Ten ways to know for sure whether your board is practicing Policy Governance

Policy Governance Top Ten by Susan Rogers

T SEEMS TO ME that an ever-increasing I number of boards are practicing Policy Governance-and that is good news. Certainly many more board members are hearing about this universally appli- cable system of governance and are driv- ing a change in thinking around their respective board tables. It has become more possible for boards to have a big- picture focus, to be concerned about leading the organization accountably, not just ensuring the management of momentum That’s more good news.

However, many boards that write policies assume, erroneously, that they are Policy Governance boards. Further, many CEOs and members of these same boards are very disgruntled about what they understand to be Policy Governance. I hear time and time again that Policy Governance doesn’t work for them, that Policy Governance was the cause of this organization’s prob- lems or that CEO’s impossible workload. That’s the bad news.

But to really practice Policy Gover- nance requires more than simply writ- ing policies.

This Top Ten list contains a number of important criteria against which board practice can be assessed. All of these criteria, among others, are funda- mental to Policy Governance practice. And even if all are present in your board’s playbook, it takes a skilled and committed governance team to maximize these ingredients, in much the same way you would if you were handed a great set of golf clubs on a world-class golf course. Knowing the rules, having some skills in place, and possessing a good set of tools are start- ing points.

these criteria, Policy Governance is an opportunity waiting to be developed!

If your board does not meet or exceed

Here are the ten ways to know for sure whether your board is practicing Policy Governance.

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You have a comprehensive “safety net” of written, layered policies in four different policy quadrants called something very similar to these: Governance Process, Board-Management Linkage, Executive Limitations, and Ends. These policies, which are expressions of the board’s val- ues, are “nested” like mixing bowls, the progressively smaller ones resting com- fortably inside the largest. These policies are the only ones the board has; they cover everything required to practice o wner-accountable effective governance. Because these policies are so compre- hensive, you reference your practice of Policy Governance in your bylaws but do not do repeat there the details already found in your policies.

A board cannot delegate away its ultimate accountability for anything that goes on in the organization.

This written policy framework describes the expectations of the board, for which the board is always solely accountable. The board, and only the board, may choose to delegate responsi- bility and authority for certain parts of its job to a board committee, officer, CEO, or whatever other party it chooses; how- ever, it cannot give to one party what it has given to someone else. Most defini-

tively, a board cannot delegate away its ultimate accountability for anything that goes on in the organization.

Policy Governance does not require the use of a CEO position, but if the board decides to use one, it does require that the CEO be responsible for all dele- gated executive functions. In this article, the use of a CEO is assumed.

Generally speaking, whenever a board stops speaking in the Executive Limitations and Ends policies, it delegates responsibility and authority in those quadrants to the CEO. When the board stops speaking in Governance Process and Board-Management Linkage policies, it delegates responsibility and authority to the chief governance officer (CGO, often called the board chair).

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Your largest or broadest Governance Process policy articulates to whom (moral ownership, shareholders) your board is accountable and for what (usu- ally worded something like “achieving appropriate results for appropriate per- sons at an appropriate cost and avoiding unacceptable actions and situations”).

Your other Governance Process poli- cies define the board’s job products and those of its committees, the board’s code of conduct and governing style, the role of the chief governance officer (CGO, often the chair), the board’s com- mitment to investing in its own develop- ment, agenda planning for governance, and more.

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Given our assumption of a CEO func- tion, your broadest Board-CEO Linkage policy identifies the board’s sole employee (delegatee), through whom the board links, exclusively, with the operational organization. AU of the other employees of the organization work for the CEO, not the board.

cies describe the disciplined way in which the board will delegate to and monitor its employee’s performance. In doing so, the board introduces the concept of “reasonable interpretation”

Your other Board-CEO Linkage poli-

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Top Ten (continuedfrom page 4)

on the part of the CEO and sets out a monitoring schedule.

These policies reinforce the principle and practice that your board speaks with one voice. The relationship between the CEO and the CGO is that of equals or col- leagues. This same principle applies to the CEO’s relationship with board committees or officers. In fact, the CEO takes direction from the board only when it speaks with one voice; the board is accountable for creating a linkage with its employee that is both empowering and safe.

7 Your broadest Executive Limitations pol- icy says something like “The CEO shall not do or allow any practice, activity, or organizational circumstance that is unlawful, imprudent, or against com- monly accepted business and profes- sional ethics and practice.”

Your other Executive Limitations poli- cies are written, consistently, in proscrip- tive language that establishes the limits for CEO actions rather than prescriptive “here’s how you ought to do it” language. These policies address the worries that the board may have about operational issues such as the treatment of staff and consumers; financial planning, condi- tions, and budgeting; compensation and benefits; and the CEO’s communication with and support of the board.

Your board uses proscriptive lan- guage in these policies to enhance the flexibility of its delegation and to give the CEO the freedom to make manage- ment decisions. Your board does not hide in proscriptive language specific instructions about how the CEO ought to do things, even if these specifics may be, in the board’s opinion, the most effec- tive way to get the work done! Executive Limitations policies describe what would be unacceptable to the board about operational means, even if they worked.

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The dreams you have about the “positive difference” your organization will make in the world are stated in your Ends poli-

cies. For example, one organization’s top priority could be that “Every baby born with Down syndrome will be celebrated, not mourned.” Ends policies are power- ful expressions of what the organization is determined to achieve on behalf of its moral ownership.

Your Ends policies are composed of three parts: what good, for whom, and for what cost or relative worth. The vari- ous levels of these policies will refer to some or all of these parts. Ends policies do not describe programs or activities of the organization.

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The greatest share of your board meeting time and energy, as much as 50 to 80 per- cent of it, is invested in ownership linkage activities. These activities consist of at least three things:

Proactive inspiration of and con- sultation with your moral owners Checking the weather (big-picture, external, uncontrollable trends and issues that might affect the organi- zation’s ability to set or accomplish its ends) Adjusting your policy framework, par- ticularly the Ends policies, in response to your findings

Any job description you write for your CEO says two things only: accomplish the ends, and in doing so, do not vio- late the Executive Limitations policies. Your board considers this statement to encapsulate the totality of the CEO job and the only criteria against which CEO performance is monitored and evaluated.

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You are monitoring CEO performance on a regular basis and onlyagainst the CEO’s reasonable interpretation (RI) of the policy criteria in the Ends and Executive Limitations policies. The board uses the “reasonable person” test to evaluate the CEO’s RI, which can be altered at any time by the CEO, not the board. When you are monitoring,

you are assuring yourself that the CEO’s data are relevant, are sufficient, and cor- relate with the CEO’s RI.

You assure yourselves that the CEO’s data show accomplishment of his or her RI of Ends policies and com- pliance with his or her RI of Executive Limitations policies. Therefore, you only accept CEO monitoring reports that have both an RI of every board policy statement in those two policy quadrants and data that relate to that RI, not to the policy itself.

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At board meetings, you are usually devoting a small percentage (certainly less than half) of your time to the follow- ing activities:

Monitoring board performance on a regular basis and only against the CGO’s reasonable interpretation of the policy criteria in its Governance Process and Board-CEO Linkage policies Affirming for the record the board’s opinion of the predistributed and reviewed CEO monitoring reports Reviewing and refreshing on a regular basis all policies in each of the four policy quadrants

Your board does not approve the organization’s strategic, operational, or business plan or budget unless an external, higher authority requires the board to do so. That external authority may be, for example, the bank or another lender, the funder, or the gov- ernment, and when these authorities so require, the board approves plans and budgets on its consent agenda along with any other such issues that the board through its policy framework has already delegated to the CEO.

Consent agenda items are provided to the board by the CEO along with the written assurance that regardless of the board’s approving them, the CEO is still within the constraints of the Executive Limitations policies.

And the number one way to know for sure whether your board is practic- ing Policy Governance is . . .

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Top Ten (continuedffom page 6)

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Your board can tell whether it is fulfill- ing its fiduciary or “trusteeship” role: producing the right results that are worth what they cost for the right peo- ple. In other words, your board knows that the difference the organization is making in the lives of the people it serves corresponds to the board’s care- fully informed expectations.

How? The evidence is in the data from the CEO’s monitoring report

on the Board’s Ends policies. What could possibly be more important than this?

And here’s more good news. Once CEOs and board members understand the feel and practice of true Policy Governance, they realize it enables exceptional board leader- ship and effective owner-accountable governance. 0

Susan Rogers, president of ROGERS Leadership Consulting in Winnipeg, Manitoba, Canada, specializes in board governance coaching and consulting. She can be reached at (204) 284-3388 or susan@rogersleadership.ca or through her Web site at www.RogersLeadership.ca.

Personal Note (continuedffom front page)

and knows it the way a parent knows his or her grown offspring, does not always take kindly to newcomers exercising shareholder rights. Not only are new- comers becoming involved strictly for the money, but they are also likely to sell their stock to other newcomers, intro- ducing an unfamiliar instability to people accustomed to the comfort of constancy. Yet to gain access to the capital needed to compete in wider markets, the old ownership feels forced to jump off this particular cliff. Stresses and strains are inevitable at the board table.

Then along comes increased atten- tion to governance codes and more criti- cal scrutiny of board practices, making the matter even more stressful.

in Southeast Asia-as indeed in most of the rest of the world-have in recent years developed or beefed up their gover- nance codes. The United States, through the well-known Sarbanes-Oxley Act, took the path of governance law instead of a voluntary code. “Voluntary” codes can be as weak as simple suggestions or as powerful as quasi-mandatory. The latter are often referred to as “comply or explain” methods, since boards that choose to deviate from the requirements of the applicable code must publicly give their reasons. So although such gover-

Unlike in the United States, countries

nance codes are technically voluntary, the pressure to comply is pretty strong. Codes are ordinarily thought of as devices used by directors’ associations or by stock exchanges. They are binding on compa- nies listed on those exchanges, but being listed on a specific exchange is optional.

Due to the flurry of interest in the new codes, nonprofit and governmental boards get caught up in the issue even though they are not directly affected. If doing so decreases conflicts of interest and increases transparency, the effect is positive. If, however, boards treat the codes as the new gold standard of gover- nance, they fall into the same trap in which most corporate boards end up. Sarbanes-Oxley, for example, does some good things, but making concep- tual sense out of governance is not one of them. As a brief comment on that issue, we are reprinting “Now Let’s Really Reform Governance” by John Carver, recently published in Directors MonthZy. We thank the National Association of Corporate Directors for graciously permitting Board Leadership to reprint the article.

This issue also includes an article in which Caroline Oliver examines the received wisdom about good gover- nance beginning with a strong relation- ship between the chair and CEO, and an article in which Susan Rogers offers ten ways to know for sure whether your board is practicing Policy Governance. 0

BOARD LEADERSHIP P O L I C Y G O V E R N A N C E I N A C T I O N

JOHN CARVER AND MIRIAM CARVER,

Executive Coeditors

N m e R 77, JAN.-FEB. 2005

BOARDLEADERSHIP ISSN 1061-4249 (print) ISSN 1542-7862 (online)

JOHN CARVER, PH.D., is widely regarded as the worlds most provocative authority on the govem- ing board role. His Policy Governance’ model has been d e d the only existjng theory of governance. Miriam Carver is a consultant, author, and author- itative source on the Policy Governance model.

Dr. Carver is author of Boards That Make a Difference (1990, 1997). John Carver on Board Laadershp (2002). the audio program Empouring Boards for LBadership (19921, the video program John Carver on Board Governance (19931, and co-author with Caroline Oliver of Corporate Boa& That Crme Value (2002). M ~ a m Carver is co-author with Bill Charney of The Board Member’s Playbook (2004). Dr. and Mrs. Carver together co-authored A New Vision of Board Leadership (19941, ReinventingYourBoard(1997). and the CarverGuide Series on Effective Board Governance (1999). They have both authored numerous articles.

Both Carvers consult widely for nonprofit, gov- ernmental, and equity corporate organizations in Asia, Europe, and North America Together, in the Policy Governance Academy, they teach advanced Policy Governance theory and practice to consultants and other leaders.

MPnqSlng Editor: Ocean Howell

Published bimonthly. Individual subscrip- tions (one copy of each issue) are $152 in the United States, Canada, and Mexico and $188 in all other countries. Board subscriptions (six copies of each issue) are $198 in the United States and Canada, and $258 in all other coun- tries. Discounts on additional board subscrip- tions are available. Call the circulation manager at (415) 782-3232.

To order: Call toll-free at (888) 378-2537; fax toll-free to (888) 481-2665; mail to Jossey-Bass, 989 Market St., San Francisco, CA 94103-1741; or order through our Web site at www.josseybass.com

Address editorial correspondence to John Carver, P.O. Box 13007, Atlanta, GA 30324. Web site ad- www.carvergovernance.com

Copyright 0 2005 Wdey Periodicals, Inc., A Wdey company. All rights reserved. Policy Governance is a registered service mark of John Carver.

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Articles are selected sdely on the basis of their own merits and their consistency with the Governance model. Publication in no way consti- tutes an endorsement of the contributm’ ing practices.

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