Governance to the next level

First, let’s highlight some of the continuing confusions being made even worse by Sarbanes-Oxley type legislation and regulation. The purpose of this article is to expand on each of these points and to introduce you to an approach that brings clarity at last.

• Accountable to whom? Boards are still not clear to what extent they are ultimately accountable to shareholders and to what extent they are accountable to other stakeholders, such as customers, employees and their local communities.
• Who does what? Boards are still not clear about the division of responsibility between themselves, their chair, their CEO and their committees, especially their audit committee and any executive committee.
• How can we get our job done? Boards are still trying to fulfil their roles using the same tools that they always have, and are therefore likely to get the same unreliable results that they have always got.

Distinguishing accountability

Let’s face it, what shareholders want and what others want is not the same thing. Thus, the board that is not clear about to whom the organisation owes its ultimate accountability is by definition a confused board. And as corporate social responsibility rises further up the agenda, the confusion grows. As practitioners of Policy Governance®, a system for board work developed by John Carver which is widely used in North America, we believe that board work is most effective when accountability is clear and that that accountability is always to an organisation’s owners.

Further, we believe that the board’s role is in fact to be the representative of ownership within the organisation and that ownership, unlike other forms of stakeholding, implies responsibility for safeguarding the long-term best interests of the organisation on behalf of all owners. Notice that employees, customers, neighbours and suppliers, for example, are perfectly entitled to lobby the organisation from their respective individual viewpoints and immediate desires, without any thought for anyone else, and the company can choose whether or not to accede. However, owners and the board are morally and legally obliged to acknowledge the interests of all the owners and ultimately to accede to their wishes, as evidenced by the fact that minority shareholders have legal recourse against the board if they believe it is failing to take sufficient account of their interests and, among all stakeholders, only owners have the ultimate right to hire and fire the board.

In for-profit companies the legal owners are always the shareholders, whereas in non-profits the legal owners are whoever has a vote at the annual meeting, which may be just the board members or a much wider group. But, in either case, the board can choose to consider ownership at a moral level as well as at a legal level, as long as those on the board are people who have the long-term best interests of the mission of the organisation at heart.

Allocating responsibility

Distinguishing that the board’s role is one of ownership immediately helps to clarify the proper allocation of responsibility in an organisation. Boards are not part of management but accountable to owners, acting in their place to ensure that their interests are translated into organisational success and safety. Chairs and board committees are accountable to the board for helping them to do this job effectively. But CEOs are accountable to boards for the day-to-day operation of the organisation.

Such clarity allows everyone to play their part and to be held accountable for doing so. When no one is clear if the responsible person for any given decision is the CEO, the CFO, the chair, the audit committee or the full board, then no one is responsible and the chain of accountability from operators to owners is broken.

The position of executive directors on the board is tricky in this context. As directors, they are accountable to owners in exactly the same way as non-executive directors are. All directors are obliged to do the same job (ensuring accountability for the organisation’s success and safety) for the same boss (the owners). Executive directors clearly have managerial responsibilities too, but these are quite separate jobs and need to be treated as such. Having executive directors on the board is much more prevalent in the for-profit than non-profit sectors, and always creates conflicts of interest that the board must confront and handle in an ethical and transparent manner.

Far from helping to further such clarity, Sarbanes-Oxley and much of the other regulation and codification spawned by corporate scandals over the last five years has increased confusion. The audit committee appears to be becoming the real board, more independent and therefore more worthy of trust and responsibility than the full board, and yet still accountable to that full board. The chair is sometimes independent and sometimes not, and, if not, another party may be introduced, the lead director. The CEO is sometimes also the chair. The board is sometimes seen as accountable to the chair and sometimes seen as accountable to the CEO. Senior executives are allowed on the full board alongside the chief executive to whom they also report. Senior executives, however, are on neither the compensation committees nor the audit committees that are accountable to the full board. CEOs and CFOs, rather than the boards which appointed them and to which they are accountable, are expected to provide assurances to owners and governments. Confused? Who wouldn’t be?

Getting the job done

Further, in spite of all the turmoil, the adequacy of the tools that boards rely upon to do their job seems to have remained unchallenged. Boards are urged to pepper their CEOs with questions, to approve budgets and strategic plans, to study variances and financial statements and to institute whistleblower provisions. Yet random questions and advice from individual board members hardly constitute systematic and comprehensive assurance and direction. Approval of someone else’s plans for the future rather than providing advance criteria hardly represents leadership. Variances and financial statements are history lessons which tell us little or nothing about where things are going, and, by the time the whistle is blown, damage will already have been done.

And there is an alternative, a far better one we believe: Policy Governance, designed specifically to enable boards to operate in their owner-representative role. This is a role in which they are ultimately accountable for everything and yet must delegate to others to get things done, a group leadership role in which no one’s and no committee’s opinion holds sway without the whole board’s consent.

We urge you to take a good look at Policy Governance and see what it has to offer your clients. Sir Adrian Cadbury, retired chairman of Cadbury Schweppes, director of the Bank of England 1970–1994 and chairman of the UK Committee on the Financial Aspects of Corporate Governance, which published its Report and Code of Best Practice (‘Cadbury Report and Code’) in December 1992, calls it ‘a fully integrated and coherent system of governance… as near a universal theory of governance as we at present have’, and asserts: ‘The most comprehensive and logical definition of the difference between direction and management is to be found in the works of Dr John Carver.’ Robert AG Monks, founder of Institutional Investor Services and the investment fund LENS, has described it as ‘a clear, convincing and comprehensive framework for corporate governance’, and reported that ‘probably the single best manual for directorial functioning in an Anglo-American context is the work of John Carver’. And Judith Hanratty, then company secretary of BP-Amoco and now council member of Lloyds of London, has similarly described John Carver’s work as ‘an unparalleled contribution to this essential subject’.

Based on clear and profound principles about the board’s unique role, Policy Governance provides a comprehensive and straightforward roadmap which enables a board to:

• readily demonstrate ethical leadership excellence to regulators and all stakeholders
• put its vision and values into a firm and consistent governing framework for securing success in good times and bad
• have board members and staff going forward powerfully using clear and common benchmarks for success and safety
• eliminate role confusion
• have board members and staff recognising and enhancing each other’s unique contribution, and
• turn the boardroom from a management interrogation chamber into a future-focused leadership forum.

We look forward to telling you more in a future article.

Boards expect accountants to be trustworthy and to know trustworthiness when they see it. Surely the time has come to acknowledge that the current tools for board work can be improved upon, and surely those accountants who help boards to achieve a new level of governing excellence can be justly proud. Responsible ownership, a clear chain of accountability from operators to owners, and a systematic and dynamic approach to risk management and leadership are the hallmarks of excellence. Boards of the future that want their organisations to succeed in attracting and maintaining investment – be it shares or equity, or donations or taxes – will need to be able to clearly demonstrate that level of governing excellence, not just at the annual meeting, but every day. Accountants of the future will be full partners in taking boards to the next level.

Vijay Mistri MBA, FCMA, CPA(K) is chief executive and lead consultant of Paradigm Resources Ltd. Formerly he was group finance and commercial director of the Steadman Group of Companies and had his own audit practice. He was the international representative for ACCA Kenya for three years and is an international policy governance consultant, having graduated from John Carver’s first academy held in the UK in 2005. Caroline Oliver is chief executive of Good to Govern Ltd and an associate consultant, Paradigm Resources Ltd. Internationally recognised as an authority on Policy Governance®, Oliver is co-author with John Carver of Corporate Boards That Create Value – Governing Company Performance from the Boardroom (Jossey Bass, 2002), and general editor of The Policy Governance Fieldbook – Practical Lessons, Tips and Tools from the Experiences of Real-World Boards (Jossey Bass, 1999).

The authors can be contacted at: vijay@paradigm-resources.org