Monitoring should be systematic
Our experience over the years, and with hundreds of boards, tells us that few boards give explicit instructions to their CEO about what is to be reported and thus what will be monitored.
In the absence of a clear prescription for reporting, we regularly witness CEOs trying to cover all the bases so that they will not be caught out. Unsystematic reporting leads to unsystematic monitoring. This does not work for either the CEO or the board.
• The board has no criteria against which to monitor the CEO’s actions and reports
• Board members bring their own subjective interpretation of the board’s criteria and judge CEO compliance on the basis of how they would have met the criteria themselves if they were in the CEO’s shoes
• The reporting submitted by the CEO either does not address the board’s criteria or the CEO presents too little or too much data.
Monitoring criteria made clear
One of the reasons why so few boards make clear to the CEO their monitoring requirements is that, in many cases, directors do not know what they need to monitor, other than in the most general terms. They know that they need to monitor the organisation’s finances, but exactly what financial information should they monitor? The same is true of other elements of their monitoring role, including keeping track of strategic achievements.
Monitoring based on policies
When the board establishes a strategic direction and governance-level policy framework it has the basis for systematic monitoring. Policies make clear what is, or is not to be done, the strategic direction makes clear what is to be achieved. Monitoring is then made simple; has the
CEO complied or hasn’t he/she, have the results been achieved or not, is the board working to its own policies or not?
The strategic direction and the policies provide a reference point from which all board and CEO action and decisions flow. CEOs should work from the maxim that if the board has developed and adopted a policy that relates to his/her work, then there is an obligation to report to the board on the carrying out of that policy. Quite simply, board monitoring is a criterion-referenced activity. Boards that grasp this concept suddenly find their monitoring role to be not only much easier to define and carry out, but also much more effective.
The board determines the ‘what’ and ‘how’
In monitoring compliance with policy, the board must ensure that the data it receives from the CEO is presented in a way that enables understanding and interpretation. This requirement too should be presented as a criterion. Typically, boards address specific areas of operational risk by developing issue specific policies, e.g., in the various areas of finances, personnel, protection of assets etc. In addition to these policies, we recommend that the board develop a policy that speaks directly to its own needs for information and support.
Respecting the CEO’s choices
Many boards we have worked with are blessed with board members with extensive skills and experience in relation to the business of the organisation, but these same board members become a curse when they try to superimpose their own version of appropriate actions over
those of the CEO. In doing this, these board members judge CEO compliance not against the outcomes achieved, but rather in terms of how they would have approached the same issue themselves. It makes little sense that the board should hire a competent CEO and then tell him/her exactly what actions or decisions to take. Allowing the CEO to make the operational choices can be hard for some board members to accept especially those with relevant expertise. But they must do so or they risk taking over the CEO’s decision-making responsibility and undermining the board’s ability to hold him/her accountable. Given that the board has developed a policy framework which provides a clear set of performance expectations for the CEO, a board must allow the CEO to exercise a reasonable interpretation of those policies. Having placed the policy ‘goal posts’, the board must accept the CEO’s efforts to achieve the desired outcomes. The goal posts should not be moved without making clear to the CEO, ahead of time, that this is to occur and why.
Too much or too little monitoring data
Too much data can be as inhibiting to effective monitoring as too little. We have witnessed boards poring over pages of often irrelevant information feeling that because the CEO has presented it all, it must all be read. One of the competencies found among good boards is that they have made clear to the CEO not only what they want reported and how, but how much reporting data is necessary to enable effective monitoring.
The board should adopt the same approach for monitoring its statement of strategic direction as it uses to monitor compliance with the policies that frame the CEO’s delegated authority, that is, against pre-stated board criteria. Having specified the results to be achieved, the CEO is required
to report against these as stated. The achievement of outcomes stated in the strategic direction is not something that can usually be demonstrated on a short-term basis. Many of the issues contained in this board document might stretch over several years. Directors need to be reasonable when asking the CEO to keep them up to date in this area of monitoring and
reporting. Many boards chose a quarterly reporting schedule to keep them apprised of progress towards the achievement of these big, organisation-wide issues. Others are comfortable with a
four monthly report. The information provided by the CEO in his/her in-depth report not only informs the board in detail about progress towards the achievement of results, but also provides the basis for a broad strategic conversation around the boardroom table. When this reporting schedule and dialogue is built into the board’s 12-month agenda, directors
and management share their collective wisdom while at the same time providing assurance about management’s focus on the ‘right’ things.
To conclude, we come back to the principles stated at the beginning of this article: it is the board’s responsibility to ensure that everything is as it ought to be. The board must determine how things ought to be. Policies are the most effective means for saying how things ought to be
and, monitoring is the method by which the board enacts these principles.
Without effective monitoring a board cannot guarantee to meet its ‘duty of care and diligence’ responsibilities and thus cannot assure its owners and key stakeholders that it is doing its job on their behalf. Such a board cannot demonstrate good governance.