Board Governance: A Thin Line Between Oversight and Operations

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Monday, September 28, 2020 / 03:35 PM / By IoD Centre for Corporate Governance / Header Image Credit: IoD Centre for Corporate Governance

 

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Introduction

Good governance practices help directors make management more accountable, with stronger internal controls, better managed risks, and more effectively measured performance. The roles and lines of accountability should be clearly defined for directors, Board Committees, the Board Chair, the Chief Executive Officer (CEO), and other Executive Officers, including written position descriptions.

 

This article intends to generally describe what role the board should perform, what role the CEO should . perform, and why the two roles should be separate and distinct.

 

While boards and management hold close ties to one another, their duties and responsibilities are distinctly different. In simple terms, the board makes the decisions and management carries them out. Due to the debatable nature of our society, boards are taking a stronger interest in day-to-day management activities because of the ensuing impact on its fiduciary responsibilities. Boards need to be informed of how the organisation is being managed to protect its legal responsibilities, but the board's role should not cross over into performing management duties.

 

The Role of the Board

The board guides the company indirectly by setting policy and seeks accountability by monitoring results and taking corrective action. It articulates the company's mission, ensures the business is carried on legally and ethically, allocates company resources, and attempts to balance the interests of the company's various stakeholders.

 

The board should develop governance expertise by ensuring its members have the skills and experience to govern in a constantly changing environment. Governance expertise encourages strategic thinking, and strategy drives the company's policies, programmes and budgets. Directors in any organisations are required to discharge their duties in accordance with the following basic fiduciary duties, which are:

 

  • Duty of care: Act with the care an ordinarily prudent person in a like position would exercise under similar circumstances;

 

  • Duty of loyalty: Act in good faith in a manner the director reasonably believes to be in the best interests of the organization

 

  • Duty of obedience: Act within the organisation's purposes and ensure that the mission is pursued.

 

Further to the above, the role of the board is one of oversight - directors "direct" - while the role of management is to carry out the day-to-day operations of the organisation - managers "manage". Often, board members cross the line between oversight and management by becoming overly engaged in the operating activities of the entity, such as the . day-to-day work required to fulfil organisational goals. Board involvement in operating activities can lead to tensions between the board and . management/staff. Boards should consider the extent to which their involvement in operating - as . opposed to strategic - activities benefits or hinders the ability of management and the organisation to perform.

 

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The Role of the CEO

The CEO, in contrast, has only the authority delegated by the board. While the CEO is expected to provide leadership, the CEO's role is often described as providing hands-on, operational, day-to-day management. Just as the board has governance expertise, the CEO has operational expertise, designing, implementing and managing all of the company's systems and processes.

 

The CEO translates the board's mission into actions. The CEO organises the company's resources to achieve the strategies set by the board and guides the company's employees on how to implement the board's policies in a fair and consistent manner.

 

With the above brief on the roles of the Board and CEO, it is noteworthy to mention that even with the basic principle that boards make decisions while management implements the plans, the complexity of today's business world often muddies the waters. Boards function best when they focus on higher-level, future-oriented issues; but there are times that they need to get more intrinsically involved. When the board sees negative results, it's a red flag to delve deeper into management issues to get the organisation back on track in order to fulfil their duties to shareholders and stakeholders.

 

Drawing the Line

Sequel to the above, defining the roles of the Board and CEO is easier in theory than in practice. Most times, it is difficult to establish a clear dividing line between what the boards should be doing and what the CEO should be doing.

 

For instance, if the board gets involved in making executive decisions, the CEO's authority is compromised, and the company's employees and other stakeholders may attempt to pitch the board members and management against each other.

 

Furthermore, if the board is too removed from the day-to-day operations of the company, it can become overly dependent on the CEO for advice and receive only selective information. If the CEO crosses the line and dictates policy to the board, the CEO usurps the board's authority and responsibility to balance the interests of the company's stakeholders. The actions of the board and management have to align with their respective written authorities and responsibilities, as inconsistent behaviour creates confusion and uncertainty both inside and outside the company, and invites employees and other stakeholders to favour themselves at the company's expense.

 

In the words of Stan Sliverman, Guest Columnist, Philadelphia Business Journal,

 

"One of the key lessons that board members must learn is not to cross the line between governance and operations. The most important job of the board on which you serve is to hire the CEO and hold them accountable for results. By crossing the line, you interfere with the ability of the CEO to do their job".

 

This is a lesson that many newly appointed directors and trustees without prior board experience need to learn. Experienced board members should be reminded of this periodically through capacity development programmes.

 

Boards that routinely infringe upon management duties and responsibilities risk upsetting a structure that is intended to help both of them. CEO's and other managers need to know that boards have confidence in them to manage things when they go awry. Boards that cross over into management role risk turnover of CEOs and executive positions. The relationship between boards and management was strategically developed for high-efficiency organisational success. Boards address the broader, mission-focused activities, leaving the daily managerial activities to the CEO and other Managers.

 

When boards and management having a strong and open working relationship with each other, the organisation benefits in notable ways. Boards should support the CEO in implementing board decisions, such as awarding or ending contracts. At times, the CEO may need to ask the board for intervention or support; CEO's may need the board to intervene with management in ways that help him/her raise performance; Boards may also support CEOs by using their networks within the community to support the work of the organisation.

 

In furtherance of achieving and maintaining effective oversight and governance, and in the interest of earning the respect and loyalty of management, the time is ripe for boards to focus on the ethics of management as well as the traditional focus on the ethics of the overall organisation.

 

It is both timely and good business for boards to put in place systems of substantive checks and balances that start with the CEO, senior management, and the board itself, and then proceed through the entire organisation. Improving board and organisational oversight and governance can not only lower the risk of failures and problems in the organisation, but can also bring sustainable operating benefits to a company and its shareholders.

 

In all, directors need to be effective in their roles. If it's a for-profit organisation, they represent the interests of the shareholders. If it's non-profit, they represent the interests of those who the non-profit serves. The Board needs to be effective advisor to the CEO, and hold them accountable for results. And remember, the Board overall job is governance, not operations. Most importantly, the board should elect members who understand and respect the difference between governance and management. Choose wisely, seeking as directors, individuals who bring no personal agendas, understand the role of management in small, large, complex organisations, and have a desire to work as part of the board-management team.

 

About Board Governance Series

The Board Governance Series is a feature publication of IoD Centre for Corporate Governance. This publication is a firrst of its kind and it deals with topical corporate governance issues that affect the Board as well as addresses the extraordinary challenges that boards are facing in our ever-changing world. Board Governance refers to the systems and processes concerned with ensuring the overall direction, effectiveness and accountability of the Board in an organisation.

 

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