Few directors would argue for no delegation at all to the CEO. A well designed delegation makes clear to the CEO two things: firstly the organisational outcomes to be achieved; and secondly the boundaries of authorities granted in order to achieve these outcomes. When a board provides such a clear delegation it meets one of the most fundamental principles of good governance; that a board should speak with one voice, especially when speaking to the CEO. When a board is explicit about its expectations and requirements it provides the basis for a sound relationship. When this relationship is left to simply evolve, a breakdown in trust can be the unintended result.
But what should the board delegate and what should it retain control over? A simplistic (and highly risky) answer is that the CEO should be charged with complete management authority over all operational activity. While we have encountered few boards that have consciously adopted such a position, we have worked with many that have ended up there by default. We have also worked with boards that have adopted an opposite position, in essence trying to control everything. Keen to maintain active control, these boards typically don’t delegate, instead requiring the CEO to seek permission to act on most matters. Less stifling but still ‘controlling’, some boards delegate but still require the CEO to ‘check in’ on a wide range of operational decisions.
Ideally a board should delegate to the greatest extent possible while ensuring that directors’ duty of care is not jeopardised. In a sense the board’s role is to be the organisation’s ‘ultimate risk manager’. Well known Australian director and CEO Fred Hilmer describes the board’s role as:
“…to ensure that corporate management is continuously and effectively striving for above average performance, taking account of risk….”2
a full and uncontrolled delegation places both the organisation and the directors at risk. Directors need to assert a measure of control over certain activities and decisions that, in their view cannot, or should not be delegated. An obvious example is the setting of CEO remuneration. Another is the design of the organisation’s mission and strategic direction. The challenge facing a board is to agree a level of delegation that is neither under-controlling nor over-controlling. A CEO should be empowered and encouraged to utilise all of his or her creative ability and experience and those of employees to achieve the board’s outcomes. A well designed delegation can facilitate this.
What does the literature say?
We have searched our considerable library of governance literature to see what local and international writers have to say about this challenge. Except for John Carver’s writing we drew a blank. Most writers discuss the importance of the relationship, stressing the need for openness and honesty and the benefits that accrue from a strong, collaborative partnership. The exercise of delegation including advice on how to determine its content, however, is rarely acknowledged. It appears taken for granted. This is a shame and, we believe, is a distinct gap in the governance literature. Carver is the only significant writer that we are aware of who deals with this matter in depth. He offers a very simple and effective method for boards to define that point at which a board ‘hands over’ to the CEO.
Use criteria to define the delegation
Carver’s method is based on a criterion-referenced approach to the board’s role. In this, a board sets the criteria by which the organisation is to be managed and then delegates to the CEO the responsibility of working to the criteria. Carver’s aim is to set the CEO free but within board set boundaries. The criteria define the boundaries. An example of this method at work would be in the area of financial management. The board would ask itself, “Which financial matters worry us or might keep us awake at night?” In other words, what are the key financial risks that could cause harm to the organisation? Having identified these, the board would then ask, “If we are to delegate in this area, what CEO actions or decisions would be unacceptable to us?” A further question follows, “Given these, what controls or limits do we need to impose in order to bring the risk within acceptable bounds?” As the board works through this process it finds what might be described as ‘the point of delegation’. This represents the point at which it is satisfied that sufficient guidance (in the form of policy) has been provided so that any CEO could make a reasonable interpretation of the policy to the board’s satisfaction.
While this might, at first glance, appear to be a somewhat lengthy and demanding process it is, in our experience, neither difficult nor time consuming. Most boards discover that, while there are certain matters that they wish to retain control over, the number is not great.
Define, delegate and monitor
To summarise, a board should not give away its duty to oversee management but it best achieves this by first determining the criteria by which the organisation should be managed and then monitoring the implementation of the criteria. The significant thing is that the board should frame its CEO’s decision-making with appropriate policy pronouncements and then monitor accordingly. A board must be very careful that it does not unwittingly undermine its ability to hold its chief executive accountable for those matters delegated to him or her. Directors should take care to ensure that they do not ‘cripple’ their CEO by giving him or her the job then doing it (or parts of it) themselves.
It is our belief, formed from listening to boards and CEOs talking about their respective roles and watching them in action that the most successful partnerships are built upon trust, a desire that both parties should succeed in their role and a carefully crafted set of expectations that define the way the two roles will work together. Each facilitates the success of the other. We have yet to see a successful board-CEO interrelationship that is based on a ‘controlling’ approach from the board. Without question the success of this vital partnership comes about via the board maximising the extent of delegation to the CEO to run the operational organisation and minimising the extent of intrusion into this. Such a board ‘defines and delegates’, rather than ‘reacts and ratifies.’
Of course it must be acknowledged that a board has the right to take or impose whatever actions or decisions it wishes as part of its duty of care. Under normal circumstances, however, a board should stay at a maximum distance from operational decisions, intervening or intruding only when this is deemed to be essential. A board that determines that it needs to participate in management decision-making almost certainly has the wrong CEO. Alternatively it could be that such action is an indication that a board, so acting, does not understand the more subtle elements of its role. When a board cannot trust its CEO with the operational management of the enterprise it should regard this as a performance problem and should address it at that level.
1 Carver, John. and Carver, Miriam Mayhew. Basic Principles of Policy Governance. Carverguide. Jossey-Bass. San Francisco. 1966.
2 Frederick Hilmer, Chair. Strictly Boardroom. Improving Governance to Enhance Company Performance. The Business Library. Melboiurne. 1993 . P 33.