Misplaced beliefs

As former chief executives ourselves, we can say with confidence that most chief executives feel they should be allowed to get on with what they consider their job—free of ‘interference’ from their boards. They usually work from an underlying assumption that there are universally established and accepted norms and expectations that everyone knows and should recognise and respect.

Well, no! These beliefs and assumptions have no sound basis, but the respective roles and responsibilities of board and management should be clearly distinguished. It is important to ensure a sensible division of labour that is valued and respected by both parties.

However, the board/management division of labour cannot and should not be static. It is inherently dynamic and both parties need to continually realign their mutual expectations. To maintain the alignment necessary for a productive working relationship, both parties must keep in mind some facts of life.

The ‘facts of life’

1. The role of chief executive is subordinate and sequential to that of the board

While in many organisations the chief executive has a high public profile, organisational constitutions invariably emphasise that the board has ultimate accountability for the performance and wellbeing of the organisation. In some jurisdictions, certain statutory references are made to the chief executive being the employer of other staff. Apart from that, however, it is rare to find in any statute or organisational constitution that even refers to, let alone specifies, the role of a chief executive. [2]

The authority to make the decisions needed to ‘manage’ or operate the business sits with the board. Any authority for an individual to carry out functions and make decisions on behalf of the board must be delegated—whether to an individual on the board (eg, a ‘managing director’), or to an employee.

The governing board’s employment of any staff is usually permissive. Typically, the constitution will contain a phrase like “the board may employ a chief executive”. It is up to the board, therefore, to determine what sort of assistance it requires, when, and from whom.

The chief executive's role (and all those roles and positions sitting below that position) is not only subordinate to the board but is sequential. Even once appointed, a chief executive does not have a job until the board has delegated some of its (ultimate) authority to the holder of that position.

This means that the board must decide what the scope of its own job is first. Only then can the chief executive’s role or any other subordinate roles—including those involving board members (eg, the board chair or a board committee)—be defined, and an appropriate level of decision-making authority assigned to that role.

2. The extent of delegation to a chief executive depends on the historical evolution of the organisation

In a newly formed organisation, whether commercial or not-for-profit, it is highly likely that board members will perform many, if not most, of the operational tasks as well as doing the governing. In a company, for example, they will likely be executive or working directors. They will both govern and execute. Similarly, in a not-for-profit organisation, board members will also be volunteers (unpaid staff) undertaking much of the work that must be done.

Things change as an organisation grows and matures. It becomes less and less possible for the comparatively small number of board members to implement the board’s own policies and business plans as well as fulfil the board’s governance responsibilities. Over time, therefore, the board will need to consider a greater division of labour. It will be compelled to become more explicit about which are the ‘governance’ compared to the ‘operational’ aspects of the board’s role. While the initial responsibility the board had for carrying out the work of the organisation can be progressively passed to others, it can never delegate its governance responsibilities.

3. In a dynamic operating environment, the board must necessarily reassess the extent of its delegation

For the moment, there may be a kind of ‘line’ defined by formal delegation and recent practice. However, it cannot be fixed in one, unchanging position. At times the board may consider that its delegation should be tightened rather than loosened. Or both at the same time, according to the matters about which the board is simultaneously anxious and relaxed.

Commonly, tightening will occur when a board judges that the risk to the organisation has increased and that it should, therefore, take greater interest in a particular judgement or decision—perhaps even assuming a more direct responsibility. Even when formal decision-making authority remains unchanged, a board may ask the chief executive to consult the board before exercising that authority. The board (or a board committee) may also signal they intend to monitor the use of a particular delegation more closely.

The reverse is also true.

Changes in board membership can also introduce greater uncertainty if, for example, new directors are uncomfortable with the current allocation of decision-making rights between board and management. It is just as likely that new directors with different experience and expectations may conclude that current delegations to management are ‘too tough’.

These are all pointers to chief executives being careful not to take current delegations for granted. Board sentiment regarding the confidence they have in staff capability and judgement is constantly being reassessed, particularly when organisations are under pressure.

The twin components of effective delegation

This overview explains why the process of corporate governance is essentially about the assignment of decision-making rights. A great deal of the tension that can occur between boards and their chief executives occurs when the process of assigning decision-making rights has been unclear or is incomplete.

Successful delegation (or, in other words, a clear description of where ‘the line’ is), depends on a board consistently getting two, complementary, things right:

1. a clear prescription of the results to be achieved (eg, ‘Meet or exceed an external fundraising target of $400,000 in the 2023/24 financial year’); and

2. a clear proscription of situations and circumstances to be avoided (eg, ‘In seeking to meet any fundraising target the chief executive shall not increase the organisation’s reliance on funds that are directly or indirectly the proceeds of gambling’).

The second part of the process is needed because of the old adage that ‘the ends do not justify the means’. Although the proscription is couched in a negative format, it is actually a very powerful form of empowerment. Chief executives are free to choose whatever means they like—as long as they remain within the limitations of board proscription. This reduces the risk that boards will be seen as ‘interfering’ because there is no need to tell their chief executives how to achieve the desired results.

This two-pronged approach creates essential ‘book-ends’ to a successful definition of decision-making rights. It establishes what is to be achieved while at the same time defining the boundaries within which the chief executive must work.

Where are we on the continuum?

Even where an apparently clear delegation exists, it is seldom completely black and white. Chief executives would do well to understand this. There is a continuum. At one end it is entirely the board’s decision. The board requires no input from the chief executive at all. At the other end the decision is totally the chief executive’s with no further reference needed to the board.

Practically and pragmatically, there are many intermediate positions between these two extremes. Boards and chief executives that work well together are adept at ensuring they know where they are on the continuum. Regardless of which party has the primary responsibility for a particular decision, they constantly check any expectations the other has of input.

Under the board’s delegation, a certain decision may belong to the chief executive. The board may still wish to satisfy itself, before the final decision, that the chief executive has recognised and taken into account considerations important to the board. A smart chief executive would find a way of identifying and understanding those considerations and factoring them into the decision. S/he would then communicate the outcome to the board in a way that provides the desired level of assurance. Boards must be just as smart at integrating the chief executive into decisions that belong primarily to them.

How can it all go wrong?

While this is mainly written to help new chief executives understand the challenges involved in successfully defining board and management responsibilities, board members should not underestimate the potential for this to all go wrong at the governance level. Some important disciplines are involved in the way the board goes about defining its delegation to the chief executive and supporting its application. For example:

• The board speaks with one voice to the chief executive. Board decision making is collective not individual. Individual board members (including the chair in most situations) have no authority to give directions to the chief executive.
• Delegations should be expressed in terms of ‘what’ not ‘how’—what is to be achieved and what is to be avoided. As soon as the board instructs the chief executive as to ‘how’ a desired result is to be achieved (or an undesirable situation avoided), it has assumed the managerial function and has lost the ability to hold the chief executive accountable for the outcome.

The first of these disciplines puts tremendous pressure on some board members—particularly on elected board members who must discharge their governance responsibilities under considerable pressure from electors who see them primarily as operational problem solvers.

Local government is a prime example of this. Highly motivated, community-minded councillors understandably want to be helpful when they receive operational service requests or inquiries from constituents (eg, potholes, leaking water mains, barking dogs, noisy parties, etc.). But they can only take on the responsibility of fixing the operational problem via operational staff who are not theirs to direct. This means they must interrupt the chief executive or other senior staff with what , for them, are ‘rats and mice’ issues that other people are employed to deal with. This can slow the whole organisation down, creating an unfair impression among both elected council members and their constituents that the organisation is underperforming operationally.

If the boundary and scope of the councillors' own role is not clear, they will end up spending far more time on operational matters than on things they should be attending to like policy, priorities, and long-term strategic planning. Their attempted operational interventions not only cut across operational accountability but also encourage queue jumping. [3] These interventions are frustrating, and time consuming for staff, and means they are routinely distracted away from things the council has previously prioritised. Well-meaning or not, council members’ attempts at operational problem-solving—a responsibility (supposedly) delegated to the chief executive—can easily lead to a negative, sometimes adversarial dynamic between elected members and senior staff, undermining trust and collaboration on shared goals.

This local government variant of ‘the line’ problem might be less marked in other sectors, but is likely to play out in some form in most governance environments.

Integrated leadership

The issues traversed in this article demonstrate why there is a very high premium on effective and continuous communication between a governing board and its chief executive. The two parties do not work in their own carefully defined—and separate—silos but partner together in the best interests of the organisation.

The partnership depends on an effective, efficient and mutually respected division of labour. Regardless of the presence of what might seem like ‘black and white’ job descriptions and delegations, chief executives would be advised to check their board’s expectations regularly. In practice there is a continuum between complete autonomy to zero autonomy, with many variations between.[4] Both boards and chief executives need to be aware of and test the inevitable grey areas in their mutual expectations. Both overlaps and gaps in the chain of accountability can have disastrous corporate consequences.

Understanding these issues will help ensure that the best possible decisions are made by these two different components of an organisation's leadership—without compromising their respective responsibilities and accountabilities. Success in this interplay is essential to maintaining mutual trust and confidence between a board and its chief executive.

Finally, going back to the basic question posed in the title of this article, there is no getting away from the constitutional hierarchy. The chief executive works for the board. The chief executive role can only exist and operate with authority delegated by the board. Therefore, ‘the line’ is important and where it sits is where the board says it is.

Chief executives, beware—if the board is doing its job, you should not expect it will be fixed in one place for long!

Notes

[1] An earlier version of this article was published in Board Works No. 5 (2010) and republished in Good Governance No. 83 (2022)

[2] An exception in New Zealand, for example, is Section 42 of the Local Government Act 2002 which sets out the responsibilities of the chief executive of a local authority

[3] This favours citizens/constituents who can access and influence someone in power to get special treatment or attention. They get special treatment at the expense of those using agreed priorities and processes for getting their service requests attended to.

[4] Readers interested in learning more about this phenomenon, see Roger Martin (2003) The Responsibility Virus: How Control Freaks, Shrinking Violets-and The Rest Of Us-can Harness The Power Of True Partnership. New York, Basic Books. Martin looks among other things at how boards and their chief executives can easily develop distorted views of each other’s intentions and expectations.