Delegation is such a vital process in organisations that corporate governance is often referred to as the allocation of decision rights. This process is both sequential and hierarchical. Corporate authority that initially resides entirely with a board is allocated down the organisation structure.

There is no fixed line between governance and management; it moves according to board preference and changes over time according to situation and circumstance. So, before a board can delegate, it must decide how much help it needs to run the organisation. Each board must decide which decisions it will retain and which it will assign to others. The principal recipient is usually (but not always) the chief executive. [2] Few boards—and even fewer chief executives—are conscious that this is the process by which every board decides what is ‘governance’ and what, by definition, is the residual work of management.

The challenge of assigning decision-making rights

Wise boards and chief executives understand that decision rights at the corporate level—particularly relating to major decisions—are seldom as cut and dried as ‘these are our decisions; those are yours’. Depending on the decision to be made, it is likely to be far more nuanced, as reflected in the widely adopted and in our version below, adapted, Seven Levels of Delegation model:

For example, the attitude of the board might be that ‘…the final decision on this is yours, but we want to have a chance to express a view on the options you are considering’ (level 5). For a decision reserved to the board, it would be rare for that board not to invite the chief executive’s advice and recommendation (level 3).

Roger Martin has developed a similar tool (the Ladder of Responsibility) that is also helpful in clarifying the allocation of decision rights, particularly when these are qualified or conditional in some way. [3]

Despite the potential of these tools to clarify mutual expectations, disagreements often arise between boards and their chief executives about who has the decision rights in certain situations. Sometimes this is because the applicable level was not mutually understood and agreed in advance. Or it may be because one or other party breaks the agreement.

From a board’s perspective, the level of delegation is about trust and confidence, and could be viewed as a reflection of the board’s risk appetite: low risk, low delegation. But no matter how clearly and formally the delegation is expressed by a board, individual board members can be a rogue element. Boards often comprise people with significant decision-making rights in other roles, who are not used to deferring to the judgement of other decision-makers. There are also the usual suspects who always ‘know better’ and are quick to share their thoughts on decisions the chief executive should make.

Chief executives may contribute to this tension in their own way, such as, for example, those who disrespect the spirit and even the letter of the delegation, typically by encroaching on decisions the board has reserved to itself. [4] Board member churn also allows long-serving chief executives to expand their decision-making autonomy progressively, often without formal approval. New directors then find themselves in a situation they would otherwise consider imprudent and may accept the authority exercised by the chief executive because they assume it has been properly mandated.

These examples point to the challenge of maintaining the clarity, integrity, validity and acceptability of a delegation framework for any length of time. What doesn’t change is that ‘the buck’ for organisational performance and wellbeing stops with the board. So, delegating some—or even most—of its authority is not a case of ‘passing the buck’.

If a board is going to allocate any of its decision rights to others, wholly or partially, it must ensure that its expectations are clear. In defining these a board must start with a clear sense of the distinction between ‘ends’ (results to be achieved) and ‘means’ (actions to achieve the desired results). With these distinctions in mind key questions for the board to answer are ‘what outcomes are to be achieved’ and—because the ends do not justify the means— ‘what limitations are to apply to the choice of means?’ Answers to these two questions point us back to the need for your board to understand why it must do its work first. The closer a board gets to a level 7 delegation, the more important it is for the board to have this figured out.

Paying attention to the pre-conditions for effective delegation

The board has full-time responsibility for directing and controlling the organisation. Abrogating from that responsibility is not an option. Over a year, however, few boards are in session for more time than most chief executives would spend at work in any given week. Even in a small organisation, full-time responsibility plus limited availability means every board must have an effective remote control system to frame and guide the many decisions that must be made when the board is not meeting.

Those exercising a delegation are entitled to have a clear-eyed view of the board’s expectations of how its delegation should be interpreted and exercised by them. This should be sufficiently clear that the board can live with a reasonable interpretation of the purpose of the delegation and the boundaries within which it can be applied. The holder of a decision right should have as much discretion as possible as to how they exercise that right. Only then can they be truly accountable.

Getting this right is the core task for a board’s policy-making function. A policy is often defined as a ‘decision made in advance’. A comprehensive, integrated policy framework allows the board to be fully accountable for the organisation’s wellbeing and performance while letting its chief executive and staff get on with the job.

In a broad sense, the necessary overarching governance policy framework is aimed at achieving two mutually reinforcing objectives:

1. to ensure organisational purpose (its reason for being), its values   and the outcomes that must be achieved to fulfil that purpose are expressly and unambiguously defined and specified

2. to prevent or mitigate situations or circumstances that might be incompatible with those values and may compromise the achievement of desired outcomes.

A policy framework to achieve these two objectives should:

• actively embrace and inform—in advance—every decision that must be made anywhere in the organisation
• be formally expressed, visible and accessible in an appropriate form to everyone with delegated decision-making authority
• be comprehensive and coordinated to avoid gaps, overlaps and inconsistencies
• be well supported through active monitoring and review, and through processes such as induction and board and staff training
• be respected and consistently applied, allowing decision-makers to apply a reasonable interpretation of applicable policies [5]
• be expressed in a format relevant to the objective (desired outcomes should be written prescriptively and constraints, proscriptively). [6]

When there is policy clarity board chairs have the tool they need to cut off the timewasting meddling and second guessing many board members are otherwise prone to. The only valid point of clarification is whether a delegated decision is policy-consistent.

Historically, board policy frameworks have been documented in a variety of ways:

• board charters
• board policy manuals
• Statements of Intent
• vision and values statements
• strategic and business plans
• instruments of delegated authority
• chief executive contracts and performance agreements
• risk registers.

These tangible manifestations of board policy may inform and even grant authority for delegated decision-making. But they are often messy, fragmented, contradictory and disconnected, rather than part of a visible, accessible, integrated whole. Given regular turnover in board membership it is also doubtful how many boards are fully aware of and understand their own policies. Much of the policy/delegation framework is taken for granted—assumed rather than codified—leading to ambiguity. Missing pieces or gaps are easily overlooked.

Most boards muddle along without this becoming a serious problem—until something goes seriously wrong. Then they find, belatedly, that they do not have a leg to stand on. All boards must ensure that their vital guidance or remote-control framework is in good shape. Until it is, they are more vulnerable than they know.

The benefits of effective delegation

In determining their delegations, boards will, ideally, apply the principle of subsidiarity. This proposes that a higher level of authority should not make decisions for a lower level if the lower level was capable of making the decision itself. Unfortunately, boards often hold onto decisions they could delegate to their chief executive. If boards were more respectful of the value of their own time—and more effective policymakers—they would not get drawn into decisions where chief executive and staff are far better placed to make the necessary judgements. [7] In those cases, a board not only diverts its attention from matters it should be dealing with but can also detract from rather than improve the quality of the decision.

An effective policy/delegation framework allows a board to influence everything that is important (including non-financial objectives) without feeling obligated to make any but a very few detailed decisions itself. Instead of getting bogged down in routine or even out-of-the-ordinary operational matters, an effective delegation system gives the board time and bandwidth to attend thoroughly to matters that properly justify not only its own time and attention but that of senior management. For example:

• It frees up time directors need to develop their thinking on the very policies and delegations that would make specific board approvals unnecessary.
• Not having to wait for board approval gives a chief executive the chance to make timely (and effective) responses to changes in an organisation’s operating environment.
• It reduces the risk of the board becoming a party to detailed operational decisions, undermining its ability to hold its chief executive accountable. If the board is implicated in operational decisions, where does responsibility lie?
• The board is forced away from the distraction of low-level management matters to concentrate instead on defining and proscribing situations or circumstances that could undermine the achievement of desirable ends.
• There will be fewer random, even inconsistent, one-off board decisions of the kind that make policy/project/programme evaluation difficult and that hold back organisational learning.
• When board policies establish the criteria for approval of staff plans and proposals, it improves the sequencing of decisions (e.g. from general to specific; abstract to particular; problem definition to solution; and policy to decision). This ensures that the decision ‘cart’ is attached to the policy ‘horse’, not the other way around.

When a board delegates its authority to its chief executive, it creates the foundation for a clearly defined decision-making and accountability framework that can ripple out through the whole organisation. This creates a basis for performance monitoring and ensures that all parts of the organisation are aligned in pursuit of a clearly defined vision of success. [8]

Boards have two choices in relation to delegation: to delegate effectively—or not. The cost of the latter option to both board and management is considerable, mostly because the board is not focused on its own job and is not doing it in a timely manner.

To be effective, the board must do its job first.

Notes

(1) Exceptions to this rule relate to the few major decisions reserved to general meetings of shareholders or their equivalent

(2) We acknowledge that some boards also determine the allocation of decision-making rights at the lower levels. We advise against that in most cases. Even if a chief executive approves this, it is effectively an exercise of the board’s judgement about which of the chief executive’s employees are suitable recipients of decision-making authority. This inherently weakens the board’s ability to hold the chief executive accountable for the exercise of that authority.

(3) See Roger Martin (2000) Board Governance and the Responsibility Virus. See also Roger Martin (2003) The Responsibility Virus. Basic Books

(4) A ‘classic’ of this kind is the circumvention of a board-set expenditure limit by breaking the true cost of a transaction into smaller components (ie, the equivalent of purchasing a vehicle by its parts rather than the fully assembled whole).

(5) When a policy prescribes how a result is to be achieved it is an instruction rather than a delegation. A delegation inherently leaves room for judgement and interpretation as to how best to apply it.

(6) Many boards resist expressing delegations in proscriptive (ie, limitation) form, usually because they mistakenly believe that positive language is more empowering. Empowerment is important but from the board’s perspective, it must also be conditional. One of our client boards (of a major charity) wanted to empower its chief executive to the max but matched this with limitation policies that also gave it control where that was important. For example, one of its limitation policies was that “The Chief Executive must not commit or allow expenditure that is inconsistent with the purpose for which funds were raised”.

(7) An interesting example was shared at the recent Australian Institute of Corporate Directors annual conference. The chair of the Westpac bank board, John McFarlane, recalled an occasion when the board was asked to decide on a $300m contract renewal. When asked why, the chief executive told the board he only had authority to spend $70m — so the board increased the limit to $300m.

(8) For a more comprehensive discussion of the importance of decision-making rights to organisational performance, see Tiffany McDowell and David Mallon, Getting decision rights right. Deloitte Insights.