Originally Published in Biz Mag March 2016.
Good governance is critical for the success of an organization. Past events have created some classic examples of weak governance — Nortel, Enron, Bear Stearns, Volkswagen — no board wants to be the next example.
I facilitate a course entitled Do You Practice S.M.A.R.T. Governance? The acronym helps boards remember to be strategic, adequately oversee management, demonstrate accountability to its stakeholders, display respect for management and within the board, and to have the appropriate talent.
Strategic governance ensures that a board encourages and supports a focus on moving forward. The board should not be focused on the past. It is easy to provide the board with loads of information on what has taken place in the organization and while it is important to know the current performance, the board needs to ensure there is a clear vision and strategic direction for the future of the organization. Strategic governance causes an organization to move forward, to continuously improve the service that it provides to its customers, to inspire employees to do their best, and to meet the expectations of the stakeholders. It is important then that the directors are able to operate at the strategic level. This is often an overlooked trait on the checklist for skills-based boards. There needs to be an appropriate balance of time on stewardship and strategy.
Management oversight or a focus on stewardship is the most common governance activity. It is necessary for a board to oversee management’s actions and decisions without getting into micromanagement. The responsibility for the board in this dimension is to hold management accountable for a positive employee environment, delivering on customer satisfaction, having effective operations, and financial health. The focus here is on the results, not on telling the CEO how to do his or her job. A critical part of this aspect is to set the appropriate performance objectives for the CEO and conduct an effective annual review of the CEO’s performance.
Accountable and independent are dimensions of high governance performance. The board has a job to do and it needs to be assessed on how it has done that job. The most often used technique is for boards to do self-assessments. Self-assessments are not the most rigorous mode of assessing the board’s effectiveness. Having an objective assessment conducted by a knowledgeable governance consultant is the superior method. However few boards and organizations will invest sufficiently in governance to actually benefit from this type of strenuous but productive process. Independence is a key measure for effective governance. Board members need to be independent of the organization, independent from management and independent from each other. The decision-making of the board needs to be free of bias and conflicts of interest.
Respect is a necessary ingredient for good governance There must be a display of respect between directors, respect by directors for the expertise of management, respect by management for the role of the board. Lack of respect on any of these dimensions will be detrimental to effective governance. Respect is earned by the board conducting its work in the long-term best interests of the organization. Management earns its respect by performing effectively for the organization and its stakeholders.
Talent is a requirement of each director and, in aggregate, the composition of directors must create a talented board. To be talented, boards need diversity, curiosity, knowledge, positive personal attributes, and a commitment to continuous development. The board should be comprised of individuals who can bring different life experiences, competencies, diversity of views, as well as strategic thinking to the table. We need directors to be curious and be willing to ask questions of management that gives them a full understanding of the issues.
There are challenges to the practice of S.M.A.R.T. governance. Some boards are not enabled to do the right job. This could be a result of weak information, distractions from the real issues, allowing governance to be taken over by management, focusing on the micro instead of the macro, or not optimizing the talent of the board. Following the practice of S.M.A.R.T. governance should enable the board to maximize its effectiveness.
All boards should ask themselves if they practice S.M.A.R.T. governance: Strategic, Management oversight, Accountable, Respectful, and Talented.
Fay Booker is the president of Booker & Associates, a consulting firm focused on promoting excellence in corporate governance, risk management and operational effectiveness. www.BookerandAssociates.com