Governance Defined

Description

We start by looking at what governance is and isn’t. The board as a subset of the owners has a separate and distinct role that needs to be made clear, understood and adhered to by directors and management alike. In this first session, we explore some of the key principles that define governance.

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Webinar Transcript

Welcome to this short series of webinars on the basics of governance. We're very pleased to be working with BoardPro on this. Across these six short sessions, we're going to try and get a day's teaching into just a few minutes. So pay attention. Stay sharp.

I'm John Page from Boardworks, and my colleague, Graeme Nahkies. We're going to chat to each other. What we're going to try and do is distill down the key principles. There are some slides going to come up. We won't talk through into all of them, and we'll leave you at the end of each session with a few more readings.

So we're going to start off in this first session about, what is governance? What is the role of the board? And what are they tasked with doing?

- OK, we're going to be talking in this first session about that the kind of things that represent good governance principles, the origins of governance, what it means, what's the role of the board, that type of scene-setting situation. And I've been thinking about my career in governance, which extends now back to the 1980s, early 1980s, and thinking about this term, "governance," because it's actually something that we never talked about in those days. You're either on a board or reporting to a board or you aren't, but the whole idea of governance as a discipline didn't exist.

And it was really only the trigger of the 1987 share market crash when so many companies in different parts of the world, high profile companies, fell over. People started saying, well, where was the board? Weren't they supposed to be protecting these organizations, these institutions, these companies?

So taking it from there, it's really interesting to think about, how can we define what governance is? And for me, I keep coming back to Sir Adrian Cadbury's definition, which is very simple and succinct. It's about directing and controlling organizations. We can dress that up. We can break it down, and we will. And certainly, the slides will give more definition to this, but it's essentially a discipline now that didn't exist 30, 35 years ago.

And there's some really important ingredients to it that I think underlie that discipline, and one is the idea that the board is expected to exercise leadership, not often used in a direct sense. But when we talk about what the work of the board is, it is about providing a particular form of leadership, what Robert Greenleaf described as external leadership as opposed to the internal leadership of the executive team, the chief executive and the executive team, the board being a really important component of the overall leadership of an organization, the external thing being about the board being outside the organization, independent of the executive process, and dealing with things in a bigger picture sense than is possible on a day-to-day basis.

- And a useful way to look at that is what John Carver calls being a layer of ownership down rather than a layer management up. And we see this too often with boards who are simply reacting to what's thrown up with them and there being a supervisory layer of management overseeing busyness, whereas they are actually a subset and representation of the owners. And on their behalf, they're charged with the future direction of the company and the custodial oversight of that.

And as Graeme says, it's control and direction. And one of the other ways to look at it is, are you in pilot mode or watchdog mode? And now, more-- all boards have watchdog mode, because you're bound by law to have compliance and oversight and risk and health and safety, et cetera, et cetera. But-- and you need to do that. You need to do that efficiently. But mostly, it's this idea of direction-setting, taking leadership of the organization, and working out why it's here and where it's going.

- I think one of the important dimensions of this leadership role is that, constitutionally, the buck stops with the board. In my early days in governance roles, we didn't really think about the board being anything more than relatively reactive and passive, reactive to whatever management initiatives came up-- maybe approval of big decisions in the monitoring role, the oversight role that you referred to, but, essentially, in a secondary role rather than a primary role. And that idea of the board having a primary function is something we're going to explore in later segments of this series.

- Yeah. Well, that's right. Actually knowing where you're going, and, very often, we see organizations. We go into them. We look for this evidence of strategic direction, and it's simply not there. And the organization and the board are moving along, just sort of reacting to what is thrown in front of them without any cohesive approach. And there's a number of famous quotes. Graeme likes the Cheshire Cat [? willow. ?] I like the baseball Yogi Berra one, which is, be careful if you don't know where you're going, because you might not get there.

And sadly, we see too much of that. But it is-- I think one of the central ideas to take out of this little section of society is that a board is a subset of the owners.

- Yeah.

- They're not a part of management.

- And we shouldn't get too tied up with the semantics of ownership either. Again, John Carver, you referred to before, made the distinction between proprietary ownership, as in shareholders, and moral ownership, which you'll get in some public institutions, for example, like a university. Who owns a university, right? So there are moral owners, though, in a number of different situations. So it's the ownership thing being the people that actually can influence both the composition of the board and the constitution of the entity-- they're the ones that are the owners effectively.

- And in recent years, we're seeing this idea of moral ownership, of course, now extend to the idea of social license. And so those people who are impacted by the work that you do and the business that you undertake have a view on you. So without the license of the community, you don't have a right to operate. So-- and, of course, now, that is starting to be codified in things like obligations under climate change. So this idea of a moral ownership is becoming much more solid in business, thinking it doesn't-- you don't exist in isolation from the community.

- The theoretical origins of corporate governance lie in financial economics and agency theory. It's really interesting that in the last year or so, we're now hearing around the world, even in very commercial environments, the idea that it's no longer about the primacy of shareholders and that boards of all kinds need to start having concern for a wider stakeholder environment, because the success of any organization depends on more than just those owners that we've been talking about.

- Yeah. Yeah, and there's a lovely phrase that I read recently in a European Union report about the purpose of business is to solve the problems of the world, not profit by making them. And I think that's a lovely phrase, and we should be very mindful of that. Of course, the non-profit environment operates solely in this space, but the accountability now is becoming very, very clear across the board.

- I think one of the things that we've discovered in what is quite an extensive period of time that we've been working in the space now is that the principles, the disciplines of governance are generic. They're not specific to a particular sector, either commercial, not for profit, governmental. They're the disciplines of a group of people making decisions collectively and being accountable collectively for them and applying very similar disciplines in terms of decision-making, oversight, managing that interrelationship between board and management.

JOHN PAGE: Yeah. And there are-- I mean, you know, arguably, a listed company has some specific requirements. A startup entity with the founders deep in the company are different. And there are various modes of engagement. But the principles that we're talking about today really sit under all of these things.

And I think that the layer of ownership thing is important, and the other thing is that the board's job is creating the future, less about minding the shop. And that's always a good test for a board to just make sure that their fingers are not in it too much and that they're actually spending time on the things they can influence.

- The idea of the board being responsible for long-term stewardship, even though there is changeover in the board's membership, the board is the permanent element of the leadership of the organization. Chief executives and their staffs come and go, but the board, as an institution, exists for as long as the organization does. And, therefore, the board has got to make the first moves and be accountable for things like organizational purpose. That's something we're going to explore later in more depth, but it's a critical thing for the board to own is, why does this organization exist?

- Well, all that's right, and the sort of trustee theory and stewardship thing is very relevant. It's about respecting the work of what's gone before, building on today, and the children's children's children's approach. So the health of the organization in the long term is the focus of the board.

OK, so in the latter part of this first section, we're just going to talk about some of the key ideas that fall out of the role of the board. And the first-- we've sort of mentioned this-- is that the owners of an organization, be they moral or legal, look for some outcomes from the work of the organization. So the board's job is to translate those wishes into organizational outcomes. That's the first.

The second is that the board has a job, which is separate from management, and it needs to make that clear and understood. And that's recorded, and we'll talk a little bit later about how that's done. And we like also the idea of the board as leader of culture. Graeme, fish rots from the head. I know you're very fond of Bob Garratt.

GRAEME NAHKIES: Yeah.

JOHN PAGE: Yeah.

GRAEME NAHKIES: Yeah, well, it's the idea that, really, if the board is not functioning effectively, all bets are off.

JOHN PAGE: Yeah, right.

GRAEME NAHKIES: Because the board sets the tone. The board sets the stand. The board sets or clarifies and defines purpose and the outcomes that the organization must achieve.

- And that is separated into what we call ends and means. Ends is where you're going, and you need to have an end of the journey preferably specified. Otherwise, any road will do. And the means to get there are more or less the domain of management within reason, and we'll talk about how that's framed later.

The board speaks with one voice. That's absolutely key. And right across the organization, including the board, there is a culture of accountability.

- I think there's one other point to make, and that is that directors, board members have fiduciary duties, and they cannot delegate those. They have to accept those, and when boards get into court defending themselves, it's about demonstrating that they've exercised those duties, like a duty of care, for example.

- Yeah. So there's a couple of sort of concluding slides here, and one is taken from someone that we read a lot, Ram Charan. And it's the four modes for a board, and it falls out of what we've been talking about. So the areas of responsibility that the board has to take charge of, and that's direction-setting, et cetera, et cetera.

So there is monitoring, the things that we have oversight over, so is the boat going fast, organizational performance, and how do we know? There are things like partner with the management on, and that's in the area of strategy and risk and developing people. And this stuff, they simply stay out of the way. So that's delegated. It's defined by policy, and it's fingers out country.

So I think in the last slide that we're sharing with you, there's just some key principles there that are worth reflecting on. And they summarize, I think, the discussion that we've been having in this first week's session.

- Just to conclude this first part of the webinar series, there's some core principles that we've been talking about and that will be reflected in one of the slides. This issue of the board translating ownership requirements and organizational outcomes is really a very important starting point, the idea that the roles of governance and management should be distinct and properly documented and the board recognizing its responsibility to take a lead in relation to a number of things.

Clarity that flows from that is about the clarity of what the organization should achieve, but also the delegation to the chief executive and their team as to what the performance expectations are there. The board also needs to be accountable for its own processes, and it needs to think through, how is it going to get the job that it has to do, which is exclusive in some respects? How is that going to be conducted efficiently and effectively?

And, finally, the operations of an organization are largely delegated by the board, because the board constitutionally has all the authority to begin with. But it's really important for that to be an explicit process and for the board to respect the delegations that it makes to the chief executive.

JOHN PAGE: And I think the last thing, and particularly in boards where people are volunteering their time, is respect the gift of time. Make it an enjoyable experience. Nobody volunteers to be miserable, so if you're miserable, there's something wrong.

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, and a lot of material. So please avail yourself of it. Thank you for your time, and we hope it's been useful to you.

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