There are three key components to the board’s job. In order to be accountable for the organization’s performance to the shareholders or “owners,” a board must:
- Maintain an ongoing connection with the shareholders or owners in order to understand their values and perspectives. Otherwise, how can the board effectively govern on their behalf? This is often called “ownership linkage.”
- Develop policies that address all areas of the board’s own job and of the operations of the organization, at the broadest levels. There are four categories of policies, that when developed well, adequately address everything about the organization.
- Monitor to assure that whatever has been delegated is being performed, consistently with the expectations of the board’s policies.
How does the board delegate effectively to the CEO? I hear a lot about “limitations” – that seems very negative.
There are two categories of policies in Policy Governance® that provide direction to the CEO: (1) Ends, and (2) Executive Limitations. The Ends describe, to whatever level of detail the board determines is needed, the organizational results that the CEO is accountable to produce, the beneficiaries, and what it is worth to produce those results (the cost). These Ends policies are not in the negative. They are “prescribed” as expectations. The second category of policies that provide direction to the CEO is the Executive Limitations policies. A lot of people have difficulty understanding why limitations can be so effective, because the prevailing wisdom is that saying something negative must inherently be bad. In this case, the reality is exactly the opposite. While the board is ultimately accountable for everything about the organization, if there is a CEO, that person is “on the ground” and is the one who actually needs to get the job done. Giving the CEO as much authority as possible to determine how best to do that job is to the board’s advantage. But at the same time, the board should not give away so much authority that it abdicates its governance role. Think of a teeter totter – it works best when evenly balanced. Similarly, the balance between board and CEO needs to be such that the CEO has the authority to make decisions expeditiously, with as much freedom as possible for creative and innovative solutions, while the board still has authority and oversight sufficient to fulfill its fiduciary responsibilities. Policy Governance® provides an elegant solution for this balancing act. The board is always more powerful than the CEO, because the board sets the Ends (the results the organization is to produce, the beneficiaries, and what it is worth to produce those results), and the board sets parameters, or limitations, on the means that the CEO may use to achieve the results. The limitations set boundaries. The board allows the CEO to use any means, as long as they fall within a reasonable interpretation of the board’s limiting policies. In other words, “if we didn’t say no, it’s pre-approved.” This gives the CEO much more creative freedom than saying, “do it this way, and come back for approval if you want to do it any other way,” which is more typical of how many boards function. Executive Limitations policies should always be about prudence or ethics. What means to achieve the Ends would be unacceptable even if they worked, because they are imprudent or unethical? Once the board has specified these limitations, to whatever level of detail the board feels necessary, it can allow the CEO to determine the most appropriate means. Of course, the board then monitors to ensure that there is appropriate performance consistent with the policies. (That’s another question – please check the FAQ on monitoring for more details.) A combination of well constructed Ends and Executive Limitations policies, and structured, rigorous monitoring provides the board with complete control of everything it needs to control in order to provide future-oriented direction and fiduciary oversight. More details about how Policy Governance® works are available in the Introduction to Policy Governance® Workshop, as well as our interactive Online Learning Modules.
CEO evaluation begins with good policies. The Board delegates to the CEO by creating Ends policies and Executive Limitations policies. (Please read the FAQ “How does the board delegate effectively to the CEO?” for more detail about this.) Then the board holds the CEO accountable for achieving a reasonable interpretation of the Ends and complying with a reasonable interpretation of the limitations. This process is known as “monitoring.” There are three methods of monitoring:
- a written report from the CEO to the board, in which the CEO provides an “interpretation” of the policy – an operational definition that explains what measures would demonstrate compliance with the policy and why they are reasonable – along with actual evidence of compliance.
- an external report, from an independent third party, in which the board receives an opinion of whether the CEO’s interpretation is reasonable and whether there is evidence of compliance.
- a “direct inspection” in which the board itself, or an individual or group designated by the board, personally examines the evidence to see if there is compliance.
There are several suggested steps for a board to get started with Policy Governance®.
- Learn about what Policy Governance® is and how it works.
- Make a commitment that the board is prepared to change its processes to apply the principles of Policy Governance®.
- Develop an initial set of policies.
- Review the draft policies against any legal requirements, and compare to existing policies to ensure that you have captured the key values of the board in the policies.
- Learn how to apply them in practice – this involves structuring your agendas to get the most benefit from the model, learning to monitor effectively, and developing a plan to deliberately gather input from your “owners.”
The board’s role in monitoring is not to provide evidence, but to assess evidence. The CEO provides the evidence. The board assesses two things:
- whether or not the CEO’s interpretation was “reasonable,” and
- whether there is sufficient evidence to determine compliance with that reasonable interpretation of the policy.
The CEO needs to provide the board with (a) an explicit reasonable interpretation of each statement in the board’s policy, including rationale for what that interpretation is reasonable, and (b) evidence of compliance with the reasonable interpretation. The interpretation is not the CEO’s plan for complying with the policy, but rather what the CEO understands the policy to mean. A good interpretation should include the measures that will demonstrate compliance, and supporting rationale for why the board should consider this interpretation “reasonable.” While developing this interpretation does take some time at the front end, interpreting the policy is an implicit part of determining how to fulfill it. A simple example of an interpretation that provides a measurement or metric might be something like this: Board policy says, “Do not allow untimely payment of debts.” CEO’s interpretation might say, “Compliance will be demonstrated when a review of accounts payable confirms that all debts have been paid within 30 days or the vendor’s terms, whichever is greater, unless the amount is under dispute. This interpretation is reasonable because it is consistent with industry standards, and avoids interest charges on overdue amounts.” After the interpretation, the CEO then provides evidence of compliance with the policy. This should be something that can be verified; if an external agent were to look for compliance, what might they look at? Following the above example, evidence might be: “An internal review of the accounts payable report from our accounting software for the fiscal period xxx, conducted on [date] by [position of person doing the internal review] confirmed that there was only one payable outstanding beyond 30 days, and that the vendor’s terms for this amount were 60 days.” Additional details about monitoring are available in the Policy Governance Toolkit: Meaningful Monitoring. You can also learn more about monitoring in our interactive Online Learning Modules. Module 7 addresses monitoring. Additional references available on this subject are included in PGIQ™ and Introduction to Policy Governance® workshop. Our Advanced Seminar provides more in-depth coverage of how to write and assess monitoring reports.
Remember that the overall performance evaluation of the CEO is simply a summation of all of the monitoring done by the board throughout the year. The frequency of monitoring each individual policy is up to the board. How often does the board feel it is prudent to receive evidence of compliance with a particular policy? How much risk would be involved if there were non-compliance? What is necessary for due diligence? How often is it likely that monitoring information will change? All of these factors should be considered when determining the frequency of monitoring. There is no "rule" in Policy Governance® about how often Ends and Executive Limitations policies need to be monitored, but as an example, virtually all boards do choose to monitor each of the policies at least annually. Many boards choose to monitor the Financial Condition policy quarterly. Since preparing monitoring reports takes a considerable effort on the part of the CEO and staff to whom the CEO may delegate responsibilities, there is value to considering a routine monitoring calendar in which a few monitoring reports are provided for each meeting (or even between meetings) throughout the year. For some organizations, it makes sense to split up the monitoring of Ends. For others, it makes sense to do all the Ends reporting at once. If the board is doing a comprehensive review of the content of Ends policies in a specific timeframe, it can be valuable to have all of the Ends monitoring data at least relatively close to that date. Since the CEO may be in the best position to determine at what times of year particular monitoring data is most readily available, once the board has determined the frequency of monitoring for each policy, it is often a good idea to ask the CEO to produce a draft schedule, consistent with the frequency, for the board’s consideration. Then expect the CEO to provide those reports as part of the board package in advance of the appropriate meeting. Additional details about monitoring are available in the Policy Governance Toolkit: Meaningful Monitoring. You can also learn more about monitoring in our interactive Online Learning Modules. Module 7 addresses monitoring. Additional references available on this subject are included in PGIQ™ and Introduction to Policy Governance® workshop. Our Advanced Seminar provides more in-depth coverage of how to write and assess monitoring reports.
Ends is a unique concept in Policy Governance®. It is not the same as a typical “mission statement.” A mission statement usually looks something like this: “We are the xxx organization, we look like this . . . and we do the following things: xxx, yyy.” Ends are statements about the purpose of an organization, why it exists, rather than what it does, or how it does things. Ends statements are about one or more of these three things (and ONLY these three):
- the benefit or results of an organization’s work,
- who the beneficiaries are, and
- what it’s worth to produce those benefits.
- Our college exists so that people in our region have opportunities to improve their lives and communities at a cost that can be justified by the results.
- Our school exists so that students become informed, contributing, fulfilled members of society at a cost that demonstrates responsible stewardship of resources.
- Our credit union exists so that members have the knowledge and ability to be in control of their financial lives at a competitive cost.
- Our voluntary agency exists so that individuals with disabilities in our service area will live secure, engaged, independent lives at a cost justified by the results.
- Our health organization exists so that there are optimal health outcomes for people in our service area at an efficiency better than the average of peer organizations.
- Our trade association exists so there will be conditions that promote member profitability in our industry for a justifiable investment of member resources.
- Our professional regulatory organization exists so there will be competent, ethical practice of our profession for the people of our province/state.
In Policy Governance® in order for the board to do its own job effectively, but not interfere in operational matters that it has delegated to the CEO, it is important to be able to differentiate among different types of information that the board receives. Therefore, a simple organizing strategy for agendas in Policy Governance is to clearly separate the three types of information: (1) information for decision-making; (2) monitoring information, and (3) nice-to-know or incidental information about internal operations. It is helpful to board effectiveness to place the decision items near the front of the agenda. Information for decisions may be of two types:
- Information necessary for a decision that is being made in the current meeting. This should be clearly identified as a background paper, briefing note, or by some designation that makes it clear the board must read it in preparation for the meeting.
- Background information – including things such as environmental scanning information, trends about the industry, articles related to Ends issues – that is not directly related to a decision at the current meeting, but that IS important to the board’s understanding and will form part of the knowledge base the board needs to develop sound policies. This information may be included as part of the “decision items” on the agenda – with a note that it is for future decisions. Or, if you prefer, add a separate category of “information necessary for future decisions.” In either case, the board should be aware that this is information that they DO need to read in order to discharge their governance responsibilities.
- Information that the board has specifically requested be provided, even though it’s about internal operations. This requirement would normally be found in the Executive Limitation on Communication and Support to the Board.
- Any other nice to know information about internal matters that the CEO chooses to share.
If you are doing a good job of agenda planning, there should not be a need to add last-minute items to the agenda except in truly urgent situations. To help keep your agendas focused, try to minimize last-minute additions. They will tend to take you off track, as you may not take time to determine which agenda category they belong to. At the same time, you do need a method for board members to bring to the board items that are appropriate. Try using a simple set of questions that board members must answer in order to get an item on the agenda, and empower the Board Chair to do the screening. This could even be submitted by email if the Board Chair is willing. An approach of this nature will result in a large majority of agenda items being pre-screened, and will allow for collection of appropriate background information in advance of the meeting, thus making the meeting more effective than if an issue were added at the last minute. Some screening questions that the Board Chair might use include:
- Is this an item that clearly belongs to the board to decide, or is it about something we’ve already delegated to the CEO?
- In which category of policy does it fit? (If Executive Limitations, is this about prudence or ethics?)
- To which specific policy does the issue relate? (Knowing this in advance will make the meeting more efficient, because you can check first on what you have already said. Sometimes board members request agenda items because they are not familiar enough with their policies, and don’t realize the item has already been addressed!)
As a board, you are entrusted with the stewardship of an organization or company on behalf of someone else – your shareholders or, if you are a not-for-profit, your “moral ownership.” That places a moral as well as a fiduciary obligation on you to ensure that the resources of that organization are used most effectively to produce appropriate results. Traditional activities such as “approving” financial statements do not fulfill this stewardship. Rather, the board needs to be able to show accountability for the organization as a whole. Is the organization or company achieving what it ought to achieve? The board sets the direction for the organization. If the board is not doing its job effectively, the whole organization suffers. The board is responsible for its own development, job design, self-discipline and performance. These are not areas that can be delegated to the CEO. The board itself is accountable for the quality of governance. Self-evaluation is a way to assure yourselves and your owners that you take accountability seriously. John Carver suggests that evaluation of board conduct is important for three reasons:
- because the board is a group of individuals, there is a need for clarity about group conduct;
- because the board is group of peers, it “must learn to govern itself before presuming to govern others”; and
- because other people depend on the board’s style of operating, there is a need for predictability and stability.
There are many ways for a board to evaluate its own performance. Board self-monitoring (or self-evaluation) involves the board’s assessing its own behaviour in comparison to the policies it has written which describe the commitments it has made. If you are using Policy GovernanceÒ these policies are usually called Governance Process (GP), and Board-Management Delegation (BMD) (or Board-CEO Relationship). There is no one prescribed method for conducting a self-evaluation, but there are a number of methods that we have found to be effective. We generally recommend that you consider two elements for self-evaluation: (1) a brief self-evaluation at the end of each board meeting; and (2) a systematic approach to self-evaluation of the board’s compliance with each of its own policies in the two categories that describe the board’s commitments (GP and BMD). Here are some simple suggestions to get started:
- Meeting self-evaluation: Many boards use a meeting self-evaluation, but too often the content is focused on whether the board members enjoyed the meeting, or felt it was a good meeting, without comparing the meeting to some pre-stated criteria. If you have a policy that describes what kind of a “style” your board is committed to, then comparing what happened at the meeting to the key elements of that style is a great way to begin. For example, if your style policy says that the board will focus more on expected results than on administrative means, then your self-evaluation can reflect on how well the board maintained that focus. If the policy commits the board to spending more time on a future focus to set direction than on present and past issues, how well did you do that? This reflection can be done by the group as a whole or by an individual assigned the task at the beginning of the meeting, who then reports at the end of the meeting. It can be done verbally, or in writing. Several tools and templates are available from The Governance Coach™ to assist in this process. An important step for continuous improvement is to agree on one thing that you will work on to improve in the next meeting.
- A systematic approach to self-evaluation of the board’s compliance with each of the GP and BMD policies: There is no one “right” way to do this kind of self-evaluation, but you might begin with a simple template that causes the board to reflect on its actual behaviour with respect to a specific policy [See the section below for templates available from The Governance Coach™.] You might (a) assign an individual board member to do a report on a particular GP policy, in advance. The report would be part of the meeting package. At the meeting, the board would focus on a few questions, identifying a specific area for improvement. (b) ask all board members to complete a worksheet on a particular policy and submit in advance; have the results tabulated for discussion (this is more work administratively than the first alternative) (c) use the template as a guide for a round table discussion on a particular policy during a meeting. The first option tends to be most useful for most boards, as well as being efficient.
It is a common misunderstanding that boards using the Policy Governance® model should not have any committees. In fact, there are times when board committees can be very helpful in the board’s work. The key principle to keep in mind is that board committees should only help the BOARD do its own work. Secondly, no board committee should be permitted to take over the board’s role in being accountable for all governance decisions. Therefore, committees that are made up of or include board members, appointed by the board, should never be created to “help” or advise the CEO in operational areas that the board has already delegated to the CEO. If a board committee advises or directs the CEO regarding means to achieving the Ends, it is no longer possible to have a clear line of accountability from the Board as a whole directly to the CEO. If the means advocated by the board committee isn’t effective, the CEO can’t be truly held accountable. So a Finance Committee which advises the CEO on financial matters is inappropriate, while an Audit Committee to assist the board in its function of monitoring CEO performance against board-stated policy criteria is fine. A Programs Committee would be inappropriate if its job is to assist or advise the CEO or staff at any level, because programs are means for which the CEO is accountable. Appropriate board committees might assist the board with its job of connecting to owners, researching information for policy development at the board level, or creating an on-going development plan for the board itself. An Executive Committee, while not inappropriate just because of its title, needs carefully stated authority to prevent it becoming the de facto board, with the rest of board members being simply rubber stamps to decisions the Executive Committee has already made. No committee should interfere with the accountability of the board as a whole to govern. In many boards, an Executive Committee is not needed at all. Some boards operate under legislation that requires them to have an Executive Committee. If this applies to you, severely restrict its powers, limiting it to making decisions on behalf of the board only in urgent situations when it is impossible to convene a quorum of the board. With the use of technology that is available now, such situations should be extremely rare. Another way to use this committee, if you are required to have it, is as a standing committee that is available for specific ad hoc tasks designated by the board. The important principles here are not to allow the Executive Committee any authority other than that authorized by the board as a whole, not to let it have any kind of instructional power over the CEO, and not to let it interfere with the wholeness of board function. Additional details about board committees are discussed in Introduction to Policy Governance® workshop. You can also learn more about committees in our interactive Online Learning Modules. Module 5 on Board Holism and Delegation addresses the use of committees.
[Please read first the answer to the question, “Should the board have committees” as background for understanding this answer.] The most important principle to remember here is that for the board to be able to hold the CEO accountable for results, the CEO must be able to have complete control of operational committees. The CEO must have authority to appoint the members of a committee, dismiss them, create or terminate the committee, and determine what the committee’s job is. If the CEO has this authority (which the CEO may choose to delegate to someone reporting to the CEO), then having a board member on such a committee is acceptable. Such a board member would be there as a volunteer, not as a board member. The board member in this situation is there because the CEO has chosen to ask him or her to be there to lend specific expertise. The board member is not there representing the board’s perspective in any way, and it is not that board member’s role to “report back” to the board about this operational committee. The board member has no more authority than any other member of the committee, and in fact, is accountable to the CEO in this situation. The CEO should be cautious about using board members this way, because there must be complete clarity about accountability – the board member must be very clear what “hat” he or she is wearing. Provided that clarity is in place, and is understood, not just by the board member, but by everyone else on the committee, there is no problem. However, maintaining this clarity in practice is easier said than done, so it is wise to limit the use of board members on operational committees to times when the board members are truly the only or best people with the expertise needed. Additional details about board committees are discussed in Introduction to Policy Governance® workshop. You can also learn more about committees in our interactive Online Learning Modules. Module 5 on Board Holism and Delegation addresses the use of committees.
There are several principles in Policy Governance® that when used as a system permit very effective delegation to the CEO:
- The board delegates with “one voice” using written policies. Individual board members do not have authority.
- The board delegates operational matters ONLY to the CEO (assuming there is such a position in the organization)
- The board makes a distinction between Ends policies, which identify organizational benefits to be produced, the beneficiaries and the worth of producing the benefits, and the organizational means used to achieve the Ends.
- Organizational means are treated differently – instead of prescribing how to achieve the Ends, the board only places limits on means that may be used, to place off-limits any means that the board considers would be imprudent or unethical.
- The CEO is allowed to make “any reasonable interpretation” of the Ends and Limitations policies, but must be able to substantiate to the board’s satisfaction why the interpretation is reasonable.
- The board rigorously monitors the CEO’s performance against the criteria in the Ends and the limiting policies.