Most companies will establish a board during or shortly after the start-up. The normal purpose of boards is to advise and/or represent the ownership of the company. Therefore the membership and activities of the board are heavily impacted by the type of ownership. For small companies the owner is often the CEO. Therefore the board acts in an advisory capacity to the CEO/owner, offering expert advice about strategy and even technical or operational matters, while encouraging the CEO to make wise decisions. Governance is not necessarily a part of the role of this board and the CEO is clearly accountable for the success or failure of the company. As ownership widens to multiple people and/or entities the role of the board changes such that the board acts on behalf of ownership to hold the CEO fully accountable for the results of the company. In this ownership environment the role of the board falls into four interrelated categories of 1. providing expert advise to the CEO, 2. agreeing to a strategic plan with the CEO, 3. establishing boundaries through policies for the work of the board and for the interaction of the board and CEO, 4. holding the CEO (and only the CEO) accountable for results. Such significant activities as secession planning, budget authorization, and consent on major expenditures fall underneath these four categories. These categories hold true for businesses as well as non-profit organizations with multiple stakeholders/owners.. They would not hold true for associations where ownership can not be defined separate from the management hierarchy.
Let’s unpack each of these afore mentioned categories to discuss the responsibilities of board members in more detail.
1. A board member is often (but not always) selected on the basis of having a certain background or experience. Having a board with diversity in background and experience provides for greater breath of discussion and advice. A board should be intentional about the selection process for board members to ensure an appropriate level of strategic thinking (LoWa), a preference for board work (VPI), and of certain expertise (i.e.: market, financial, operational, legal, innovation, social media, etc.) for reasons which should be obvious. The board will be more likely to make valuable suggestions to the CEO and less likely to agree to any unwise strategic direction. While it is valuable to have experts, an individual board member has no authority outside of the consensus action of the board. Therefore board member should be cautioned and board policy should warn them against unauthorized contact with company employees. Such contact would significantly undermine the CEO and by default make the board accountable for results rather than the CEO. It should be noted that the CEO may authorize a board member to act in a purely advisory role on a matter, which would allow for direct contact with appropriate employees. In addition the board will routinely authorize, as part of its governance responsibilities, either select board members or an external audit group to validate certain information provided by the CEO to ensure compliance with board policy. In each of these examples the contact is authorized by the CEO or by policy prior to any contact with employees.
2. The CEO will provide for the board an on-going update of the strategic direction of the company. Most companies call this the strategic plan, and it comes in many forms and levels of detail. While the board should vigorously discuss the plan for understanding, suggest changes (even significant changes), and attempt to find consensus agreement with the overall plan; the board should not dictate a strategy to the CEO, nor dictate specific details within the plan. If the CEO is to remain accountable for results, the CEO must have full ownership of the overall plan, without fear of the board dictating the strategy or even the tactical specifics of the plan. The board then has the option of one of the follow decisions:
A. The plan is reasonable and authorized by the board.
B. The plan seems reasonable but clarifications are needed.
C. The plan is unreasonable and the CEO should resubmit promptly.
Naturally if the board should choose C above, they should also consider doing a performance diagnostic as to why the CEO and board have differing judgements on the strategic direction of the company, which is discussed further in category 4 of the role of the board.
3. The inter-workings of the board members and the relationship between the board and the CEO is pivotal to the success of the CEO and the results of the company. There must be clarity about how the activities of the board itself will be achieved and how the board will interface with the CEO. This goes beyond having rules for meetings but rather establishes a systematic approach for the board and clarifies the boundaries for the CEO. Note that I said “boundaries”. Some boards destroy creativity by focusing on telling the CEO how to manage, rather they should focus on the boundaries, thereby enabling the CEO to choose various paths within boundaries which utilize his/her full capabilities to achieve the expected results. To this end the board should establish policies to govern the work of the board and set sufficiently wide boundaries for the CEO. I like the concepts of Policy Governance developed by Dr. John Carver. His approach meshes well with the Requisite Organization principles of Dr. Elliott Jaques. Policy Governance is focused on the board and its role, while Requisite Organization focuses on the management (CEO and below). Having some implementation experience in both, here is an approach at organizing your board policy manual, leaning heavily on Policy Governance.
- Performance Expectations: Start by composing a set of written statements as to “who the company is” including what the company will achieve in a time-frame, if it is to be successful. Carver refers to these as Ends Statements established by the board, which then allows the CEO to develop the means of achieving the Ends. The means are presented to the board as the strategic plan. A key part of the board role is agreeing that this plan is reasonable and then reviewing progress toward these performance expectations.
- Management Limitations: Set the boundaries which the CEO must work within. Since these are boundaries, it is better to word each limitation policy in the negative. For example: The CEO shall not cause or allow any practice or activity that is unlawful, imprudent, unsafe, or in violation of commonly accepted business ethics. Or another example of “in the negative”: With respect to treatment of employees, the CEO shall not cause or allow conditions that are unfair, undignified, or unprofessional. Or: The CEO shall not authorize or allow borrowing greater than $xxx. Wording the policy in the negative has the surprising effective outcome of setting clearer boundary lines. The board should attempt to maintain wide boundaries taking into account the CEO’s experience and judgement, and reasonable prudence in maintaining good governance practices.
- Board-Management Delegation: This section establishes the policies for the formal relationship between the board and the CEO including the requirement that the CEO will make a formal monitoring report to the board on each of the policies in section 1 and 2 above. This section also states that the board is a single entity and that delegation will only occur through the CEO. A formal CEO review process is established in this section as well.
- Governance Process: This section establishes the actual work processes of the board itself, including how meeting are set up, how often, how they will be conducted, and role of the chair. This is a place for setting expectations on how board members will perform, including selection and development of new board members. The board needs to be serious about reviewing its own results.
4. Obviously one of the key roles of the board is holding the CEO accountable to delivering reasonable results. As should be in your policies above, the board should have a formal review process but the CEO is continually being judged on reasonableness of his/her judgement(including LoWa), in achieving reasonable results, and compliance to policy. The board should reframe from judging the CEO on previously unspecific characteristics which may be expressed by individual board members from time to time.
High performance organizations need highly effective boards who know how to hold the CEO accountable without destroying the creativity of the organization. They should not fail to review their own performance as well. The best CEO’s want to work for highly effective boards and highly talented board members are attracted as well.