Governance - A Pocket Guide For Directors And CEOs

The guide is not intended to be a legal treatise – there are many technical works dealing with the responsibilities of directors and CEOs. Rather, the aim is to provide an outline of the key issues which will assist directors and CEOs in their role in the organisation.

The guide gives an overview of key areas such as developing a strategic plan; how to work with the CEO; and how to ensure that the organisations’ overall plans and visions are achieved. And, most importantly, ongoing evaluation of the board members own performance in achieving the organisations objectives.

10 Key issues for good governance

1. Know your role
   
   
2. Understand the law and the duties of directors and officers
   
   
3. Helping to set the policy framework
   
   
4. Developing a strategic direction
   
   
5. Assessing and managing risk
   
   
6. Working with the CEO
   
   
7. Making it happen - Board practices and procedures
   
   
8. The scorecard - monitor and evaluate results
   
   
9. Avoid traps for the unwary
   
   
10. Evaluate performance

 

1. Know your role
   
   Understanding the responsibilities and rights of board members and the CEO is fundamental to the principles of good governance. The roles and responsibilities are quite different but often, in the day to day operation of an organisation, the roles can become blurred. And when they do, the successful operation of the organisation is put at risk. A successful organisation demands the development of a strong partnership between the board and its CEO.
   
   The board’s primary role (in partnership with the CEO) is to ensure the stakeholders (e.g. shareholders, investors, employees, creditor, customers and the community) interests are fully protected; the organisations strategic direction set, and the organisations performance monitored. All designed to ensure that the organisation survives into the longer term.
   
   The CEO’s primary responsibility is to carry responsibility for implementing the strategic plan by effectively managing the organisation.
   
   A key distinction is that the board must clearly define its role, ensuring that it is not just another layer of management.
   
   The board and the CEO must, if they are performing their roles effectively, add real value.
   
   In summary:
   
   
   • Set and focus continually on the strategic direction of the organisation.
     
     
   • Establish policies; plan how the organisation will achieve its strategic intent.
     
     
   • Monitor the organisations performance.
     
     
   • Establish and monitor risk management strategies.
     
     
   • Be aware of the external environment in which the organisation functions so that it may be ahead of its competitors.
     
     
   • Use the skills and experience which led to your appointment to further the interests of the organisation.
     
     
   • Accept (and hopefully exceed) expectations of the board’s role and constantly evaluate whether it is governing well.
   
   
   
   
2. Understand the law and the duties of directors and officers
   
   Directors and officers have a legal duty to manage the organisation in accordance with the law and in the interests of all of the stakeholders. The overriding duty is first to the organisation. Directors and officers also have duties to creditors or potential creditors particularly to ensure that the company does not trade whilst insolvent. And directors also have other duties to employees and the community broadly particularly in the areas of Occupational Health and Safety, Trade Practices etc.
   
   In exercising responsibility directors and CEOs must act honestly; avoiding conflict of interest, with reasonable care and not for personal gain.
   
   Obviously this broad list of duties has many elements and at times it will be difficult to judge whether a director or CEO is honoring his or her duties. A useful test to apply in a given circumstance might include an affirmative answer to the following questions.
   
   
   • Is the decision I am about to take in the best interests of the organisation?
     
     
   • If yes, do I hold that belief honestly and reasonably?
     
     
   • Have I sought all of the relevant information and advice to assist me in making the decision?
     
     
   • Does the decision impact on me personally. Is there any real or apparent conflict?
   
   
   
   Summarising then:
   
   
   • The well governed board will be fully aware of its duties and legal responsibilities.
     
     
   • Ensure that in making decisions they take account of the interests of the organisation, its members and other stakeholders.
     
     
   • The organisation is acting in accordance with its charter taking appropriate account of its “good corporate citizenship” status.
     
     
   • Have in place policies and procedures to ensure that all legislative and other legal obligations are identified and met.
     
     
   • Ensure processes are in place and followed to enable the Board to ascertain if the objectives or plans for the organisation are being achieved.
     
     
   • For the directors and personal wellbeing ensure that the organisation has in place appropriate directors and officers’ liability insurance.
   
   
   
   
3. Helping to set the policy framework
   
   Good governance requires effective policies to be put in place and regularly monitored.
   
   Governance policies are, if you like, the commandments by which the organisation lives and operates. They provide a strong framework within which the CEO and other employees operate.
   
   They are the values by which the organisation becomes known.
   
   It is incumbent therefore that governance policies be led from the board. Leadership is or ought be the hallmark of the board of directors.
   
   Once appropriate policies are in place they give confidence to the CEO and the organisation to enable them to know the parameters within which they can work.
   
   In summary:
   
   
   • What existing policies for governance does the organisation have?
     
     
   • Review the policies and if not appropriate develop policies to replace them.
     
     
   • Constantly refer to and monitor the policy and use it as a measure by which the organisation performs.
     
     
   • Direct the CEO with the responsibility for developing day to day planning within the policy framework.
     
     
   • Ensure that the policies in place lead toward the strategic results that the organisation has set for itself.
   
   
   
   
4. Developing a strategic direction
   
   One of the greatest dangers for any organisation is to allow it to drift. As they say: “If you don’t know where you’re going you might end up some place else!”
   
   The board has a clear duty to set the strategic aims for the organisation – its vision, its goals and the strategies by which it hopes to achieve those goals.
   
   “The board’s role is to create the future – not mind the shop” – John Carver.
   
   The board should change the way things are in the organisation from what they are to what they think they should be.
   
   In setting strategic direction for the organisation the board is essentially answering questions such as:
   
   
   • What do we want this organisation to be?
     
     
   • What preferred future do we plan for this organisation?
     
     
   • Where do we want to be in the next ___ years?
   
   
   
   The questions for the CEO are somewhat different:
   
   
   • Given the strategic direction set by the board how will I help the organisation to get there?
   
   
   
   Put simply then, the board sets the direction and the CEO is responsible for ensuring that the organisation gets there.
   
   Regrettably, too often the board fails to take the time and the trouble to establish clearly its mission or purpose, its values, its vision. But without them, the CEO and others in the organisation are, at best, left to drift and at worst, they themselves determine the direction of the organisation.
   
   
5. Assessing and managing risk
   
   “If things seem under control, you’re just not going fast enough” - Mario Andretti - Formula One Racing Driver.
   
   “The future always arrives a little before you are ready to give up the past”.
   
   “Whatever made you successful in the past won’t in the future”.
   
   What these statements are saying is that every organisation is involved in change (or should be). The ongoing process of change involves taking risk in order to satisfy the strategic objectives of the organisation and satisfying the stakeholders. The board must accept that taking risk is a normal and necessary part of doing business.
   
   What is critically important is the board’s role in assessing risk and developing policies to manage risk.
   
   Unless those two issues are addressed the greater the likelihood the organisation will suffer loss; either loss of business, reputation or money.
   
   And so the board and CEO must ensure that risks are correctly identified and managed. This is best done by a full appreciation of the risks involved and then setting appropriate policies to ensure that those risks, if taken, are managed appropriately.
   
   A period of great change as it is experienced by business today is the “best of times” for those who have the vision to profit from the new economic arrangements and the “worst of times” for those who continue to rely on old crumbling institutions.
   
   Take risks therefore but only when you have fully appreciated the extent of the risk, and set in place policies to mange it.
   
   
6. Working with the CEO
   
   Most employees in an organisation want to do a good job. How they work is simply a matter of who they work for.
   
   The CEO will work well if the board and the CEO work in partnership. This assumes that each is doing their job and that there is a clear understanding of where responsibilities start and finish for each.
   
   Having settled the strategic direction for the organisation and having employed the right CEO the best thing that the board can then do is to get out of the way and let the CEO manage. This is obviously easier said than done but can be achieved if there is a clear and defined role for the CEO and the CEO is given the right to operate and freedom to act.
   
   This is not to say that the board cannot and should not be involved in discussion about a particular issue but a board must accept that it is not another tier of management and that there is only one manger in the business - the CEO.
   
   In summary then:
   
   
   • Recruit the right CEO.
     
     
   • Delegate as much authority to the CEO as is appropriate and then let he or she get on with it.
     
     
   • Have an annual review to a predetermined measurement to assess the performance of the CEO.
     
     
   • Create policies in key areas establishing the CEO’s boundaries in which he or she can act.
     
     
   • Accept that the board as a whole must be involved in establishing a good working relationship with the CEO and that at every board meeting the CEO reports in a fashion and to an agreed criteria that assist the board in constantly evaluating the CEO’s role and achievements.
     
     
   • Set and monitor, don’t manage.
   
   
   
   
7. Making it happen - Board practices and procedures
   
   The “rules” by which an organisation works are broadly laid down in its constitution or rules. In many respects however, these are largely procedural. Good governance dictates that the board will establish and maintain policies to ensure the success of its organisation.
   
   Governance policies are therefore within the domain of the board. To “make it happen” the board needs to design appropriate policies, and measures some of which will include:
   
   
   • A code of ethics.
     
     
   • Portfolios for board members.
     
     
   • Training and education for board members.
     
     
   • Recruitment policies for new board members.
     
     
   • Meeting agendas and procedures.
   
   
   
   In overall terms, good governance policies are to be directed to ensure that the board is focusing on its key responsibilities including:
   
   
   • The strategic direction of the organisation.
     
     
   • Adherence to the strategic plan.
     
     
   • Adopting a view of the future.
     
     
   • Ensuring that all board members have an equal opportunity to contribute.
     
     
   • Set standards of corporate and individual responsibility within the organisation.
     
     
   • Seek to establish “world’s best practice” in all board processes.
     
     
   • Ensuring the organisation achieves what it should.
     
     
   • Monitoring the organisation
   
   
   
   
8. The score card - Monitor and evaluate results
   
   Having set the strategic direction for the organisation it is then important to monitor the performance and evaluate the results of the organisation over time.
   
   And the results that matter are not just immediately transparent matters such as profitability, market share or the like. In every business, the results the organisations should seek is the building and sustaining of long term relationships with “customers” and at the same time satisfying the stakeholders in the organisation.
   
   Monitoring and evaluating the organisations’ performance using those ends as the criteria ensures that the organisation achieves its strategic objectives.
   
   This is done by:
   
   
   • Not concentrating safely on the financial and other internal issues but rather on the overall performance of the organisation in the eyes of its customers.
     
     
   • The board remaining focused on the “bigger picture”.
     
     
   • Having the CEO report against stated board policies, performance measures and objectives.
   
   
   
9. Avoid traps for the unwary
   
   As we have already seen there are a range of obligations and duties imposed upon directors and CEOs. For some they appear daunting and no doubt dissuade many good people from accepting a board position even though they may have the skills and experience which would benefit an organisation.
   
   And the enjoyment and sense of satisfaction that arises from doing a good job should outweigh the sense of responsibility and personal risk that might be attached to accepting a board directorship. Working as part of a well structured and professional board should mean that the obligations and risks attached to being a board member are overcome.
   
   Some tips then for the new director or CEO:
   
   
   • First, never be afraid to ask questions. Seek to be informed so that you are then in a position to make a judgement.
     
     
   • Ensure that the organisation arranges appropriate training and education for board members so that they can better understand and therefore better perform their roles.
     
     
   • Examine and understand the financial information that affects the organisation.
     
     
   • Never allow yourself to be in a situation of conflict.
     
     
   • Never misuse your position as a director or misuse information that comes to you as a result of being a board member.
     
     
   • Consistently challenge accepted fact.
     
     
   • Don’t act unless you are comfortable so doing.
     
     
   • Have confidence in yourself and in your decisions and that of your fellow board members.
     
     
   • Have courage in making tough decisions, particularly those that might at first glance be unpopular.
     
     
   • Seek to use your influence. Good leaders have influence over people, not power over them. Influence means achieving teamwork by agreement.
     
     
   • Don’t allow yourself to be forced to make decisions “on the run”. Demand time and information in order to achieve good decision making.
   
   
   
   
10. Evaluate performance
    
    The board must be as good at its job as the CEO and other staff are at theirs.
    
    This means that each must constantly be evaluating their own performance and measure it against an agreed set of criteria. All too often the CEO or other staff are the scapegoats for poor performance. The board of an organisation rarely examines their own performance.
    
    Performance assessments are to be made of the board in a similar way as they are made of the CEO. Using key results criteria the board should evaluate their performance objectively and address shortcomings. Such assessment should be carried out at least annually.
    
    Using an external facilitator to assist the board in evaluating its own performance helps to bring about an objective review rather than a subjective one.

For advice and futher information please contact: Peter Wilson at Nevett Ford, Email: pwilson@nevettford.com.au
First published: 20 September 2004.
Last updated: 10 January 2006.