The Board of Directors must assess the level of risk that an organization is willing to tolerate and decide how it wants to manage those risks. Policy Governance creates a superb structure to manage risks without micromanaging the executive. What it does not do is explain whether a particular Executive Limitation policy is necessary or overly cautious. Having too many Executive Limitations is harmful to organizations because it diverts resources that should be devoted to producing Ends and redirects those resources to protecting something that may not be a great threat to the organization. In addition, organizations can be so cautious that the become paralyzed which prevents them from achieving their Ends. After all, ceasing all flights is probably not an appropriate risk management strategy for airlines who what to prevent midair collisions.
Policy Governance practitioners need to go beyond the “starter set” of Executive Limitations policies and begin to more thoughtfully manage the risks to their own organization.
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Policy Governance Update: Using the “stock set” of Executive Limitations is not serving your moral owners
Good Governance Averts Crisis Despite Perceived CEO Mistake
One board member angrily complains that an letter improperly solicited the members of their organization. Accusatory emails shoot back and forth and the temperatures of the Board members and CEO begins to rise. “This was the old way of handling problems,” one board member comments. However, they had recently implemented a new way of governing and it was time for its first test.
In Policy Governance, there is a specific approach to addressing problems which prevents situations from spinning out of control. Here is how this organization addressed the emerging problem and prevented a crisis.
The President and the CEO acknowledged it was a real issue.
Policy Governance creates a system by which the Board can control the organization without micromanaging. Well thought-out systems are important, but a board is a human system comprised of people and their feelings. By telling the aggrieved Board member that the problem is being taken seriously and is being addressed directly, they buy themselves time to deal with the issue in a meaningful way. The challenge is to appropriately follow through so that the Board provides direction without usurping the CEO’s authority to run the organization. That’s where Policy Governance comes in.
Has the Board Already Prohibited Such Action?
The Board had created a list of problematic situations that they wanted the CEO to avoid, such as treating their members unprofessionally, financially imperiling the organization, etc. This list became the basis of the Board’s policies prohibiting the CEO from allowing these situations to transpire.
The President, the CEO, and the agitated Board member talked about what had actually happened . There was no question that the CEO had the right to send a solicitation in the name of the organization. There was also no expectation that the CEO needed to read the minds and sensitivities of Board members or individual members of the organization regarding sending out solicitations. However, in their discussion, they revealed an area of sensitivity that the President and Board member thought the CEO needed to consider. However, the President and the single Board member do not have the authority, by themselves, to tell the CEO what to do or how to do it. Only the Board, as a whole, can do that.
The Board checked their policies to see if this particular situation regarding the solicitation of certain members had already been barred. If it had, the CEO had some serious explaining to do. In this case, the Board had not prohibited this type of action.
Fashion a Policy; Board Approves
The Board Chair, with input from several Board members and the CEO, created a policy that prohibited these kinds of situations in the future. The President brought the policy to the Board which discussed and ultimately approved it. The Board recognized that the CEO had the authority to take this action in the past, but they thought it was in the best interest of the organization as a whole to slightly limit the CEO’s authority in this one, narrow area.
Monitor, Monitor, Monitor
Then the Board directed the CEO to provide information at a future meeting that the policy is being followed. This gave the aggrieved Board member even more confidence that her issues were being taken seriously and the needs of the members, whom she represents, were being well represented. In Policy Governance, the Board monitor every one of its prohibitions each year, if not more, to ensure that the CEO is acting in accordance with the Board’s directions.
Strong Governance Systems Prevent Crises
Dealing with aggrieved members is a typical problem that can blow up into a serious crisis. If the challenge is handled poorly, it can leave residues of hurt feelings and mistrust that undermine the strength of all of the leadership. Policy Governance provides a coherent and robust system that clearly defines the roles of the Board and CEO and creates a roadmap for constructively addressing all governance circumstances.
Executive Directors Unnecessarily Relinquishes Authority
In the “traditional” board model where the board serves as an extension of the management, there is a dance between the CEO and the board. The CEO provides information to the board which then deliberates over that information and approves a next step. But what if the CEO already has the authority to make the decision?
One CEO reported to the board about the progress of several projects under his direction. He showed the board time lines, budgets, copies of potential contracts, etc. He was being dutiful in that he was trying to keep the board well-informed. However, much of the information did not require any board action, it was just informational. For instance, the contract that he showed to the board was with a well-known and respected company and it seemed to be reasonably drawn.
However, one of the board members with a self-perception of expertise in the area of the contract had some questions about the agreement. There were some aspects of the contract that he would do differently. The board member raised his questions and several other board members expressed concerned that they may never have known about the problems with the contract had this first board member not raised the issue. Suddenly, the board member who had claimed expertise and questioned the contract had volunteered to review the contract with the company. The board quickly agreed, feeling that their newly realized concerns would be addressed. And just as quickly, the CEO’s ability to contract with other organizations disappeared under the board’s micromanagement.
What would have been a better way to handle the situation?
The board should think ahead about the types of activities in which the organization engages. This board knows that they will be engaging contractors, therefore, it should research what restrictions it should place on its CEO when engaging in a contract. For instance, if it is concerned that someone with expertise should review an agreement before entering in a contract, then the board should demand as much in a policy.
The policy might read:
The CEO shall not enter into any contract of over$1,000 without having the contract reviewed by someone without conflicts of interest and with expertise in the appropriate field of the contract.
In the above situation, the board member questioning the contract may have expertise in the particular field, but then again, he may not. It is difficult for the board to assess if his expertise is applicable, but it is extremely difficult for the CEO to reject using that particular board member’s input, even if the board member’s expertise is clearly insufficient. After a contract has been signed, the CEO should be required to submit a report to the board demonstrating that the contract was, in fact, reviewed by a person, of the CEO’s choice, who had appropriate expertise.
CEOs should not treat their board as an advisory committee since there is no reason to believe that the board contains the necessary knowledge. The board should proactively think about the types of situations in which the organization engages and think about the types of problems that might occur. By expressing these concerns as Executive Limitations policies and demanding that the CEO follow those limitations, the board is able to protect the organization and preserve the CEO’s authority to make decisions.