October 2010 Issue 5
BoardWorks International
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Where is ‘The Line’?  

It is common to hear both board members and managers talking about 'the line' between governance and management. This is most likely when there is a sense that one of the parties has strayed too far into the other’s (jealously guarded) territory.  These conversations often reflect the assumption that the respective roles and responsibilities are clearly distinguishable. A parallel assumption is that there are universally established and accepted norms and expectations that everyone knows, and should recognise and respect. 

There is no sound basis for these assumptions.  The simple fact is that the line is where the board says it is. There are several good reasons why this is true.

1.  The role of chief executive is subordinate and sequential to that of the board 

In some jurisdictions certain statutory references are made to the chief executive being the employer of other staff. Apart from that, it is rare to find any organisational constitution that even refers to, let alone specifies, the role of chief executive.  Invariably organisational constitutions emphasise the ultimate accountability of the board for the performance and well-being of the organisation.

In relation to the board’s employment of any staff the constitution is usually permissive. Typically, it will contain a phrase like "the board may employ a chief executive".  It is up to the board, therefore, to determine what sort of assistance it requires, when, and from whom. Any staff appointment the board does make is clearly subordinate to the board. 

The chief executive's role (and all of those roles and positions sitting below that position) is not only subordinate to the board but is sequential. Even once appointed, a chief executive does not have a job until the board has delegated some of its (ultimate) authority to the position holder. This means that the board must decide what the scope of its own job is first. Only then can the chief executive’s role be defined.

2.  The extent of the delegation to a chief executive depends on the historical evolution of the organisation

In a newly formed organisation, whether commercial or not-for-profit, it is highly likely that board members will perform many, if not most, of the operational tasks as well as doing the governing.  In a company, for example, they will likely be executive or working directors.  They will both govern and execute.  Similarly, in a not-for-profit organisation, board members will also be volunteers (unpaid staff) undertaking much of the work that has to be done.

Things change as an organisation grows and matures. It becomes less and less possible for the comparatively small number of board members to implement the board’s own policies and business plans as well as fulfilling the governance responsibilities. Over time, therefore, the board will be required to consider a greater division of labour. It will be compelled to redefine the 'governance' compared to the 'operational' aspects of the board’s role. The initial responsibility the board had for carrying out the work of the organisation can be progressively passed to others; it can never delegate its governance responsibilities. 

3.  In a dynamic operating environment the board must necessarily reassess the extent of its delegation

Even if there is a ‘line’ it is not a straight one and it is not fixed in one uncontrovertible position.  As indicated above, organisational growth, in particular, will suggest a trend of an increasing delegation of responsibility to employees via the chief executive.  Within such a trend, however, there may be times when the board considers that its delegation should be tightened rather than loosened.  Commonly, this will occur where a board considers that risk to the organisation has increased and that it should take greater responsibility itself for a particular judgement or decision.  In New Zealand, for example, it might be predicted that the recent intense media scrutiny given to the use of corporate credit cards (on the back of the English Parliamentary expenditure scandals) will lead to tighter expenditure delegations.

The twin components of effective delegation

This analysis helps to explain why the process of corporate governance is essentially about the assignment of decision-making rights.  A great deal of the tension that can occur between boards and their chief executives is a reflection that the process of assigning decision-making rights has been unclear or is incomplete. 

Successful delegation (or, in other words, a clear description of where ‘the line’ is), depends on a board consistently getting two, complementary, things right:

1.  A clear prescription of the results to be achieved (e.g. 'achieve a fundraising target of $200,000 in the 2010/11 financial year’); and
2.  A clear proscription of situations and circumstances to be avoided (e.g. ‘in seeking to fulfil any fundraising target the chief executive shall not increase the organisation's dependency on government funding').

The second part of the process is needed because of the old adage that the ends do not justify the means. While, necessarily, the proscription is couched in a negative format, it is actually a very powerful form of empowerment. Chief executives are free to choose whatever means they like – provided they remain within the boundaries. This reduces the risk that boards will be seen as ‘interfering’ because there is no need to tell their chief executives how to achieve the desired results.

This two-pronged approach is essential ‘book-ends’ to a successful definition of decision-making rights.  It establishes what is to be achieved while at the same time defining the boundaries within which the chief executive must work. 

Where are we on the continuum? 

Even where an apparently clear delegation exists, it is seldom a completely black and white situation.  Chief executives, in particular, would do well to understand this.  There is a continuum. At one end it is entirely the board's decision.  The board requires no input from the chief executive at all.  At the other end the decision is totally the chief executive's with no further reference needed to the board.

In a practical and pragmatic sense there are many intermediate positions between these two extremes.  Boards and chief executives that work well together are adept at ensuring they know where they are on the continuum. Regardless of which party has the primary responsibility for a particular decision, they constantly check any expectations the other has of some input to that decision.  For example, under the board's delegation a certain decision may belong to the chief executive.  The board may still wish to satisfy itself, before the decision is finally taken, that the chief executive has recognised and taken into account certain considerations that are important to the board.  A smart chief executive would find a way of identifying and understanding those considerations and of factoring them into his or her decision.  He or she would then communicate the outcome to the board in a way that provided the desired level of assurance.  Boards have to be equally smart at integrating the chief executive into decisions that belong primarily to them. 

The issues traversed in this article demonstrate why there is a very high premium on effective and continuous communication between a board and its chief executive.  The two do not work in their own carefully defined – and separate - silos but partner together in the best interests of the organisation.  An understanding of these issues will help to ensure that the best possible decisions are made by these two different components of an organisation's leadership - without compromising their respective responsibilities and accountabilities. Success in this interplay is essential to maintaining mutual trust and confidence between a board and its chief executive.

 

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