Fast Company

Vanguard Governance: Part III - Roles, Rigor, and Structure

Boards have a dual responsibility to ensure compliance, while also envisioning and achieving the organization’s greater potential.  By “envisioning the greater potential,” I mean taking a time out from incremental thinking to consider input from experts and people with diverse backgrounds and perspectives to imagine how the organization could become an extraordinary enterprise – either in expanding shareholder value (for-profit), or adding compelling value in making the community or world a better place (nonprofit). 

 

By “achieving the greater potential,” I mean creating a more ambitious and robust revenue model.  For a for-profit, by developing products and services at the best price that will be highly competitive in the global marketplace.  For a nonprofit, by developing the optimal revenue model  - usually involving a mix of fees for services, government funding, and philanthropy from corporations, foundations, and individuals.

 

I believe that boards can achieve their dual responsibilities of compliance and vision when boards understand and define their roles, practice rigorous governance standards, and establish efficient board structures.                                                      

 

Define Roles

  1. Establish clear roles and expectations of officers and board members with an enforceable system of accountability; tailor role descriptions for each particular board based on what the organization seeks to achieve.
  2. Separate the board chair and CEO functions.  I believe it is in the interest of the “owners” of the corporation - shareholders (for-profit) or the community (nonprofits) – for the chair to be independent; at the same time, the chair can be a strong partner in helping the CEO to succeed. The trend to separate roles is growing in the U.S. but still only among fewer than half of S & P 500 companies, while in Europe most companies separate the roles of chair and CEO.  (Even among U.S. boards where the CEO is the chair, almost all have established a new role of non-executive lead or presiding director as of 2007, as compared to a minority of companies in 2003.) In the nonprofit sector, separation of the roles of board chair and CEO is standard practice.
  3. Board: establish clear expectations of the CEO, hire an outstanding CEO, and conduct an annual performance review; the board officers conduct the annual review with input from the board.
  4. Board: retain counsel and auditor.
  5. Understand that a major distinction in the roles of for-profit and nonprofit board members is that nonprofit board members are usually expected to contribute and raise funds to help support the organization’s charitable work. 

Apply Rigor

  1. Establish conflict of interest policies; involve outside counsel and an auditor in monitoring the enforcement.
  2. Compensate the CEO competitively in both for-profit and nonprofit enterprises, using the expertise of professional services firms for guidance on salary norms; hold the CEO accountable for performance.
  3. Compensate board members competitively for for-profit corporations, using the expertise of professional services firms for guidance on salary norms. Only for-profit board members are compensated financially; nonprofit board members are not compensated – these are voluntary roles on behalf of the community.  There must, however, be a system of board member accountability for board member performance in both sectors.
  4. Focus board agendas on the organization’s greater vision and its revenue model, how the organization is performing (based on relevant dashboard information), and compliance matters.  Board meetings are the forum for the board to make key decisions and determine the board’s, CEO’s and management’s next steps to advance the organization towards success.  Productive board meetings require thoughtful preparation by the board chair and CEO, as well as coordination and preparation through committee work (see below under “Structure”).
  5. Establish dashboards for regular review by the board, showing relevant financial and organizational metrics for iterative assessment and planning­­. Make sure that what you measure creates incentives for organizational behaviors that achieve maximize shareholder value (for for-profits) and benefit to the community (for nonprofits); the wrong metrics will pervert organizational behaviors.
  6. Board: oversee compliance and regulatory matters as carried out by management.
  7. Provide board education, training, assessment, and improvement as an ongoing process, in a more professionalized, customized, and relevant manner than current practices. 

Create Effective Structures

  1. Determine the optimal board size based on the needs and work of each organization for expertise and experience including diverse backgrounds and perspectives relevant to the enterprise and its ambitions.  For-profit boards tend to be smaller (averaging 10).  Nonprofit boards tend to be larger (averaging 16).
  2. Board committee structure: The board will be able to manage its dual responsibility of compliance, and vision with revenues, by creating an efficient committee structure.  Since for-profit boards are paid positions, and the boards are smaller, board members are expected to serve on multiple committees. Most for-profit boards have committees for audit, compensation, nominating, and corporate governance. Since nonprofit board members are volunteer, it generally takes more board members to do all the board work; yet another way to fill out nonprofit board committees with qualified candidates is to selectively include a few non-board members who bring particular expertise.  Key committees for nonprofits include: audit, investment, governance, and finance; executive committees are sometimes useful for larger boards for the officers and committee chairs to coordinate their efforts.
  3. The optimal frequency of board meetings should be determined based on the work of each board. The average is 8.7 per year for for-profits, and 6.9 per year for nonprofits. (I think the number should be 3 – 5 per year for nonprofits depending on the organization.) When committees are working effectively, diving more deeply into key governance matters, then there can be a good balance of board work and committee work.  Ideally, board meetings provide the vital opportunity for members to review, deliberate, and make decisions about the relationship between financial and strategic options for the future of the enterprise.

For-profit and nonprofit boards are both responsible to the “owners” of the corporations, to shareholders (for-profits) and to the community (nonprofits).  The past year has shown us the power of boards to have an impact on our communities and our world.  Boards that understand their roles and organize themselves effectively can advance their enterprises and our universe to new heights of success.  In Part IV, I will talk about building boards with the best people.

 

 

 

 

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