We are pleased to offer this complete list of Seven Principles that we have been developing. Shortly we will also publish associated practice notes (how they look when in use) and a list of relevant resources.
I believe the way toward mastery of any endeavour is to work toward simplicity.
Yvon Chouinard – founder of Patagonia
In thinking about the handful of things that actually distinguish effective boards, we have discerned seven central matters.
They come not from governance codes but from what we have observed and learned across 30 years of consulting, with 650 very different clients, over 240 board reviews and serving on a range of boards.
Governance is a living system, a dynamic process. Templates, guides and policies are necessary, but it is how they are used and how they fit together that makes the system as a whole effective or not. We highlight just these seven principles, suggesting that—if these are in place, fully understood and kept front of mind—your board has a stronger chance of being effective than most boards. They are the key elements of an effective system of governance: eighty percent of things right, one hundred percent of the time.
Attention to these building blocks of governance will make sure everyone’s time is focused on the right value-adding matters. Basically, more time to think, more time to invent the future and less time on the minimally relevant.
What’s not here?
Many things are not specifically detailed. If you want a fuller list, we point you to governance codes in the associated resource list, (coming soon). Our point is that applying these seven principles will establish the best platform to support a group of people able to cover the full list of duties and obligations. And, most importantly, the board will be a group consciously adding value and helping create a prosperous future for the organisation.
Interconnected
These principles are, of course, not unrelated. They overlap and interconnect. One does not exist in isolation from the others.
The seven principles
- The right people around the table
- Role clarity
- Focus on outcomes
- The board leads
- Oversight is predetermined
- Learning is continuous
- Accountability and transparency
1. The right people around the table
The board ensures it has the right skills, diversity and competencies for the challenges ahead. Succession planning is active and ongoing.
First Who, then What—get the right people on the bus. - Jim Collins
A great board starts with the right people around the table, able to work as an effective team. Not all boards have full control over their composition. But, in all cases, boards should have an up-to-date perspective on the skills and competencies required. This sits across two areas: core director competencies and any specific knowledge related to the business and the challenges ahead. Those who control the appointment or election processes should have that information in front of them.
A board needs diversity. A broad range of background, opinion and thought is one reason you have a multi-person board. Gender, age, experience, skills, knowledge and ethnicity and—in some cases—representation are all factors when constituting a board.
Above all, a great board is a robust, effective social system. [1] It follows that, when recruiting, the overriding requirement is for people already competent enough to function within a group, who can both constructively challenge (each other and management) and work as an effective team, despite only very occasionally actually being together.
A regular question should be: Do we still have the right team? Effective boards are not shy about replacing members—either for inadequate performance or to match a shift in skill requirements arising from a fresh consideration of the challenges ahead.
High-performing boards almost always have a great chair who understands the role. They are the Chief Governance Officer, there to get the best out of the people around the table. Succession planning always has an eye to the next possible chair.
2. Role clarity
Board and management are clear about their respective roles; how each adds value. Their interaction is set in a clear framework and characterised by mutual trust and respect.
Governance is the system by which companies are directed and controlled. [2]
The basic legal duties of boards and directors need to be expanded on to be operationally useful.
The board first makes clear what is to be achieved—ends or outcomes (principle #3: Focus on outcomes). Then, through policies consolidated in its charter or policy manual and related delegations, it creates a framework that guides its own work and that of management. Because the board remains accountable for management’s interpretation and application of delegated authority, it must also clearly state any limits to the choices management might make in its selection of available actions (means).
The ends do not justify the means. [3]
Over a year, most boards convene as a group for less than one per cent of the time: a part-time group perhaps, but with full-time accountability. Here are useful questions to give comfort across the other 99% of the time:
- Is the board comfortable it has adequate frameworks and policies in place to guide management decision making and ensure all duties and obligations are being honoured?
- Is management clear about what is to be achieved and when escalation to the board is required?
Above all, the board must avoid becoming another layer of management, either rehashing work already done, getting into unnecessary detail or simply dealing with matters already delegated to management.
The board is there to add wisdom. Its focus is not on observing operational busyness but on assessing the results flowing from management activity and the efficacy of the agreed strategies. Sense testing and high-quality questioning are defining governance skills.
Boards should be conscious of and cautious about any drift to ‘weka governance’—going after matters that may be shiny and interesting but are irrelevant to the board’s role. [4]
3. Focus on outcomes
The primary focus is on ends to be achieved and the factors that influence progress towards them. The board spends most of its time on things yet to happen.
Every board should clearly define what is meant by above average sustainable performance in its particular context. [5]
In the first instance, all organisations exist to deliver some form of benefit to a defined group of people, who sit outside the organisation. That purpose naturally varies depending on the type of organisation and its products or services. But no entity exists for itself alone, so it follows that the benefit to be created must be clearly articulated.
Without being clear on core purpose and outcomes—benefits to be created—all bets about governance effectiveness are off. It is the role of the board, on behalf of the owners (of varied types), to define what success will look like. Simply put, what is the desired outcome and its associated measures?
This is the board’s job; nobody else’s. Others may contribute but the board cannot delegate this core responsibility.
Before strategy—options to achieve the goals—can be addressed, the board needs to go through this strategic thought process, defining the ends to be achieved.
Paraphrasing Lewis Carroll’s Cheshire Cat:
Well, if you don’t know where you want to get to then any road will do.
Once clarity is achieved, all decisions should be couched in the context of the relevant desired outcome. Without this clarity the board is directionless, and management lacks the necessary guidance to inform its operational choices.
One of the great boardroom questions is, “Will this make the boat go faster in the right direction—and how will we know?”. In other words, what is the optimal use of the resources at hand to achieve the best possible performance in pursuit of our stated outcomes. This discussion sits at the heart of the board’s work, which is (in the words of John Carver):
To achieve the right results for the right people at the right cost.
The for-profit world has a simple measurement for success: the bottom line. Absolutely essential but now insufficient in a world of broader accountability, so a more nuanced set of measures is needed.
In the nonprofit (for purpose) sector, we know from research that one thing that characterises a successful organisation is absolute focus on impact:
It is an obsession with impact that drives internal alignment. [6]
4. The board leads
The board is self-aware and intentional in its leadership, defining the work it needs to do and how it wishes to address it.
The board’s role is to invent the future, not mind the shop. [7]
Owners of an entity vest in the board responsibility, accountability and an expectation that they will lead. At the very least, this means boards take responsibility for and control of their own work.
Often boards just respond to management actions or the crisis of the day. The number one comment that arises during our board reviews, consistent with others around the world is, ‘I wish we had more time for strategic thought’.
A McKinsey study [8] noted that most boards still spend around 70% of their time on reporting, reviewing, budgeting and compliance. In other words, boards continue to focus on their rear-view mirror. The solution lies in the board’s own hands.
Good boards are organised. They prioritise and plan the use of their time in advance; they make clear their information needs. With thorough policy frameworks, clear delegation and specific monitoring criteria in place, management do not have to fill the board pack with irrelevancies. Time can be found.
Most of a board’s time should be spent on what is yet to happen, as that is the only thing they can affect. The board should be considering future options in a planned and structured way. A useful perspective on board work is that it should be more about problem finding and less about problem solving. Yes, things happen that require their urgent attention. But, in normal times, one third of a meeting will give more than enough time for an organised board’s compliance and oversight duties.
This is also about honouring the time and talents of the people around the table and not dwelling on matters of modest relevance at best. Nothing is more demotivating than having good people waste time on matters of little consequence.
5. Oversight is predetermined
Compliance is achieved both effectively and efficiently. The matters requiring oversight have been made clear, along with the related criteria and any permitted variances.
The problem is not measurement, but excessive measurement and inappropriate measurement – not metrics, but metric fixation. [9]
All boards are obliged to have effective oversight of both conformance (with law, policy, etc) and performance—a long list that now includes organisational culture, health and safety, supply chain integrity and climate impact.
The board must first determine what is important. Most business-as-usual activity should occur within the board’s policy framework. Once in place, the board’s concern is simply that activity continues to take place within that policy envelope. If not, then escalation to the board, or certainly an alert, is required. That will usually be left to the judgement of the chief executive. The board should trust that judgment but will occasionally seek independent verification on particular matters.
The extent of both conformance and performance should be visible against predetermined criteria. Not all information is relevant at the governance level. Good boards make it clear to their chief executives not only what they want reported, but how much depth or detail is necessary.
All directors should have the level of financial literacy needed in the circumstances. Financial oversight is not about the detail but about alignment to policy. The board is interested in relationships, ratios, characteristics and the avoidance of unacceptable conditions. Resources must be demonstrably allocated to achieving stated outcomes. The budget is a financial subset of, but not THE plan. The relevant consideration is what happens from this point forward.
Performance oversight will flow from stated outcomes and how they are measured in the annual business plan.
Risk reporting is too often a siloed activity that produces a kaleidoscopic laundry list splashed across multiple pages. Make clear the handful of risks that might prevent the organisation from achieving its objectives and require constant oversight of those matters.
Compliance reporting addresses the board’s need for assurance, but the true point of any measurement and monitoring system is learning and improvement. That moves more into genuine governance.
6. Learning is continuous
The board sees itself as a learning entity, open and inquiring. Review, reflection and development are intrinsic at the group and individual level.
…organisations where people continually expand their capacity to create the results, they truly desire, where new and expansive patterns of thinking are nurtured. [10]
Good boards and their directors are committed to being better at what they do. They welcome processes that advance that aspiration.
The operating environment is rapidly changing. So, boards understand they must be learning entities at the collective and individual level. They are not fixed in perspective, but searching for new, relevant information and willing to change their thinking as new understanding emerges. The board exhibits a culture of inquiry.
There are efforts to understand the complex dynamics of an effective boardroom team and a strong commitment to reflection and development.
The purpose of questioning is not to interrogate but to learn and understand. Questioning is a skill to be developed.
The board is clear about the matters it needs to understand better. They are reflected in the annual work plan. Information and perspectives are collected to inform those discussions.
The board pursues independent thought, not captured by any constituent grouping. It is correctly focused on the wellbeing of the organisation as a whole.
Development options that flow from regular reviews are pursued at the collective and individual level. Wherever possible there is a budget provision for governance development.
Good directors are highly self-aware and conscious of potential bias. They make considered efforts to improve their personal contributions.
7. Accountability and transparency
Trusteeship is central. Governing boards have a set of non-negotiable fiduciary duties that embrace ethics, integrity and transparency. On behalf of some form of ownership, the board holds itself accountable for its own performance and that of the organisation.
The board appears to be an unreliable instrument for ensuring accountability – the outcome society most wants from it. [11]
Boards in most cases [12] come into being because the relevant legislation requires an incorporated entity to have a grouping of officers, trustees or directors. This reflects the reality that the ownership group is too large or dispersed to run the business itself. The board is acting as an agent of or a subset of the ownership.
A board must be clear about who the owners are. That may not be simple. The easy answer is those who can vote at the annual meeting and determine the composition of the board. The more nuanced view is found in social licence theory. [13] No matter who owns a business, the society it operates within and affects provides the licence or permission to operate. This perspective is becoming increasingly relevant. The adjunct idea of moral ownership points to those who are affected by the activities of certain organisations. For example, in a social services entity, this could range across charitable beneficiaries, volunteers, programme participants and customers.
The board needs to clarify what its ownership groupings are, then establish, maintain and protect its relationship with the groups to whom they are accountable.
Agreement is reached on how that accountability will be delivered. Directors accept that the standards expected of management apply equally in the boardroom. Ethical frameworks are prescribed and adhered to. There is a powerful sense that the board exists to add value, and there is an understanding of how that occurs. The board reports externally on governance performance and cost. It makes obvious, through clear reporting, how resources entrusted to it have been used to best effect in pursuit of desired organisational outcomes.
Notes
- Sonnenfeld, J. What Makes Great Boards Great. Harvard Business Review. September 2002
- The Financial Aspects of Corporate Governance (known as the Cadbury Report) UK. December 1992
- Often attributed to Niccolò Machiavelli. Although he alluded to it, he never said it directly.
- For those outside Aotearoa New Zealand: the weka is a native ground-dwelling hen-like bird, highly curious, attracted to and prone to making off with shiny objects—car keys a favourite.
- Hilmer, F. Strictly Boardroom. Information Australia 1998 p67
- Crutchfield LR and H. McLeod Grant. Forces for Good. The six practices of high impact non-profits. Jossey Bass San Francisco 2012
- Carver, J. Boards that Make a Difference. Jossey Bass. 3rd edition 2006.
- Cited in Stitger, M. & Cooper, C. Boards that Dare. How to Future Proof Today's Corporate Boards, Bloomsbury Business 2018, p21
- Muller, J.Z. The Tyranny of Metrics, Princeton University Press, 2018 p40
- Senge, P. The Fifth Discipline: The Art and Practice of the Learning Organization. Doubleday 1990
- Chait, Richard P. Ryan, William P. Taylor, Barbara E. Governance as Leadership. John Wiley & Sons. 2005
- Noting the use of discretionary advisory boards
- https://blogs.griffith.edu.au/law-futures-centre/2021/08/03/understanding-the-social-licence-to-operate/
