By Michele Hengen, Client Services Executive
Generally speaking, governance refers to the relationship between a Board of Directors and management and provides the system through which objectives are set and attained and organizational performance is monitored. In plain language, governance refers to how a board and management work together to run an organization effectively. Each party plays a critical role and without a solid framework, the lines between those roles can become blurred, resulting in organizational challenges that could have been avoided.
Doing the right things vs. doing things right
A board’s role is to oversee key functions in an organization, and it does so by remaining independent from management. This means that the board is not involved in the day-to-day business but instead ensures the organization is doing the right things. The board delegates internal management functions through one employee – the CEO. The CEO’s role is to ensure that management implements decisions, strategies and policies so that the organization is doing things right.
The boat and the balloon
Picture a scenario in which a boat prepares to navigate through a maze of rock formations while a hot air balloon observes from directly above. Who is in the balloon? Answer – the board.
The board must remain in the balloon so that it can help the boat stay out of danger and move towards its ultimate goal. That leaves management to drive the boat, with the CEO at the wheel. If the board climbs into the boat, the organization is vulnerable as nobody is left to oversee it from a higher level.
Establishing a solid governance framework
Boards have a critical fiduciary duty. Even with the best of intentions, issues can arise that cause conflicts of interest, confidentiality breaches and other potential problems. How can organizations ensure that their governance practices are effective and suitable for their organization?
Developing the right framework that clearly articulates not only board and management roles and responsibilities, but also expectations around code of conduct, ensures the organization does not find itself depending on specific individuals in a way that could invite scenarios of elevated risk..
Navigating a ‘won the lottery’ scenario
Consider this – a CEO and the entire management team win the big lottery and suddenly retire. The board is then left with a new management team that they do not personally know and trust to steer the boat. If good governance practices are in place, the board can remain confident that the internal control environment is intact and objectives will be met.
In this or any other scenario, having a solid governance framework will help to enhance an organization’s performance and results immediately and in the long term. The following steps can help to improve any governance foundation:
- Determine desired state of governance – research various sources including, but not limited to, governance best practices, your industry’s regulatory framework, and models followed by successful organizations.
- Define your current state of governance – review all policies and procedures in place; interview current board and management.
- Identify and evaluate the gap between the desired and current state of governance – search for areas of improvement to move you towards the goal.
- Create plan to move towards desired state of governance – include tangible recommendations and work plan.
If you need support or recommendations establishing a governance framework in your organization, contact us to start a conversation.