Despite anxious tones, the number of prosecutions of directors In Aotearoa New Zealand remains low and the bar for successful conviction remains high.

In writing this piece we acknowledge the work of Chait, Ryan and Taylor [1] who characterised three board modes: Type 1 is compliance and conformance; Type 2 is described as strategic; and Type 3 is focused on the ultimate goal—generative thinking.

Yet we observe that many boards remain focused on Type 1 matters. This is the mindset of the fiduciary, cautious, deliberate and risk averse. The root causes of being stuck in first gear are not hard to discern. In Good Governance 85 we reviewed Fred Hilmer’s new book, What’s Wrong with Boards. [2] He points the bone at regulators and writers of governance codes that focus on process and one-size-fits-all ‘good practice’ rather than the outcomes the organisation is striving to produce. This then leads to box-ticking behaviour. We see this in Aotearoa New Zealand, notably within the Crown sector. Guidance from central agencies focuses on compliance, risk and—in particular—not causing grief for the Minister.
A board charter that lays out the potential years in prison for breaching the Crimes Act is not helpful guidance towards good governance.

Charles Handy [3] makes a wonderful distinction between Type 1 error—not getting it right—and Type 2 error—not getting it right as it could have been, observing wryly, ‘he walked in many corridors of power and left no footprint in any of them—a life devoid of Type 1 errors’. A life lived with blameless mediocrity!

We are not suggesting that the oversight role is unimportant. Ensuring that an organisation remains in compliance is crucial. Being informed custodians of the desired organisational culture is pivotal in today’s world. These duties must be undertaken but they should not overwhelm the work of the board. As John Carver [4] noted, the ‘job of the board is to invent the future not mind the shop’.

Yes, a board has accountabilities for all matters, but the reality is that they are physically present well under one percent of the time. So, a considered mechanism is needed to ensure oversight the other 99 plus percent of the time. Such a mechanism needs to be clear, understood by all and not overly prescriptive. In short, it credits management with the intelligence to make sound judgement with parameters of general guidance. Having laid that out—and then made clear the form of monitoring required—the board should have made time to get out of first gear.

So, returning to our three-speed board and working up through the gears, Chait et al acknowledge that Type 1 governance is important, but Type 1 boards are a problem. They suggest that the urgent drives out the important and the focus on efficiency obscures the need for effectiveness. Ultimately a board stuck in this mode descends into tedium and its members become bored spectators. We would also suggest applying an ethical lens. Prudent management of assets is a given. But using them to generate maximum benefit for an ownership is the ethical imperative. As Hilmer said in his earlier book Strictly Boardroom, [5] ‘every board should clearly define what is meant by above sustainable average performance in its particular context’.

So, assuming that a board is sufficiently organised to spend most of its time (60% plus) on things yet to happen, what does that look like? Some boards sign off the strategic plan, then check in from time to time. This is not shifting gears. Type 2 assumes that the board’s primary role is to think—but what about? A board has the capacity to consider only three to four big items at any one time. It should know what they are and be very intentional in structuring the workplan in response.

James Barksdale [6] suggests that ‘the main thing is to be damn sure that the main thing is really the main thing’. To be informed about the main thing, the board needs to ensure the right information is available to them so it can focus on those priorities. This is the real value-add of the board and, as such, its processes, committee work, development programme, succession planning and agenda structure should all take heed of the ‘main thing’. Then, perhaps, the board is ready for top gear. Chait et al call this Generative Governing. The shift between the two is not necessarily a distinct change, more the easy click of the automatic gearbox dropping into overdrive.

Here we are very much in the realm of finding the right question. The process is sense making—an active collaboration between management and the board. Being honest about what we don’t know, about the ambiguities in the world and grappling with them together. In working towards a desired future Roger Martin [7] suggests the key question is, ‘what would need to be true for this to be possible?’. A board can deploy many techniques in this mode. A previous Good Governance article lays out some sound steps here.

The main point of the article is to caution about getting stuck in Type 1 governance. How can you tell? One good technique—that we use in board evaluations—is simply to mark up the most recent board pack, already happened or yet to happen. You can tell very quickly if you need to reach for the gear stick.

_________________________________________________________________________________

Notes

1. Chait, Richard P. Ryan William P and Taylor Barbara E. Governance John Wiley & Sons.as Leadership. 2005
2. Hilmer Fred, What’s Wrong With Boards – Rethinking Corporate Governance Brio Books, 2022 (Kindle version)
3. Handy, Charles. The Empty Raincoat. Arrow Books edition 2002.
4. Carver, John. Boards that Make a Difference. Jossey Bass Third edition 2006
5. Hilmer, Fred. Strictly Boardroom. Information Australia 1998
6. James Barksdale , former CEO of Netscape
7. Management and marketing thinker Roger Martin