests of executive and/or their staff.
Limit Conflicts of Interest
Similar to independence, it seeks to ensure that no commitments to other organizations that would cause them to not be able to place the interests of those whose money they are managing (stakeholders) in first position in their priorities.
Separate the Roles of the Board Chair and the Executive
While it may seem obvious that the role of the executive who is being overseen and the board chair who is responsible for ensuring that the executive in overseen on behalf of stakeholders, it is the one finding of the Cadbury Committee that has taken the longest to adopt by corporations. Depending on how they are counted, approximately 50% of the publicly traded companies in the U.S. still have one person who holds both roles simultaneously. Most nonprofits have adopted the recommended separation as well as most civic organizations. However, there are some cities that operate under the “Strong Mayor” model where the mayor is also the city manager.
Establish Board Committees
Specifically mentioned in the best practice is the audit committee, an entity staffed with financially literate individuals who can assist the entire board in monitoring the financial health and compliance.
Monitor Operational and Internal Controls
The board is to monitor, not manage, operational controls of the organization to ensure that the interests of those whose money they are managing are protected.
Anyone who understands governance at almost any level will recognize the “fingerprints” of the Cadbury Committee on their functions. However, now that we are fully into the 21st century, I would like to propose a new set of governance best practices.
What are the 21st Century Best Practices in Board Governance?
- Differentiate between good governance practices and good compliance with external mandates.
- Governance policies are important tools, but they alone are not the solution.
- Identify clear, complementary roles for both the board and the executive.
- Clearly Align the Unique Roles of the Board of Directors and the Executive.
- Establish Aligned Policy Sets
Board Governance Best Practice #1: Differentiate between good governance practices and good compliance with external mandates.
An important distinction when exploring governance, is distinguishing between compliance with external requirements and developing good governance practices. Governance failures over the last twenty years have led to increased requirements for external compliance. History has shown us over and over that when our ethics fail, the government will be forced into establishing laws to protect the public interest. That is clearly what has happened in corporate governance. When corporate ethics and governance strategy failures went too far, government stepped in and instituted laws that publicly held corporations had to adhere to. Sarbanes-Oxley and Dodd-Frank are the two best known such bodies of legislature.
My corporate governance students each semester are very quick to recognize the limits of external compliance. Their review of case studies reveals a pattern of companies who suffer significant failures in governance, to have just previous to the failure being lauded for compliance with external regulations.
External regulation may be necessary, but we do those whose money we are managing potential harm when we confuse compliance with those regulations with good governance. Our attorneys are experts at understanding the details of the external requirements and we can be lulled into thinking that the voice of our attorney confirming our compliance with those external regulations is governance. It is not. Good governance will drive the work of our attorneys to confirm compliance with the external regulations but also create their own specific boundaries to be complied with by the executive and their team. External compliance by nature is generalized and limited because it has to apply to the entire breadth of corporations to which it applies.
Good governance practice creates governance policies that document…
- the board’s direction outlining what is to be accomplished, what is the work of the organization and who it directly benefits, and what ideals are to be maintained along the way;
- the board’s protective boundaries in operational areas, and
- the board’s commitment to function in a way that enables rather than interferes with the work of the executive and their team.
All of this leads us to the second 21st century best practice related to the appropriate role for governance policies.
Board Governance Best Practice #2: Governance policies are important tools, but they alone are not the solution.
Governance policies are of keen interest to boards of directors, and they should be. However, with the development of what today is often called Policy Governance or International Policy Governance, we have placed policies in the position of a solution in and of themselves. How often have you heard, “We need to rewrite our policies because we are not being effective.” A few years ago, a potential client of Aligned Influence called a said that they needed help with their board. They had been a “policy governance” board and they were so frustrated that they wanted to just start over. I could actually hear the shredder running in the background as they eliminated their policies. They had fallen into the trap of thinking that the policies were the solution and therefore their flawed policies must be the problem.
What they needed to understand was that even the best policies applied to a mis-aligned organization will be ineffective. Alignment is the key. Policies are a tool to document the alignment between the board and the executive, but policies do not create that alignment. Policies are a very important tool, but not the solution. The solution, alignment, begins with clearly identified roles for both the executive and the board which leads us to the next proposed 21st century best practice.
Board Governance Best Practice #3: Identify clear, complementary roles for both the board and the executive.
Many models and processes that are intended to improve governance have attempted to define appropriate roles for the board of directors. If you look at the best practices referenced earlier as outlined by the Cadbury Committee, you will notice that an appropriate role for the board of directors is implied. John Carver’s work focused solely on the role of the board and is often “summarized” and simplified to be define the ends, limit the means, and stay out of everything else. Carver’s definition implies that there is a role for the executive that the board is supposed to “stay out of,” but it does not really define that role other than to label it “operations.”
To move forward in 21st century governance, we need to identify appropriate, complementary roles for both the board of directors and the executive. Appropriate in that they accurately define the unique nature of each role and complementary in that they function to enable the work of the other. In my work called Aligned Influence, I have proposed such roles with a modern and highly effective governance model. In this model, the role of the board is to direct, protect, and enable the work of the organization. The role of the executive is to lead, manage, and accomplish the work of the organization.
When understood independently, each set of roles defines a clear set of duties. When understood side-by-side, roles appear that clarify shared, complementary responsibilities for addressing the future, the now, and “do” roles for each.
To direct, the board of directors defines who is to be served, what is to be accomplished, and ideals that are to be maintained as that work is accomplished. To protect, the board of directors defines operational boundaries that are to be respected by the executive and monitored for compliance by the board. To enable, the board of directors commits to use the spheres of influence to advocate for and make visible the work of the organization.
To lead, the executive creates a 3-5 year program, product and people plans, and the budgets that support them that are intended to accomplish what the board has directed. To manage, the executive creates the procedures, policies, and processes necessary to ensure an on-time, on-target, and on-budget delivery of products and services. To accomplish, assumes ultimate responsibility for producing the outcomes directed by the board.
Historically, we have seen such roles in isolation; often where only one role is perceived to do strategic planning or be future focused. This has led to confusion and ineffectiveness and leads to our next 21st century best practice, alignment.
Board Governance Best Practice #4: Clearly Align the Unique Roles of the Board of Directors and the Executive.
If better policies are not the solution to better governance, what is the solution? Alignment! Applying even the best policies to a mis-aligned organization, leaves that organization mis-aligned and wanting for the effectiveness that they desire. I know some organizations that have found so much improvement from just being properly aligned that they begin to think that they don’t need to do the work of creating or recreating policies. Let me be clear, alignment is critical, but policies are important tools for maintaining and actuating that alignment.
Alignment is only possible if you have one or more things to align. That is why best practice #4 follows best practice #3. Defining clear and unique roles is important, but remember that one of the other characteristics of good roles is that they are complementary or alignable.
In this “complementary roles” structure, both the board of directors and the executive address the future; the board addresses the future by providing direction and the executive addresses the future by providing leadership. Both address operational issues, but in unique and complementary ways. The board places boundaries in operational areas and the executive creates procedures, policies, and processes that keep the organization within the board’s boundaries and ensures that the work gets done. Finally, both have “do” roles. The board’s “do” role is to enable the work of the organization by using their spheres of influence to make it visible and advocate for it. The executive’s “do” role is to accomplish the work of the organization.
So alignment is the solution and policies are the tool. But are policies just policies or is there something else to be understood as well? That leads to the next 21st century best practice.
Board Governance Best Practice #5: Establish Aligned Policy Sets
I have rarely had a client who had no policies in place, but I have had very few clients whose policy sets were complete, mature, and aligned. Mature organizations who have the added complexity of a board of directors will have three sets of policies: policies that establish, policies that govern, and policies that operate. When any one of these policy sets is missing, you can almost hear the vacuum created by the missing set when existing policies are being sucked into the role of the missing policy set.
Policies that establish are usually called bylaws or constitutions. In some civic organizations, the establishing document could be statutory in nature. Regardless, the document that establishes usually has the voice of an attorney in its creation and is then used by the board to understand things like officers and their roles, quorum requirements, and the original intended purpose of the organization. Often misunderstood as a governance document, boards find themselves adding governance policies to the bylaws which take it out of its intended purpose and often cloud the need for the second set of aligned policies; governance policies.
Policies the govern are created by the board of directors and used to document their direction, protection, and commitment to enable the work of the organization. Governing policies are the tools that activate board in its role. The board annually reviews its direction policies for the organization through interaction with stakeholders. It annually reviews protection policies for currency and monitors the organization against them for operational compliance. And finally, it commits itself to the discipline of enabling rather than accomplishing the work of the organization.
Policies that operate are created by the executive and their team to guide the work of all employees and volunteers. Operational policies will be driven by the protection policies of the board, external regulation, and the desire for greater effectiveness.
These five proposed 21st century best practices do not take the place of the 20th century best practices but are additive. We could not have articulated the new proposed best practices without the strong guiding hand of those proposed by the Cadbury Committee 30 years ago. But I think the members of that committee would be happy that their thought has spurred additional thought.
The professionals at Aligned Influence Consulting have built the Aligned Influence Model and their consulting practice to address these 21st century best practices. You can learn more about us at www.alignedinfluence.com.
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