April 8, 2020

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Ted Hull

Why Your Board Cannot Ignore Any of the Policy Governance® Principles

My wife and I have decided that we must replace our old vehicle. It has served us well, but recently it has laid down on us at the most inopportune times. We sat down at the table and after careful budget considerations determined we could afford $25,000.  We could do that and still travel to see our daughter and her family in Toronto, take a winter vacation, complete some needed renovations on our home and continue to support our favourite charities.  

We got to chatting with a friend who is in the preowned car business. She told us about a nearly new, loaded Escalade that we could get for $40,000. And because we are the ones who set the budget, we are the ones who can change it. We changed the number we had settled on earlier and we’ve bought the Escalade. We love it! 

However, we have learned some painful lessons as a result of our decision to change our vehicle purchasing plans as we encountered a couple of unintended consequences. 

The first lesson we learned is that we shouldn’t change our values when we are faced with a pragmatic or expedient decision. When we sat at the table with our pencil and paper, we were able to objectively articulate our values related to our budget. Once we took the fiscally fatal test drive, we abandoned our values.  

Our second lesson, learned too late, is that changing one value has far reaching implications for our other stated values. At the time we decided to change our value regarding the amount we would spend on a vehicle, we didn’t consider how that would affect other values that we held. It has had a huge impact on our values of visiting our grandchildren and taking a winter vacation. The need to make a few upgrades to our home is just as essential as ever, but changing our value relating to what we could afford in a vehicle has impacted the functionality of our home. Those charities that are making a difference in the world are less able to do so because we can no longer afford to donate as we did in the past. 

Most boards understand in theory that Policy Governance is a system; not just a list of good governance principles.  The challenge arises when an idea is presented that compromises one of the principles.  Just as changing one value has an effect on other values, so changing a principle has an effect on the whole system. 

Recently I have become aware of two organizations who want to change one of the Policy Governance principles: delegation to management. The principle states that if the board chooses to delegate to management through a chief executive officer, it honors the exclusive authority and accountability of that role as the sole connector between governance and management. In any event, the board never delegates the same authority or responsibility to more than one point.  

“But why can’t we have the CEO and the CFO report to the board?”  

The answer relates to the ability of the board to maintain clear accountability. The board monitors organizational performance solely through an assessment of whether a reasonable interpretation of its Ends policies is being achieved within the boundaries set by a reasonable interpretation of its Executive Limitations policies.  

Who will provide the monitoring reports? The CEO or the CFO? I suppose the CFO could provide reports that relate to the finances and the CEO could do the rest. But how does the CFO report on compliance to not allowing for fiscal jeopardy if that person has no control over how money is spent? And who will be held accountable for Ends accomplishment? Both of the leaders? What if one has a different interpretation than the other? 

This is just one example of the unintended consequences that result from setting aside one element in a system, without watching where the rest of the dominoes might fall. Policy Governance is a set of integrated and internally consistent principles. 

So before you alter your budget at home or set aside even one of the principles of Policy Governance in the board room, consider the implications for the entire set of values or the entire system. 

Author

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