Expert Coaching. Practical Resources.

August 7, 2018

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Rose Mercier

Remedy for a Governance Failure: Part 1: TRUST….BUT VERIFY

Perhaps because I live in a smaller city, lots of circumstances that might otherwise be a footnote in a larger metropolitan area attract the local newspaper’s attention. Consequently, I have a rich source of revelations about the impact of poor governance. Last week’s secondary front page story revealed that the municipality had removed both the board and executive director of a not-for-profit housing corporation1. As I read the story of governance failure, I wondered yet again why more boards have not discovered the benefits that Policy Governance® – a set of integrated principles, when consistently applied – provides governing boards in order to realize organizations that are accountable to their owners.

What types of governance failure would prompt the board’s legal owner to essentially fire the board?

As reported in the newspaper, there were several breaches of the legislation governing the social housing organization. These included a failure to take action on written notice to remedy fire code breaches. An operational review of the organization had also revealed several irregularities in financial management, investment of assets, operational deficits, conflict of interest guidelines and governance. In their defense, board members indicated that they knew about the operational review and were contributing to the “governance side” of the review, and beyond that, the board was relying onthe executive director to make sure they had the necessary financial documents. And besides, noted one board member, their specific priority was ensuring a particular site became a reality.

Wow – I thought, there are all kinds of ways that Policy Governance might have prevented this level of governance failure.

A board using Policy Governance would have clearly stated conditions that it would find unacceptable and written them into a set of Executive Limitations. Let’s start with policies this board might have had:

[At the highest level] The Executive Directorshall not cause or allow any practice, activity, decision or organizational circumstance which is either unlawful, imprudent, or in violation of commonly accepted business and professional ethics.

And at the next level, the board might have determined the following as limitations:

The Executive Director shall not cause or allow conditions, procedures or decisions related to the treatment of clients that are unsafe, disrespectful, or unnecessarily intrusive.

The Executive Director shall not permit planning that allocates resources in a way that deviates materially from Board-stated Ends priorities, risks fiscal jeopardy, or does not enable the longer-term ability of the organization to achieve Ends.

With respect to the actual, ongoing financial conditions and activities, the Executive Director shall not cause or allow the development of fiscal jeopardy or a material deviation of actual expenditures from Board priorities established in Ends policies.

The Executive Director shall not allow assets to be unprotected, inadequately maintained or unnecessarily risked.

It is likely that a board would write further levels of detail for each of these policies. For the purpose of illustrating how Policy Governance provides boards assurance that the organization is operating as it intended, these higher level policies will suffice. Not having clearly written statements of unacceptable conditions or actions (unacceptable because such situations are unlawful, unethical or imprudent) would contribute to governance failure.

However, just writing policy is insufficient for a board that wishes to govern effectively and successfully demonstrate its accountability to those that have assigned them the authority to govern. A board cannot just rely onthe executive director to implement the types of administrative policies, procedures or processes, or hopethat the executive director reports give it sufficient indications that its policies are having their intended effect. A board must assureitself its policies are being achieved.

Enter here, the very powerful Policy Governance tool of monitoring. Monitoring data provides a board with information about precisely that which it has chosen to control – whether this is the organization’s financial conditions and activities, its treatment of clients (in this case, residents of social housing), protection of its assets or financial planning. What does monitoring involve? The board expects the executive director to submit a monitoring report for a given policy at the interval scheduled by the board (and incidentally, also recorded as board policy). When received, the board assesses the report to assure itself that it includes:

  • The executive director’s interpretation telling the board the measure being used to demonstrate compliance, the level of actual achievement on that measure that would demonstrate compliance, along with a justifiable rationale for the reasonability of the measure and level chosen by the executive director, and
  • Verifiable evidencethat the level of the identified measure has been achieved. Without verifiable evidence – data that anyone else could find if they looked for it – a board cannot assess whether its policies are having their desired effect. A statement by the executive director that everything is happening just as described in the board’s policy or even as described in the interpretation for that matter, is not evidence – it is a ‘trust me’ statement. Relying on ‘trust me’ statements can lead to governance failure.

Sometimes a board feels that requiring the executive director to demonstrate accountability indicates a lack of trust. In an article by Caroline Oliver2, there is an instructive opening paragraph:

Trust is a huge issue for every board. Understandably so. As the body that is ultimately accountable for the organization, it is of the utmost importance that all stakeholders have as the Merriam-Webster Dictionary calls it, ‘assured reliance on the character, ability, strength or truth’ of the organization. In fact, since the board is ultimately accountable for everyone and everything in the organization, it needs to have an ‘assured reliance’ on every aspect of the organization.”

The board uses monitoring to assure itself there is verifiable data of a reasonable interpretation of its policies, in effect so that it has assuredreliance. Not seeking the data that produces assured reliance is another contributing factor to governance failure. This type of failure occurs in all sizes of organizations. Consider that the board of Wells-Fargo relied on management’s reports that remedial actions had been taken to correct the sales practices that precipitated the fake accounts scandal, only to learn through an independent investigation that this had not happened.

Boards would do well to heed the traditional Russian proverb, Доверяй, но проверяй(doveryai no proveryai) taught to, and subsequently made famous by Ronald Reagan3– Trust…but verify!

 

1The Kingston Whig Standard, Tuesday July 24, 2018 (p. A1, A5)
2Caroline Oliver in “What Can You Trust(Board Leadership, Number 84. Mar-Apr 2006)
3Source: www.urbandictionary.com

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