Governance is the structure, relationships and processes of authority, responsibility and accountability in a business or organization.
Governance is not a procedure, action or activity. Governance is the structure of responsibilities and accountabilities in a business or organization.
Every business or organization has governance, because processes and relationships of authority, responsibility and accountability are systemic to every business or organization. The processes and relationships of authority, responsibility and accountability may be dysfunctional, abusive, reactionary, unethical, or they may be effective, accountable, visionary, and ethical. These are the differences between good and bad governance, not the presence or absence of governance.
Good Governance has four basic elements or components; Ownership (Shareholders, Membership, Citizens…), Oversight & Direction (Board of Directors), Management & Implementation (CEO) and Staff (Employees, Volunteers and Contractors). The functions of these elements, with the relationships of support and accountability between the elements, are an organization’s Governance, the foundation of effectiveness, efficiency and accountability of the business or organization.
In good Governance roles and responsibilities are clearly understood, effective and accountable. The Board of directors clearly understands that they are responsible for oversight of the business or organization, not management. The Board of Directors delegates management responsibility to a CEO. The CEO may be internal or external to the Board of Directors, but whoever has responsibility for management, the Board of Directors has the responsibility to oversee that management, give direction to that management and hold that management accountable.
Whatever the reason the business or organization exists, when a director accepts a position on a Board of Directors they fundamentally take on a obligation to the ownership or membership that they will oversee that the financial and material resources are used responsibly to pursue the objectives and values the business or organization exists to pursue based on the needs and/or expectations the ownership or membership.
The CEO must clearly understand that they work for the Board of Directors and is accountable only to the Board of Directors. The entire Board of Directors, not a subset of the Board of Directors, not the executive committee or any other committee, not the Board chair or any other individual on the Board of Directors. The Board of Directors hires or selects the CEO, gives direction to the CEO, holds the CEO accountable, and if needed fires the CEO.
The CEO is the Board of Director’s instrument of management because the Board of Directors is not in a position to manage effectively. This must also be clearly understood. The Board of Directors has authority over the organization or business, but individual directors, or groups of directors, have no authority. So the Board of Directors only exists when they are meeting formally. In between meetings the authority of the Board of Directors only exists in the direction they have given. The minutiae of management, opportunities and risk cannot be foreseen in the broad direction the Board of Directors can effectively give a CEO. The Board of Directors cannot be on the ground when the day-to-day management decisions need to be made. So the Board of Directors must choose their CEO wisely looking for the experience and knowledge to manage well and also giving good direction that clearly defines goals and expectations while also limiting risk from bad decisions by setting limits or parameters on CEO authority.
The Board of Directors may decide to delegate management internally, re: a board member is the CEO and some cases multiple board members are a management team. This can create substantial conflict of interest since the Board of Directors is responsible for oversight, direction and accountability of management. If management influences or controls the Board of Directors, the Board of Directors is compromised or neutered in their fundamental responsibilities. Board of Directors delegating management internally is generally is often unavoidable for small businesses or organizations with limited resources however Boards must always be aware of their oversight responsibilities.
Staff are extensions or capacity building of the CEO role and all staff work or volunteer for and under the direction of the CEO. Staff includes employees, contractors, volunteers and anyone else that works in the operations of the business or organization. The CEO is accountable for success or failure of all aspects of operations. Directors, owners and members who work or volunteer for the organization or business need to understand they are staff accountable to the CEO when they do so.
Board of Directors Duties
Boards of Directors have specific, legally required, duties:
Duty of Loyalty
* Directors must give their undivided loyalty to the organization and must not let matters of personal interest or profit come into conflict with the interests of the organization.
Duty of Honesty
* Directors must act honestly at all times when dealing with, or on behalf of, the organization.
Duty of Care
* Directors must look after the affairs of the organization with as much care, good sense and good judgment as a reasonable person would in the same circumstance.
Duty of Skill
* Directors are not required to be experts. Directors are required to use as much skill in making decisions for the organization as any similarly skilled reasonable person.
Duty of Diligence
* Directors must be diligent about their work as directors. Directors need to attend meetings regularly, read all minutes and reports from committees, look at all the available facts including expert recommendations on issues, but then make up their own minds on decisions.
Duty of Prudence
* Directors are expected to exercise caution and common sense on behalf of the organization.
Addressing board duties can be complex and confusing. Many tasks involved require knowledge and expertise beyond most board members. Many boards try to address this lack of expertise by recruiting “expert” board members. This can create hazards such as other board members deferring to the “expert” board members instead of giving issues their own consideration or, because expert board members have an enhanced level of liability being on a board because of their expertise, expert board members may make decisions that safeguard them from liability, but may not be in the best interests of the business or organization. Expertise is best recruited as board council or advisors, not voting board members. This puts the expert in a neutral position regarding liability for decisions so they are able to give the best possible advice.
An example of expert board council is a CPA that audits the accounts of an organization. They are, or should be, independent of management. They do an analysis of the organization’s finances that they present to the board as audited or unaudited financial statements. This type of expert, independent advice should be sought whenever needed by boards so boards can address their oversight responsibilities effectively.
Governance is not limited to the relationship between the Board of Directors and CEO. When you look at the relationships between the various governance elements, Ownership, Board of Directors, CEO, Staff, they are all relationships of delegation. Ownership delegates responsibility for organizational direction and oversight to the Board of Directors, the Board of Directors delegates operational management responsibility to the CEO. The CEO delegates responsibility of components of operations to various staff: employees, volunteers or contractors. Delegation of authority and responsibility is systemic in any business or organization. For the CEO especially, effective delegation is crucial to capacity building. Delegation is fundamentally important to sustainability and success.
• Capacity Building
• Recruit Expertise
• Focuses resources, responsibility and accountability
• Succession Planning
• Development of Skill and Expertise
Delegation is the assignment of a responsibility from one entity to another entity. Responsibility rests with only one entity at a time. An entity may be one individual, or an entity may be a group of individuals. When the ownership assigns the responsibility and authority of organizational oversight to a board of directors, this responsibility and authority does not rest in the individual board members. A Board of Directors is one entity, and the authority to make decisions is collective and therefore only exists when the Board members or directors come together in a board meeting. When the Directors are not meeting their authority does not exist except in the decisions they made during the Board meeting. This is one of the reasons a Board of Directors needs to delegate operational responsibility to an individual. Board members do not have the individual authority to make decisions.
That is the difference between Good Governance and Bad Governance, whether delegation is effective and accountable, or not. Good governance, at its essence, is effective, accountable delegation.
Effective delegation requires clear and formal articulation of expectations as well as a commitment to monitor the responsibility delegated to ensure expectations are met. Expectations encompassing both what is to be accomplished and how it is to accomplished including limits or parameters on authority and responsibilities.
- Parameters – What is allowed in pursuit of the objectives by defining what is not allowed
- Hard Parameters – Actions that are not permitted under any circumstances (Legal and Policy Breaches)
- Soft Parameters – Actions that are permitted only with permission from a higher authority.
- Have there been legal or policy breaches?
- Has progress met expectations to this point?
- Will progress continue to align with and progress to expectations? What is the plan to realize expectations and respect parameters? Does planning need to be re-aligned or do expectations and parameters need to be reviewed or refined? Does the plan make senses?
Rules of Delegation
- Responsibility can only reside with one entity at any one time.
- An entity can be an individual, or a group of individuals.
- If an entity is a group, authority resides in the whole group, not individuals or parts of the group.
- Delegated authority accompanies delegated responsibility.
- Delegated authority and responsibility must be held accountable by the entity that delegates the authority and responsibility.
- Any limits on authority and responsibility are also limits on accountability.
- Applying accountability to oneself is a conflict of interest.
- The entity that delegates responsibility and authority is responsible for holding that responsibility and authority accountable.
- Accountability encompasses past, present and future.
- Accountability is applied from the perspective of the core responsibilities of the entity delegating.
Delegation must first be appropriate to be effective and accountable. To delegate effectively and accountably, responsibilities must be recognized and categorized:
- Core Responsibilities
• Responsibilities fundamental to a governance role
• Core responsibilities cannot be delegated
- Subsidiary responsibilities
• Responsibilities that support the core responsibilities of the governance role.
• Subsidiary responsibilities generally can be delegated, and often should be delegated, depending on resources and circumstances.
- Responsibilities of others
• Responsibilities that are not part of your governance role because:
• The responsibility have been delegated by your governance role and your responsibility is now support and accountability of that responsibility or
• The responsibility is not part of your governance role or responsibilities and your responsibility is to ensure that your actions do not conflict but support all other roles and responsibilities in the business or organization.
The Board – CEO relationship is the foundation of good governance is a business or organization. The board needs to delegate operational responsibility to someone. There are two reasons for this:
- The board of director’s core responsibility is organizational oversight, not organizational management. Organizational management is a subsidiary responsibility to organizational oversight. Board involvement in management can conflict with the board’s oversight responsibilities of direction and accountability of management.
- The authority of the board of directors to make decisions exists only when the board members come together in formal board meetings. The board of directors is actually considered a single entity, not a group of individual people. Board authority exists in the whole board, not individual directors. Hence the importance of board meeting effectiveness where the board decides who will have responsibility, what they will accomplish and evaluate progress and effectiveness of what they have previously delegated.
The cleanest delegation of operational responsibility by a board of directors is to a non-board member, generally a CEO or Executive Director. Giving direction to a single person who can effectively be held accountable allows clarity of operational responsibility and authority, and accountability is un-conflicted. The board can delegate operational responsibility to multiple persons however when responsibility is divided, authority and accountability are also divided which generally results in less operational effectiveness and efficiency; and accountability is confusing and conflicted. The board can also invest operational authority in a board member or members, but this can conflict with the board’s oversight responsibilities of holding the responsibilities they delegate accountable. When the board is evaluating the performance of anyone they have delegated responsibility to that person would be in a conflict of interest if they take part in performing the evaluation.
Many smaller organizations with limited resources, have no choice but to delegate internally, but the board members both individually and as a group must keep in mind that the board has the responsibility of operational oversight and any authority they delegate, externally or internally, must be held accountable by the board.
The board can invest operational authorities in individual or groups of board members. This should not be done if the board has a CEO as it undermines CEO effectiveness and accountability. The board has the responsibility of holding the authority and responsibilities it delegates accountable, whether it is the CEO or others. If board members are given any operational authority, the board has the responsibility of holding those board members accountable, a situation with potential conflicts of interest. Also any authority invested in someone other than the CEO, the CEO cannot ethically be held accountable for. If the CEO is not given certain authorities or responsibilities, how can the CEO ethically be held accountable for those responsibilities?
Not delegating decisively is also weak governance. Effective delegation is not only delegating responsibility, authority must be delegated as well. Authority is not intrinsic to responsibility. Authority is a resource, a very important resource in effectiveness but also a resource that can be abused and misused like any other important resource. Authority needs to be defined much like a budget defines the use of financial resources, not only what the authority being invested is, but also what the limits or parameters on the use of that authority. As responsibility is delegated from Ownership to Board, from board to CEO, from CEO to staff, authority is a resource that also needs to be invested so responsibilities can be addressed and pursued effectively, ethically and accountably.
When the ownership of a business or organization creates a board of directors, the responsibility they invest in the board of directors is oversight of operations. In order to effectively address the board’s oversight role the board needs the authority to direct operations and hold operations accountable. If the ownership retains any authority to direct operations they confuse direction and undermine the board of director’s ability to effectively direct. The authority of the board of directors should be defined by limits that are part of mandatory accountability of the board of directors to the ownership. Minimum accountability of the board of directors is defined in corporate law and usually includes requirements of specific annual reporting to the ownership and the ability to determine who the board of directors are. By-laws or constitution further refine the ownership expectations and accountability of the board of directors. But the ownership should have a board of directors, or not, ownership should delegate oversight of operations to the board of directors, or not. By-laws could include a requirement that board decisions of specific types and magnitude need to be brought to a general meeting for ratification. But the ownership should stay out of giving operational direction. It is weak and messy governance. If the ownership is not satisfied with the oversight of the board of directors, they should tell the board so, or replace the directors, not circumvent their board of directors.
The same applies to the Board – CEO relationship. When the board of directors hires a CEO, they invest operational responsibility in the CEO. Operational responsibility should include operational authority. The board has specific expectations of operations. The CEO needs resources to accomplish the board’s expectations, including authority. CEO authority should be defined, including limits on authority where operational decisions of specific types and magnitudes need to be brought back to the board for ratification. But the board should stay out of the management they have delegated. Board involvement in management is weak and messy governance. If the board is not satisfied with the operational management of the CEO, they should tell the CEO, or replace CEO, not circumvent CEO.
The CEO also needs to delegate decisively. Staff, volunteers, contractors are all capacity building to extend the capabilities of the CEO. Not delegating authority with responsibility limits the effectiveness of the delegation. Again, delegated responsibility and authority has to be defined, and held accountable.
Board member involved in operations is a tricky issue. Outside of board meetings, board members are people with titles not authority, so being involved in operations should theoretically not be a problem. However, board members involved in operations have to be aware that this is potentially an awkward situation for the CEO and the board member. The CEO has responsibility and authority over operations and will be held accountable for operational success, or lack thereof. A board member involved in operations must be under the authority of the CEO; otherwise it compromises the CEO and operational effectiveness. If a board member cannot separate their board self from their self in operations, they should relinquish one of their responsibilities.
Each element in an organization or business, Ownership, Board of Directors, CEO, Staff, has a role and responsibilities in the sustainable effectiveness of their business or organization. Each governance element is distinct but not separate from each of the other governance elements because they depend on each other. Governance is a structure of relationships, and as any structure is weaker if any of its materials or components is weak, a business or organization’s governance is weaker if any of its governance elements is weak. Each element, and the business or organization as a whole, depends on the quality of performance of all of the other elements, like a chain that is only as strong as its weakest link.
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