Boards and Compromise

As someone who believes that boards can and should lead, I find myself considering the relationship between leadership and compromise. Compromise too much and your board’s claim to leadership starts looking very weak. Compromise too little and you may well find yourselves becoming a contradiction in terms – a leadership body that has no followers.

Strong leadership requires a clear vision AND the ability to enrol others in that vision. For boards, creating a clear vision however is not about any one individual, or even themselves as a group, having a brilliant idea. For boards leadership is about the board as a group seeking to understand their owners’ intentions and translating those intentions into organizational success and safety.

Thus strong leadership in the board context is about collective power exercised within a democratic framework. By definition therefore, boards operate in the world of compromise. So what does that mean about their ability to lead?

For my answer, I want to distinguish between process and results. Boards are essentially leaders of a process – the process of translating owners’ intentions into reality. To be successful boards need to lead:

  • Their owners in understanding that they are owners and the powerful expression of their intentions
  • Themselves in defining and executing and monitoring their collective role as the link between their owners and their CEO
  • Their CEO in fulfilling and monitoring the expectations which the board has created on behalf of their owners.

Board leadership is therefore about creating and sustaining the framework within which the CEO’s individual leadership can flourish. In creating this framework, boards must always be ready to make compromises between different owners’ perspectives and between the expectations they would ideally like to create and what can realistically be achieved but dealing with these conflicts, and finding the best way through, is surely the very essence of board leadership.

Breakthrough strategies for small and medium organizations — the board’s wake up call

Struggles are common with small and medium companies. Resource constraints, time pressures, internal controls and keeping up with external changes are a constant reality for many of these types of organizations.

Ultimately, the whole burden lies with the board (who in many cases are owners). It is much like having a pyramid turned upside down with full pressure on the tip down below which is the board. There are traps everywhere. If you are successful, the pressures of keeping up are immense. If you have failures and constant cash flow problems, you end up in a very stressful situation. Even if you have a knowledgeable team doing a highly commendable job, challenges are all over the company.

The purpose of this article is to help such organizations ease the burden and pressures, yet perform to their maximum potential. There is a better way to function at the top level. In fact a better way is an understatement as this is an excellent way to build wealth and manage risks. I will give a practical example in which you may recognize your own or other company operations.

When I was auditing a steel company a few years back, I realised that a governance structure did not exist. The reasons were that there was far less awareness of the need for board governance back then and that the owner was the CEO who called all the shots. The buzz words back then were corporate strategy, management reports, budgets as well as cash flows. Actually, these looked and were important in many instances. But these were simply activities without a resultant outcome. These activities are simply means to an end. The company was very busy but the direction was unclear.

Under the model of governance to which I want to introduce you, Policy Governance, decisions on the company’s Ends are segregated clearly from everything else. This distinction clarifies final outcome from activities. If the Steel Company’s board had separated their management meetings from their governance meetings, and firmly focused their governance meetings on determining the company’s Ends, all the operations involved in running the business could have taken a different, and far more aligned, turn.

Board policies which clearly translate owners’ best interests into statements of the company’s true values, principles and performance expectations can be readily permeated through all levels of management and provide a strong backbone for the company as a whole. At this steel company there was no such structure present, which meant that the CEO was always under constant pressure to answer management as well as governance issues with no proper guidance. The stress levels were always high and frustrations were evident with the way he treated his staff and other stakeholders. The difficulties kept rising as the level of growth was extremely fast.

Companies globally look for long term sustainability. But in the real world, board members change, the executive team changes, as well as a myriad of other processes keep changing. The core question is how can companies cope with these changes in a competitive landscape, have workable revenue generating and growth strategies, as well as meet up with innumerable regulatory changes? The answer is to have up to date articles or bylaws in which the owners empower the board, and, up to date board policies that guide and discipline the organization on owners’ behalf.

The Policy Governance model offers a holistic approach for those acting as custodians to a company that allows them to develop simple yet clear and comprehensive policy controls that express their core values and principles in order to instil the right discipline.

Having attended many seminars on governance and ethical issues, I realise that behaviours and cultural issues play a crucial role in an organization’s performance. It is true that matters such as remuneration, health and safety, risk management are equally important, but behavioural and cultural patterns take centre stage in many discussions. Companies applying the Policy Governance model have a well designed structure and system in place for boards to align their company’s behaviour and culture with their owners’ values in terms of their Ends as well as their standards of ethics and prudence.

We must not also forget that the cause of reserves being obliterated is mainly due to the wrong choices which company directors have made. Wrong, often because the board and management were too busy with day to day fire fighting to consider what was required for their long-term success.

In summary, small and medium organizations can add leverage and take advantage of opportunities using the Policy Governance model. Whilst your competitors will be busy looking at the ins and outs of day-to-day means related issues, you will be firmly focused on defining and tracking the outcomes your owners want, taking you further and faster ahead.

How to Avoid Missing Corporate Performance Targets – At the Board Level

Let’s face it. Many companies globally exceed their performance targets and many boards perform their duties with high levels of competence. For example, in recent times, it is notable that many major banks have consistently exceeded their targets.

The momentum seems to be strong and investor confidence is growing. But there is a problem. These types of results may be short lived and could be the start of another rollercoaster. These same banks at one time cleaned their balance sheets by posting huge write offs. Most of them were not spared the spotlight falling on their wealth draining tactics. The memories are still fresh. Those who have played the investing game before may be coming back into the arena but they are doing so cautiously.

The point I want to discuss here is who should decide on future corporate performance targets? Should it be the CEO with the board’s approval? Or should it be the board that decides on the targets based on past performance, new products, risk factors and other issues? After all, the board is the ultimate body accountable.

My past experience as a coach has shown me that many boards look only at short term goals. And, as their coach, I would often join in these short term discussions never taking the time to look up and see beyond the horizon. In many cases there were valid reasons such as adverse cash flows threatening to impact their very existence.

However, what was rarely taken into consideration was the importance of having ‘real board’ meetings. Instead the entire company’s executive team kept hammering away at a myriad of short term targets which we kept missing.

Avoiding missing the mark

Subsequently, I learnt that there was a better, simple, yet powerful way that the boards of these corporations could have leveraged their companies’ success using a framework and system based approach. The Policy Governance® model, developed by Dr John Carver, is available to all as a way to resolve the difficulties created by an exclusively short-term approach.

The key difference between traditional governance practices and Policy Governance is that, in using Policy Governance, boards think of themselves as one step below owners rather than one step above management. If the board thinks of itself as accountable to share-holders rather than share-flippers then this concept in itself helps to provide the long-term perspective that I believe is needed for better corporate performance.

You can read a full description of the Policy Governance model as applicable to corporations in Corporate Boards That Create Value: Governing Company Performance from the Boardroom by John Carver with Caroline Oliver, published by Jossey-Bass in 2002. However, the following are just a few points I want to highlight in relation to the advantages I see this approach providing for corporations:

1) Having clarity in defining Ends
Perhaps the key fundamental point which traditionally organised boards miss is that they don’t have clearly defined outcomes that describe where they want to ultimately be. Yes, they have goals, forecasts and a whole laundry list of activities supporting future years but these are actually disconnected from their true purpose described in terms of the people whose lives they believe they exist to benefit, how those lives should be benefitted and what the relative worth of those benefits is.

Setting and monitoring a simple rich and relevant board policy proscribing the true Ends unfolds a stronger line of connection to core purpose. A much better investment of board time than the time consuming performance of complex variance analyses on data regarding activities whose relationship to core purpose is wholly unclear. Take for example the due diligence exercises in which consultants like me are often engaged. The points of discussions tend to revolved around past results and future forecasts which may look important, but often serve merely to distract from the lack of clear purpose. In hindsight, I see now, that, if my clients had had clearly defined Ends policies, the strategy linkage element which includes the financial health of this company would have clearly surfaced.

2) Raising Standards
Boards globally have meaningful discussions on important issues such as the financial health, risk, and governance. But how many board members see, evaluate, and build upon their own progression (collectively and individually) as well as that of their chief executive? With the Policy Governance model, policies are developed by the board and regularly reviewed and updated as the board believes necessary. Thus the board is always able to raise its standards for itself and its organization.

3) Eliminating complexity
If you see a string with multiple knots, you realise that it becomes difficult to entangle these and it takes time. These knots are basically the hindrance to a smooth straight string. Many companies carry strings with such knots. They are everywhere. Boards end up so engrossed in trying to disentangle one knot at a time, that they forget the smooth straight string. Too many complexities drag a company further down the ladder instead of going up the ladder. Under the Policy Governance banner, there are a few policies which are meaningful and simple to follow. Mission statements that fail to distinguish between matters of ends (ultimate purpose) and means (everything else) are a thing of the past. I believe this untangling of Ends from everything else to be the starting point for unpicking a whole range of other knots that bedevil organizational effectiveness.

4) The story teller
During typical board meetings, I notice a lot of stories being told. What I mean is that responsibility for the discussion is not being owned by the board as a whole. Instead the blame game is being played, or the passing the buck story is being told, and meetings are deteriorating into endless unwanted discussions. Agendas are not followed but end up as good pieces of paper to do other things on. The main purpose of such meetings often seems to be to see who will dominate. The point is that discipline must be maintained when executing board level duties. Overall accountability must be owned by the boards. This can be achieved by having a set of governance process policies that draw on principles of the board’s collective accountability to owners and define parameters for the board’s behaviour. A material deviation from these parameters can then be acted upon by the Chair using the board’s collective authority rather than his or her personal authority.

5) Transparency for Investors
In a for-profit, corporate performance includes a combination of people, resources and processes (systems). Some publicly listed corporations have statements that tell investors what is expected to happen in the future and why the company believes it will meet expected targets but most companies don’t. Yet all investors want simple, to the point information that tells them, say, what return on investment the company is aiming for in 5 years which can be reviewed in comparison with what is happening in the short term, so that an evidential linkage exists. Using an Ends policy, a board can develop this communication in as little as a few sentences. And, going further, the board can also choose to demonstrate its level of prudence and ethics and governance integrity by sharing its means policies.

Conclusion

Even though boards may be meeting or exceeding targets in the present markets, there may be new complexities entering the global markets. Companies are poised to benefit if their board has a simple set of policies exactly pinpointing where they are heading. Without a rich meaningful set of policies which can be reasonably interpreted, boards stand to keep missing the corporate performance mark with more painful experiences. I, therefore, believe that using this model-based approach can bring out the best in boards, the best in practices, the optimum performance targets and ultimately, a better economy.

Policy Governance and Organizational Accountability Practices

A Study of Compatibility

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.