To ensure good governance practices, Board members must acknowledge and adhere to three primary fiduciary duties, which was the message that I recently delivered in education sessions to public pension plan trustees and board members for not-for-profit organizations.
- Duty of Loyalty;
- Duty of Prudence; and
- Duty of Impartiality.
Part of making sure that you are fulfilling your primary fiduciary duties is to make sure that you and your Board are following proper operating processes. As has been said many times by governance and legal experts, you cannot be sued for the decisions you make as a Board, but you can be sued for not following proper processes in making your decisions.
One key problem area for boards of all sizes, in all industries, is the separation of roles between the Board and management. Often boards get too far down into the weeds on operational issues that can be better delegated to management and, as a result, do not spend the necessary time focusing on the important strategic issues facing the organization. This pattern of behavior can lead to several negative outcomes, including:
- The loss of influence of your Top Executive over implementation and operational decisions, which can ultimately hurt them in commanding the respect of other senior staff members.
- Friction between the Top Executive and the Board that ultimately leads to a lack of trust on both sides.
- Potential loss of key talent due to the dysfunction between the Board and management.
The common mantra in governance circles is for boards to have their “nose in and fingers out,” which refers to a board's obligation to be on top of all governance matters, but to not stray down into trying to manage the day-to-day operations of the organization. In recent years, a new term: “nose in and fingers on the pulse” has emerged. This describes a board that succeeds by playing a role in overseeing the execution of the strategic vision, while simultaneously keeping on top of strategic developments that will affect the organization. In either case, it is important that Board and management have a clear understanding of their responsibilities, which starts with identifying situations where the Board is being over-active and straying too far down into management issues.
Signs of an Over-Active Board
There are four ways to spot an over-active board:
- Too much time is spent in Board meetings discussing operational issues.
- Board meetings are constantly running behind schedule.
- Your Top Executive’s relationship with the Board is strained.
- You find yourself, as a Board confused, over your responsibilities vs. management’s.
If you spot any of these situations you need to discuss your concerns with your fellow Board members, as well as management, to see how you can improve.
Here are some starting points to consider when delineating between Board and management responsibilities.
Common Board Responsibilities
- Review and approve annual and long-term objectives for the organization.
- Review and approve policies and procedures that govern the organization.
- Review and approve strategic plan and annual operating budget.
- Hiring, firing and compensation for the Top Executive.
- Provide direction and strategic input to the Top Executive and management.
- Monitoring performance and risk of the organization.
- Setting and approving the organization’s overall Board governance framework.
- Review and approve required public disclosure documents.
Common Management Responsibilities
- Initial formulation of annual and long-term objectives for the organization.
- Initial formulation of policies and procedures that govern the organization.
- Prepare Board reports and draft annual operating budget.
- Provide continuous input into the strategic plan of the organization.
- Hiring, firing and compensation for staff below the Top Executive.
- Managing risk and monitoring performance of the organization.
- Preparation of required public disclosure documents for the Board’s review.
- Run the day-to-day operations of the organization.
Let us consider the responsibilities of the Board and management as it relates to setting the annual operating budget. In this case, it is management’s role to develop the budget by considering all the potential areas to allocate funds on while balancing that with consideration of the fiscal constraints that the organization faces. Management must also draft the budget quickly enough so that the Board has adequate time to review and ask questions about the budget before it needs to be finalized. Once the budget is drafted and presented to the Board, by management, it is the Board’s role to ask management good questions about the assumptions, omissions and estimates used to draft the budget.
The following are types of questions that the Board should ask at a strategic, not granular, level to better understand the budget and ultimately be able to approve it. Please note that the Board should not be asking questions on every single line item of the budget.
- What did management consider including, but ultimately decide to exclude from the budget and what was their rationale?
- What is the impact on the budget if a certain estimate is missed?
- What are the key variables that will impact the organization’s ability to meet the budget?
Ultimately, better defined roles lead to a positive working relationship between the Board and management, which should lead to better decision-making, a collaborative approach to solving issues, candor in speaking about difficult issues and a high level of trust on both sides.
We all desire clarity in our day-to-day lives, why shouldn’t we ask for it in the Boardroom as well.