A board is generally physically present less than 1% of the time but with full responsibility 100% of the time. It needs to be comfortable that for the vast majority of the time is not in session the organisation is well run and pointed in the right direction. The connection to the chief executive is the primary mechanism for ensuring that all is as it should be. Here we look at how that happens.
Welcome to session four of this group of six webinars on the principles of governance, hosted by BoardPro and BoardWorks. I'm John Page. This is Graeme Nahkies. And in this fourth session, we're talking about the board's connection to the chief executive. Welcome back. In the past three sessions, we've largely talked about the role of the board and what that looks like.
We're now going to move to how it connects with the chief executive. That's really important. Because when you think about it, a board is physically present in the organization probably less than 1% of the time. But it has accountability for the organization the whole time-- particularly legal accountability. So therefore, it means there needs to be some method of connection to the chief executive. We're going to work out how that is done and talk a little bit through that in this session.
- There's a number of different dimensions to this. But I think the starting point really is that the board needs to create a framework within which the management team does its job. So that goes back to the direction and control concept we talked about earlier. The board needs to give direction. And it needs to create a framework of control as well.
And that's largely done through the process of delegating what is in the first instance, the board's authority. And creating a sense within the management team of where its decision-making space is, for example. So one of the definitions of corporate governance is it's the allocation of decision-making rights. However, [LAUGHS] as chief executives frequently find, that what they thought was a clear cut delegation is not. If the decision they make is something that upset somebody on the board.
- That's right. It's this sort of idea of necessary remote control. So that we've said enough, that when we're not here, it's very clear to management, two things-- a, what we're trying to achieve, and b, what you can't do, which is important.
- Yeah. So there's another concept, which I think is really important here. And we've touched on it slightly in previous modules. But we want-- as a board-- to ensure that the organization is well-managed without doing the management ourselves. We might talk about it in a later session. But the problem is that executive teams frequently complain to us that their boards are meddling, for example. And then you look at what they're reporting to the board. And it's mostly inviting the board to be spectators to management activity.
- Well, that's right. And in those cases, generally speaking both parties are at fault. The board has failed to create the necessarily clear framework. So management is at a bit of a loss and just--
- Yeah. It's natural. Let's just tell them how busy we've been.
- Yeah. So what we have to work through here and have the board think about is, how does it-- when it's not in session-- exercise this sort of remote control. And the way it does it is through governance policy. And that can take a myriad of forms, including the strategy stuff that we were talking about earlier.
JOHN PAGE: Well, that's right. And that's one of the things that people fail to understand. That the board's primary instrument of policy is what we talked about earlier-- the statement of intent.
- Because everything flows from there.
- There are other categories of governance-related policy though that are important. And we tend to think about there being four key components to governance policy. This is what I'd loosely call the housekeeping stuff. So the board's own job description-- the processes, and so forth, and documenting those, in for example, a board charter, or a governance policy manual, or something like that. But charters have become quite commonplace and are a very useful tool for the board describing how it's going to do its own job.
And the second category of governance policy is really how does it connect to the chief executive. As we're talking about. So that would be a lot of the delegation staff and the performance management stuff. Even the original appointment of chief executive-- how are they going to go about that? Is the board committing to it being a merit-based appointment, for example.
There's a third category. And it touches on the risk management stuff that we talked about before and the control element. And that is basically creating some boundaries within which the chief executive is free to exercise their best judgment. Which there's another point we need to make about allowing the chief executive to exercise a reasonable interpretation of the board's policy. And that--
JOHN PAGE: I think, just before we leave that, it's just we're coming back to in the process part of the charter. There should be definitions of the role of directors and the expectations that are being placed on them-- both in terms of their behavior and their contribution. And whilst we're not talking a lot about recruitment in here, those things should be transparent at the outset.
- One of the things that's really important in most governance environments that would fit into that governance process category are how they will deal with, for example, conflicts of interest.
- Because that goes to the heart of the integrity not just of the board but of the organization. Something that's often lost sight of is that managing conflict of interests well is as much as anything else protecting the reputation of an individual who might be unfairly accused of having a conflict, for example.
- Yeah. Just often simple things as well. Sometimes we come up against directors when we're doing evaluations. They say, well, I wasn't made aware that I was going to be evaluated. Well, that needs to be expressed upfront and laid out in a charter. That actually, this is part of how we work. We take accountability for our performance.
- One of the things that's challenging boards more and more, which you'd also expect to be set out in that governance process part of the policy set, is how a new board member will be inducted, for example. So with increasing diversity on boards, we're seeing boards really seriously challenged. Not by taking a diversity box, per se, but the inclusion of someone who is there because they've got a different way of seeing the world in the first place. How they become fully contributing members of the board as opposed to some sort of subject matter expert who is sitting out on the edge somehow.
- And this comes to the kind of heart of the purpose of a board. As many people have said, if we all have the same view, we only need one of us. Because that makes the board meeting much more simple. The purpose of the board is to have diverse and often conflicting opinions, from which you get a better outcome.
- But you have to understand how to work with that, otherwise you just end up with conflict and nothing else.
- Yeah. So I talked about three of those categories of policy. The fourth one is the one that you referred to at the outset, which is that direction thing. What are the ends that we're pursuing? What are the outcomes that we must achieve? What's the impact we must have on our world? So those four components fit really nicely together in this idea of some sort of device for remote control, which enables the chief executive and their team to travel safely-- to be able to get on with the job of operationalizing those plans and those intentions.
- And one of the ways that we look at this when the board frames policy-- which is the board's job-- is this idea of mixing bowls. In your larder, you can't stack mixing bowls the other way around. You can't start with the small ones, because that just doesn't work. And very often, the largest one is actually something we talked about earlier, which is values.
GRAEME NAHKIES: Mm-hmm.
JOHN PAGE: Because as humans, our values are set at about 25. And we don't change that very much. So within that, then you come down. And I think earlier we said, so we value our people. Well, what does that mean?
GRAEME NAHKIES: Yeah.
JOHN PAGE: You need to be more specific, such that you've given guidance to management. And it might come down to, this is what we believe about maternity and parental leave, et cetera, et cetera. To the point where Graham was saying, we have seen enough. And now, beyond this point there is a reasonable interpretation that management can make.
- Yeah. Just in terms of that mixing bowl analogy. So you always start with the big outside bowl. And you look at those policy statements. And you say, have we said enough about this? And probably in most cases, it's not sufficient. Because the test is always, have we said enough to let the chief executive and their team go away and interpret this on our behalf? So there's almost always one or two, three, even smaller mixing bowls fit in, so that the policy starts at a very high relatively general, maybe even abstract level, and gradually becomes more specific to the point where the board is comfortable that they can let somebody else interpret that policy.
- That's right. And boards are generally very good at creating financial policies, because they understand limitations on numbers. But usually, they go wrong in other areas. And we've seen this of late, particularly in the cultural behavioral areas, that they don't make their values express and clear in those spaces. And that's where things come badly off the rails.
- Yeah. I mean a very good case in point was thrown up by the Australian Royal Commission into the financial services sector, which showed that there was a lot of really bad conduct going on inside particularly the major banks, but also some of the other major financial institutions in Australia. And that the directors were seemingly unaware of. But perhaps they were also creating the incentives for that bad behavior in the first place. So that's not just confined to Australia or New Zealand for that matter. It's a global thing. And there's been a lot of those sorts of problems.
- And this circles back to the earlier conversation about ends and means. It's the board's job to define the means to be achieved. And this policy process to a certain extent is about are there any limitations on the means that management can choose. And one of the ways that we look at that in the slides is this idea of policy funnel, which is quite a good concept, where you've got the ends defined and the means. And the walls simply say, if you want to go outside the walls, you've got to come back and talk to us some more.
- Yeah. Sometimes it's specifically to ask for permission. Other times it's, come and tell us what you're thinking about the options are for action and to achieve this result. Yeah. It's a very simple concept. And it invites the right sort of conversations and reminds chief executives that they can't take for granted-- they can't make assumptions-- that just because they've been nominally delegated authority, that the Board necessarily meant that in its heart.
- And that really only comes to light if the judgment, that as a chief executive you make, is inconsistent with what was in some-- maybe be just one director's head at the time that they made that. But again, I think you made the point earlier that the board needs to respect the delegations until such time. It's a bit like, here's the goalposts. We're not going to move the goalposts in the middle of the game.
- Well, yes and no. Sometimes the board is at liberty to move goalposts. Because at the end of the day, it's accountable for all things at all times.
GRAEME NAHKIES: Of course.
JOHN PAGE: And the most obvious recent example is COVID. Where goalposts move very quickly. And boards suddenly became very interested in a lot of detail. And that was correct.
- Yeah. And look. Chief executives need to acknowledge that their boards will dive deeper when there is a crisis, when there is uncertainty, which is actually when a board comes into its own really. Because for a lot of the time, being on a board is a relatively straightforward exercise. But it's in the crisis, when there's a high level of uncertainty or risk, that directors start stepping up and saying, we've really got to be involved in this. Because ultimately, we're accountable for the organization.
- And chief executives want help in these areas.
- Yeah. And there's been a lot of great stories come out of the lockdown periods in particular, of how-- maybe even for the first time-- boards and management teams have really sat down together and combined their respective perspectives, and experience, and skill sets, and so forth. And it's been welcomed by both board and management.
- So the other area here in terms of communication to management is about the board's monitoring role as watchdog or its oversight role. But again, the board needs to be specific about what its monitoring and the criteria. And this comes down to being very clear about what we're trying to achieve and the measurement around it. So that the management can put information up that allows the board to answer the question, are we going fast enough in the right direction? And again, the board has to do its work first there. Otherwise-- and we see this all the time. You get board papers full of irrelevant measurement, which is not helpful.
GRAEME NAHKIES: Yeah. And I think, just to reinforce that point, the board's policy settings actually create the criteria for reporting. Not just in a compliance sense. But it's because the board has said, this is what's important to us. This is how we want to do our job. And this is how you need to help. And this is how we are going to impact on you doing your job. But it's a two way process. And ultimately, it's a collaboration. There's some asymmetry of power because the board has all the positional authority-- in a sense-- as the employer. But who controls the information that the board works on.
- Well, that's right. And we'll come to that in the next section about meetings, which is about management understanding that it's assisting the board to do its job. It's not looking for the board to have oversight of management activities so much. I think one of the last things on here is the phrase that we often use when we're working with boards about-- it is the board's job to make clear what information it wants and in what form.
And we'll see that flow through into the meeting things. So unless the board has said that, they'll get what they deserve, really. So I think probably, we can wrap this one up. What we've said here is that the board has to do its job, first, before it can even begin to construct a connection with management, which is largely done through policy and limitations on means to be chosen. So management must not be left guessing.
- No. And if I can just add to that John. I think one of the things that I think is missing in a lot of governance education is the importance of policy in the way we've been talking about it. It is the board's main tool. And yet, you see very little reference to the board's policy-making role in most governance related literature. It's like boards just muddle through and make a lot of assumptions. And management on their side do as well. What we're talking about here is creating a really safe environment for both board and management-- and thereby the organization. Because respective expectations are clear.
- And it's time consuming. It's often not simple. And it does take time. And boards are sometimes unsure how to go about it. So they probably need a little bit of help. But once that's there, what it does essentially is it clears the desk for the board to focus on its job, not worrying about whether the management is doing the right job. Because it's been very clear about that. So it allows the board to come back into the spaces that we were talking about-- having a strategic role rather than an operational role.
So look, thanks for joining us across these six short seminars. Thank you my colleague Graeme, thank you to BoardPro. We really do hope this has been useful. If you want to continue the journey and learn some more, look to our website BoardWorks.nz. We've got lots of great articles. We're committed to writing and have done for 20 odd years. There's a lot of reference up there. And BoardPro's own site has a lot of material. So please avail yourself of it. Thank you for your time. And we hope it's been useful to you.