Category Archives: Governance

Do You Play it S.M.A.R.T.?

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 

Board Succession Planning

Originally Published in Biz Mag December 2016.

There is generally focus at the Board level on succession planning for the CEO and other key management positions which is an important role of the Board but it is equally important that the Board give attention to its own succession planning.

Objectives of Board succession are:

  • Board composition provides for continuity and renewal of Board talent
  • New Board members are able to effectively succeed the Board’s departing members and can contribute to governing the organization as quickly as possible
  • Collectively the members of the Board have the talent necessary to perform the governance role effectively
  • Effectively prepare Board members for leadership positions on the Board and prevent the risk of people dependencies at the governing level.

Board succession involves five key interdependent governing practices::

  1. Talent composition
  2. Nominating and election
  3. Director Orientation and ongoing Director development
  4. Developing Board leaders
  5. Board assessment and Director assessment.

Boards need to have the appropriate competencies, experiences, and attributes to create a talented governance level for the organization being governed. We refer readers to Booker’s article in Biz Q2 2016 entitled “It Takes a Team” to gain an understanding of this first step in the succession planning process. Annually evaluating the talent of all Directors and identifying Director’s anticipated departure date keeps the Board aware of the impeding people changes.

The second step of nominations and elections involves calling for or recruiting nominees that meet the needed competencies, experiences and attributes identified in stage one in a time frame which considers the departure of sitting Directors. Community organizations are taking different approaches with respect to populating the Board. Some organizations follow a process whereby any person who is nominated as a Director candidate is allowed to stand for election based on their personally expressed merits while others follow a process whereby the Nominating Committee provides its perspective on the merits of candidates by providing its endorsements for select candidates or providing a ‘slate’. Any individual standing for election as Director must have the commitment, capacity, and ability to serve the organization in the best interests of all stakeholders.

The results of the election and resulting composition of the Board may impact the training requirements in stage 3. Director orientation recognizes that new Directors need to be oriented to the organization regarding its business, its strategic plan, the Board’s governance duties, governance protocols and the expectations of a Director. All Directors require ongoing education on changes in the sector in which the organization operates, stakeholder needs, and governance evolution. There should be a curriculum of learning for individual Directors as well as team learning for the Board as a whole. Using the information from stage 1, some training may be specifically needed to bridge the gap of actual composition of competencies and experience from that of the ideal talent composition

Stage four – developing Board leaders. There needs to be clear responsibilities for the Board Chair, Vice Chair, and Committee Chairs. Committee chair experience for a Director provides succession planning for the Board leadership role and provides the opportunity for fellow Directors to observe Directors in a leadership and chairing role prior to being considered for Board leadership. The Board needs to provide for a balance of continuity and movement of people in the leadership roles, e.g. limit the time that any director holds a leadership position to no more than three consecutive years. This allows the organization to benefit from the stability of leadership while having a pool of proven leaders and not creating people dependencies.

Step five is the Board and Director assessment process. This process enables the Board to identify where its practices need improvement to achieve overall governance effectiveness including the identification of talent gaps and nominating process gaps. The individual Director assessment process assists an individual director in identifying where they could improve their contribution or the need to step aside to provide for succession and evolution of the governance level.

Effective succession planning for a Board requires the combined success in the implementation of the five key processes. Thus, the organization will benefit from a boardroom environment that acknowledges the need to provide for continuous evolution of the governance talent level for the benefit of the organization.

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 

Putting the Brakes on Executive Compensation and Expenses

Originally Published in The Bay Observer, October 2016.

“159 to 1 is pay ratio of top CEOs to the average worker” ran the September 16, 2016 headline in the business section of the National Post. In the 1960s the average pay of CEOs was about 25 times that of a production employee according to Montreal business weekly LesAffaires.

Compensation for executives of publicly listed corporations has been subject to disclosure for some time. New rules in the United States now require disclosure of the CEO-employee pay ratios. Similar rules do not exist in Canada. For public bodies, the sunshine list has been informing the taxpayers on the use of their dollars for a number of years. However the $100,000 threshold was set some 20 years ago and likely should be adjusted for an inflation element so that the list provides better highlights.

But are Boards keeping compensation in check? We have heard some interesting stories over the years. A few years ago there was a great gasp when the multi-million pay packet and perks for the Home Depot CEO came to light while Home Depot was suffering weak financial performance. The CEO did not share in the pain with the owners. This is one of the reasons “say on pay” by shareholders became a force.

An interesting aspect is the difference in compensation between the CEO and his/her direct reports. Should a CEO earn twice as much as those who are reporting to him/her? Is the CEO really worth twice as much as the person who is overseeing all the operating activities? For example, is the CEO of a hospital worth 50% more than the vice president of nursing?

I also find it interesting how a new person coming into a CEO position gets paid more than the retiring CEO. Why would a green first time CEO get paid more than a fully matured and performing CEO who held the post for 10 years? Is this the Board doing its job? Unfortunately what we see is reliance on “survey says.” In consulting with Boards for years, I have seen a misuse of “survey says.” One issue is that Boards don’t understand that the survey is quoting compensation for CEO’s who have been in the position for years and are performing well. I have also seen Board use comparators that are not really comparators – not equivalent in terms of size of organization, complexity, or demands of the position. Sometimes the clubiness of the Board means that the CEO gets a nice compensation package and he is left to set compensation for his direct reports. Those direct reports then look after their direct reports, but the vast majority of the staff are grouped as the “employees” and are looking at only a cost of living adjustment. But when the books have to be balanced, it is the front line employees who are cut back rather than reducing some of the bureaucracy and freeing up compensation for a multiple front line staff in place of one executive. If the goal is truly client or patient care, then don’t cut the front line.

Here is an example from a member based organization. The CEO’s salary plus bonus plus benefits was $930,000; the Chief Financial Officer came in at $485,000, the Chief Information Officer came in at $440,000. Is the CEO worth twice as much as his next in line? Many Boards struggle at doing robust performance reviews for the CEO and many struggle at containing the compensation packages. One client commented to me lately that finding a CEO was easy, but finding a talented chief information officer was the challenge.  So in the case above, looks like the talented resource is the one who is under paid. But if the CIO is bumped, does that automatically bump the CEO?

Often the best way for a CEO to give himself a pay increase is to increase the pay for his direct reports. The CEO then expects the Board to follow his lead when it comes to adjusting the CEO’s pay. The Boards which I work with retain authority over the salary ranges for the CEO’s direct reports in order to try to rein in the domino effect.

Then there is the abuse of the expense account. I had to deal with a case where the CEO, while already receiving a monthly car allowance, was also claiming reimbursement for mileage and his car insurance. I had another case where I was called in by a CFO to deal with a CEO who tried claiming 25% more than the allowed moving allowance. The Board Chair was nervous about not approving the expense reports as the CEO might have gotten upset. Really? This is the CEO you don’t want.

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 

Integrity or Not

Originally Published in The Bay Observer, September 2016

The questionable conduct of leaders does not go unnoticed. It can be embarrassing for the person, for the organization, and disappointing for those who want to look up to these leaders.

The CEO of one of the world’s most famous advertising agencies, Saatchi & Saatchi finds himself on leave as a result of his comments reported in a major financial newspaper. It was reported that the CEO stated “some women lack vertical ambition and that low numbers of women in senior positions was not a problem.” We could be kind and suggest that his comments were taken out of context and that he actually does not believe that the problem with women not being in senior positions is the fault of women themselves. In September 2014 there was the well covered story of the CEO of food service giant Centerplate Inc. caught on an elevator camera repeatedly kicking his friend’s cowering dog. The firestorm that erupted through social media pushed the Board of Directors to oust the CEO. Chip Wilson, then CEO of Lululemon is still well known for his inappropriate comments in 2013 when he pointed the finger at “some women’s bodies” as part of the reason why a line of yoga pants were recalled for being too sheer. And of course, we have the spending habits of a few senators (Duffy, Wallin) which certainly brought into question the integrity of senators’ spending of taxpayer dollars.

There is an expectation that leaders will conduct themselves with integrity and respect for others. There are five main responsibilities of a Board: oversight of planning and performance, talent management, risk governance, integrity of organization, and governance practices. Integrity of the organization – this covers the integrity of people, processes, and information. When I work with Boards of Directors, there is always an emphasis placed on the Code of Conduct to set the framework which creates the expected integrity of the organization’s people. It is not only having a code of conduct but also dealing with breaches to the code which creates the substance of integrity. I have observed expense reports submitted by Directors containing expenses not allowed. Some Directors become defensive when their expenses are challenged – even going so far as to advise staff members that staff are not to question the expenses of a Director. These situations call for an assertive and ethical Board Chair to remedy the situation and enforce the code. Consistent enforcement should lead to fewer attempts to circumvent the policy.

When I develop Codes of Conduct for Boards I caution them that it is impossible to provide direction to Directors and the organization’s executives on how to handle every situation that might occur. I advise that the code needs to contain language that states the difficulty in coding all elements that Directors and Officers should observe to meet the necessary level of business conduct. The Code should create a principles based approach to the aura of integrity rather than a rules based tick the box mentality. It is the general expectation that Directors and Officers will seek to do what is right for the protection of the organization, to act within the values of the organization, and to behave in a manner that reflects sound business conduct and ethical standards becoming to the integrity, image and good reputation of the organization.

Organizations generally outline the allowable expenses that can be incurred by Directors and Officers. While it is possible to address the typical expenses for travel, meals, accommodation, it is difficult to create a fulsome list of rules that covers all types of expenses. Recognizing that we are addressing the leaders of the organization, it should be sufficient to provide general direction to these individuals. For example, language in an expense policy should cover expectations: a policy that I wrote contained the following language.  “It is recognized that Directors will incur expenses in the conduct of their duties. Guidelines cannot be established to govern all situations which might confront a Director as far as expenses are concerned, but general principles have been established and Directors are expected to exercise discretion and good judgement in determining what is a reasonable and proper expense to be incurred on behalf of the organization. Directors are expected to demonstrate a good example for use of corporate resources. The reimbursement will be limited to expenses incurred and are not to be used to enrich a Director.”

The statements that I outline above for the code of conduct and the expense policy contain leadership statements. While a CEO should be provided with a code of conduct that sets out expectations of behaviour, CEO’s need to continually consider how their actions and behaviours demonstrate what the organization stands for. While a senator should be provided with a general outline of what is an allowable expense, if they are a leader working with integrity and considering they are spending someone else’s money, they should not need a laundry list of what is or is not allowed.

I give lots of credit to the Council for the city of Burlington for establishing a citizens committee periodically to examine and make recommendations for the compensation and allowable expenses for the mayor and Councillors. I was part of that committee, and one of the committee’s recommendations in its November 2013 report was that the City should establish a Code for Conduct for the members of Council. It is now August 2016 and while staff have proposed draft Codes of Conduct for Council, this item has been deferred multiple times and continues to be in abeyance. It is not a sign of leadership when the leaders are happy to have a code of conduct in place for the staff but not for themselves.

Fay Booker is principal of Booker & Associates, a firm focused on promoting good governance, enterprise risk management and operational effectiveness – www.bookerandassociates.com.

It Takes a Team

Originally Published in Biz Magazine, June 2016

Boards of Directors have a job to do. This means that every Board needs to consider what makes for a competent Board. Just as a baseball team comprised of nine pitchers won’t win many games,, A Board comprised of individuals from the same discipline or industry will not be effective. Boards need the right combination of talent to fulfill their responsibilities.

The basis for determining the talent needed to form the Board of Directors comes from two elements: the nature of the organization being governed; and the job responsibilities of the Board of Directors. Using the Board’s terms of reference and the mandate and strategy of the organization we can articulate the competencies needed to fulfill the job. This is the same exercise we go through for employees. An employee has responsibilities and in order to carry out those responsibilities there is an expectation of what makes a person competent for the position. The same is true for Directors.

Booker & Associates has developed a diagnostic process through which we can determine if a Board is comprised of the necessary talent. The Board’s ability is reflected by the composition of the individuals around the table. The first step in the process is to identify the desired skills, knowledge and experience based on the needs of the organization and the stakeholders. Each organization has different needs in the talent of the Board. A financial institution may demand strong financial and risk literacy. A social services organization may demand strong community knowledge.

The next step is to have each Director complete a diagnostic tool which has five dimensions to the assessment: knowledge and capability; attributes; diversity; experience; and education.

The first dimension requires each Director to evaluate their knowledge and capabilities in relation to specific talents required for the governance of the organization. A common evaluation scale we use is: expert, proficient, introductory. Expert means a Director has deep training or experience in the subject and is able to explain the concepts and applications to others. Proficient means they have some training or experience in the subject and can work through material themselves but are not able to help others in understanding the concepts. Introductory means that they have had exposure to the subject but don’t have a clear understanding of the application or concepts and need others to provide explanation.

The next dimension gathers information on a Director’s attributes. Attributes cover aspects such as capacity to serve; independence from management; ability to communicate effectively and respectfully; personal reputation; open mindedness; willingness to listen to others; respectful of diverse perspectives; and willingness to be part of a team.

The dimension of diversity covers demographics (like gender and age), background, and thinking style. Having different thinking styles adds to the dynamic discussion around the table – Boards need Directors who think strategically, those who have a respect for compliance; those who like broad perspective and at times deep discussions; and those who are methodical, quick, reflective, and analytical. Diversity on the Board will allow for thorough discussion, multiple perspectives, new ideas, and taking action.

The fourth and fifth dimensions of education and experience are pulled from the Directors’ resumes. Education covers the curriculum of education, designations and trades which a Director has completed. Experience covers the positions held during their working career, the industries which the individual has worked in, the positions held, as well as experience on other Boards of Directors, and length of time in the sector which the organization operates.

The extract below illustrates a part of the diagnostic tool. It shows the ideal rating which has been determined as required by the organization for specific subject matter, and the next two columns show the individual ratings provided by two Directors. It is not necessary that all Directors meet the ideal rating.

Insert Name of Director: Ideal Rating Director 1 Director 2
KNOWLEDGE gained through education and/or experience
Regulatory Framework 2 1 1
Economics 2 1 2
Executive Talent Management 2 1 3
Risk Literacy 2 1 2
Financial Literacy 2 1 3
Strategic Guidance 3 2 3
Retail Sector 2 2 3
Technology as business channel 2 2 2
Aboriginal Community 3 2 2
Local Community 3 2 3
Other (specify):     Rules of Order
3 = expert; 2 = proficient; 1 = introductory

The talent diagnostic process can be used for a variety of purposes. It can be used to inform the Director recruitment process, determine the orientation process for new Directors, and assist in designing the ongoing education program for Directors.

Governance of Strategy

Originally Published in Biz Magazine, March 2016

One of the Boards of Directors’ five major responsibilities is active participation in strategic and business planning. Note the key words “active participation.” There are questions why the Boards of corporations such as Blockbuster, Radio Shack, and Blackberry failed to see the need for a change in strategy if they indeed were active participants bringing a broader business and economic viewpoint.

It is important that there be clear agreement on the role of the Board with regard to strategy. The Canadian Coalition for Good Governance (CCGG) expresses the view that the Board is responsible for setting the overall vision and long-term direction of the corporation. The CCGG further states “The board reviews, questions, discusses and ultimately approves management’s recommended strategy.” The interpretation of this has led to confusion as to whether it is management’s strategy which the Board dutifully approves (passive role) or is the Board clearly setting the strategy (assertive role)? Or is the Board’s role to determine the long term direction of the company and only evaluate if management’s strategy will make progress towards that end?

The National Association of Corporate Directors (NACD) promotes a different position that “Boards should be constructively engaged with management to ensure the appropriate development, execution, monitoring, and modification of their companies’ strategies.” NACD states that the traditional periodic cooperative process of the Board and management jointly establishing the process the company will use to develop its strategy needs to be changed. NACD sees the need for Boards to become continually and proactively involved in strategy formulation.

I have watched many discussions between Boards and management regarding the level of involvement in determining and setting strategy. The involvement by Directors ranges from passive endorsement of management’s strategy on the basis that management are the experts in the business through to active robust discussion in a working session where Directors fully engage with management to discuss scenarios, options, and alternative strategic directions which could be pursued by the organization.

The actions in the strategic planning process include: informing the deliberations; deliberating the information, implications and options; making decisions on the strategic direction and goals; developing plans to achieve strategic goals; and monitoring progress.

The Board needs to own the process for developing the strategy which has Board involvement in critical decisions while respecting management’s deep knowledge of the business. The process to develop the strategy needs to consider the following:

  • The facilitator – who selects the facilitator – the Board or management, or jointly?
  • Timetable for the process – when will the process occur, will there be preliminary discussions on key topics, will there be a one day workshop, what are the key checkpoints?
  • Inputs to the process – what information will be provided and by whom, will subject matter experts be involved, how will stakeholder input be gathered, will scenario planning be used?
  • Approach to strategic planning – what time period will the plan cover, is the approach to be blue sky in nature or incremental, is there to be a new vision or will it be a stay the course focus?
  • Developing the plan – who will develop the plan, who will develop the goals and the measures, what is subject to Board approval, what is management’s discretion, what is the process to develop the annual plan to operationalize the multiple year strategic plan?
  • Monitoring – how will the Board monitor progress, what reporting is required on a quarterly and annual basis, what will require revision to metrics?

There is also new dialogue around the relationship between management’s capabilities and strategy. Some Boards are concerned that management recommends the strategy which it is most capable of delivering rather than the strategy which will be most beneficial to the company. NACD recommends that once the strategic direction is decided, the Board needs to have an in-camera discussion to answer the question: Do we have the management team which can deliver the strategy that we have determined is necessary for the future of this organization? This may be a difficult discussion but the duty of the Board is as a steward of the organization and to provide for its long term sustainability.

The Board is the Leader of the Organization’s Ethics

Originally Published in Biz Magazine, December 2015

Ethics is part of the brand of your organization. Your company’s ethics create the culture of the organization. Every few months there is a high profile issue with respect to ethics – the GM ignition switch scandal, the questionable spending of tax dollars by senators, and the latest: the Volkswagen emissions scandal (did they learn nothing from GM?).

What is the Board’s role in an organization’s ethics framework? Those at the top of the organization create the culture of the organization through their actions and behaviours. Many think that the culture of ethics is created through corporate values and codes of conduct. However, actions always speak louder than words.

Headlines over the years identify the ire which is drawn with the abuse exercised in leadership positions. London Mayor Resigns After Fraud Conviction; Dynalife Executive Resigns over $75,000 Expense Scandal; Toshiba CEO Resigns Over Doctored Accounts. What type of culture is set when staff are aware of Directors padding their expense reports, or the generous perks Directors decide to give themselves, like Christmas gifts, clothing allowances, computers and tablets?

The Board needs to be aware of the elements in the ethics framework and consciously seek assurance that all are in alignment to uphold the desired framework. The ethics framework starts with the values of the organization which need to be lived within the organization, by the people of the organization in all actions and interactions. Words on a poster do not establish culture, actioning the values does.

We recommend two codes of ethics (or conduct) for an organization – one to address Directors and Officers and one to address all staff. We expect that the leaders of the organization will be held to more stringent standards. The code of conduct for Directors and Officers needs to strongly set the bar for expectations of actions and behaviours, and must address expectations for safeguarding of the organization’s assets, confidentiality of information, gifts and entertainment, observing and respecting policies and laws, and conflicts of interest.

Only once this code has been clearly set and agreed to by each Director and Officer, can the rest of the ethics framework be built.

The processes which are needed in the framework include the following:

  • Involving employees in developing the code of ethics policy for employees
  • Communicating the policy to the employees – at least annually, and acknowledgement of their understanding and commitment to adhere
  • Demonstration of holding Directors and Officers accountable to the terms of the policy
  • Reputable process for reporting potential breaches to the policy
  • Handling and investigating potential breaches to the policy including a reputable process for dealing with violations
  • Reporting on adherence to the policies to senior management and to the governing level.

The Board is responsible for gaining assurance that all of the necessary processes which enable the ethics framework to be active are established and operating effectively. The graphic below provides an illustration of the ethics framework.

Integrity of the framework is gained through the employees’ observation of how the code is lived and honoured. The employees will watch for consistency of application across all levels of management and the Board members. Effective ethics depends not only on the stated commitment of leaders to the organization’s values but also their actions which demonstrate their actual dedication to uphold the values and ethics. The Board’s actions and decisions and the organization’s actions and decisions must be aligned with the values and ethics. It is not about matching the behaviours of others but acting in a manner which meets the organization’s own standards.

Organizations that truly see the importance of the ethics framework will take the next step and audit the framework to test its effectiveness. Having a good-looking picture is not the same as actualizing the framework.

The Board and each Director needs to demonstrate leadership for ethics through their own behaviours and actions and the Board needs to gain assurance that the framework is sturdy enough to achieve the actual ethical standards desired. The Board is the steward of the organization’s ethical standards.

The Board is the Leader of the Organization's Ethics

Fay Booker is the president of Booker & Associates, a consulting firm focused on promoting excellence in corporate governance, risk management and operational effectiveness.

Risk Governance, Governance Risk

Originally Published in Biz Magazine, September 2015

A key area of responsibility for all Boards of Directors is risk governance. Risk governance focuses on recognizing the risks inherent to the business of the organization and instilling processes to provide for protection of people, assets, and reputation. Governance risk recognizes that the ability or ineffectiveness of a Board can actually add to an organization’s risk profile rather than providing a deductive factor to the risk profile.

We have seen headlines where risk was allowed to consume the organization and lead to drastic consequences. Costa Concordia sailing an unsafe route which the Captain claims was condoned by superiors. General Motors and faulty ignition switches which staff claim was known within the company but action taken to deal with the risk was not adequate. Montreal, Maine & Atlantic and unsafe transport of dangerous goods; XL Foods and tainted beef; Mattel Toys and lead paint. If the Boards were exercising their risk governance responsibility the unfortunate outcomes of these events could have been prevented.

Enterprise risk management (ERM) is a methodology that has been in place for years. Identify the risk, assess the risk, take action to mitigate the risk, and monitor the behaviour of the risk and effectiveness of the risk response. The illustration shows the phases of an effective risk management approach. As an organization moves through the phases in the risk process, the risk intelligence of the organization builds.

Creating a Risk Intelligent Organization

Risk-Intelligent-Org-sm

Risk is an inevitable and acceptable part of all businesses. Not managing the level of risk is not acceptable. The ERM process requires an explicit identification of the risks inherent to the business given the products and services offered and the means by which they are delivered. For example, companies which transact over the internet and which store confidential personal information will identify a cyberattack as a high risk. The Board needs to gain assurance that the inherent risks have been thoroughly identified and evaluated in terms of the severity that each presents to the business. More importantly, the Board needs to gain assurance that appropriate measures are being taken to mitigate the risk to an acceptable level. A level that if the risk does still occur, the situation can be dealt with in a calm and reasonable manner. This is not crisis management. It is making sure you don’t have to activate that crisis management plan. It is the essence of operating in a sound and secure manner to achieve the strategic and business objectives of the organization.

Before establishing a risk framework and undertaking the process to identify the risk profile, the following elements must be in place to permit effective risk management.

  1. Support at senior levels: Concern for risk management must start and be supported at the highest level within the company. This includes the governance level and the CEO.
  2. Risk management efforts must be dynamic: This includes active identification, measurement and management of the risks, scanning for changes in the risk profile, and reporting on the risk profile.
  3. Clarity of understanding: There needs to be a clear definition of the risks and these must be understood across the organization.
  4. Accountability: Responsibility for responding to and managing the risks must be clearly understood and individuals held accountable for fulfilling the roles. Everyone is a risk owner.
  5. Resources: Appropriate resources including people and tools need to be deployed and available to help staff, managers, executive, and the Board fulfill their duties within the ERM framework.
  6. Culture: The organization’s culture must support the active managing of risk in terms of attitude.

Risk governance is one thing; the Board also needs to take action to not create governance risk. Does the Board have the capability to oversee the risk profile of the organization? Has it set an appropriate risk appetite? Does it receive fulsome information to monitor the risk profile on a dynamic basis? Does the Board fit within the framework for a risk intelligent organization? To test your risk literacy capability, I invite you to take the self-assessment here.

Fay Booker is the president of Booker & Associates, a consulting firm focused on promoting excellence in corporate governance, risk management and operational effectiveness.

Boards—Take Back Governance

Originally published in The Bay Observer, Hamilton ON

Who runs the Board of Directors? The Board Members? The Chair of the Board? Or is it really – the CEO or Executive Director.

To fulfill good governance the Board must know its responsibilities and take action to fulfill them. This requires competency, self-motivation, and leadership. It requires the Chair of the Board to be the leader of the Board. Unfortunately we see many Boards where the Board’s governance responsibilities falls under the control of the CEO.

We see CEO control over the Board in different forms.

The CEO who thanks Board members for taking time to participate in the strategic planning session. But is it not the Board who is responsible for setting a valid strategic direction for the organization and if the wrong direction is selected based on valid data and research, isn’t it the Board that takes responsibility and accountability?

We see CEO control through the calling and cancelling of Board meetings based on the CEO’s schedule. Hold on – the Chair of the Board is responsible for calling and cancelling meetings. Board meetings are held to provide a forum for the Board to perform its duties – it is not about meetings being held for the convenience of the CEO.

CEOs have huge control over Boards through information provided by the CEO (or staff) to the Board and its Committees. Many Boards are manipulated by CEOs through selective release of information and the tone and manner in which information is delivered. Best practice CEOs share information in a fully transparent manner – they provide information that is succinct, timely, complete and objective. When presenting information for the Board’s decision making, best practice CEOs provide Boards with the options which were considered, the pros and cons of each, and the reason for the recommendation to the Board.

Then there is the matter of control over the Board through people dynamics. This includes CEOs being involved in the Director nomination process to control who becomes his/her boss and which Directors get on each of the Board Committees. Not to mention the respect (or lack thereof) which CEOs display when communicating with Directors in meetings, particularly in front of staff, as well as in communications outside formal meetings.

Boards set themselves up for this take over by the CEO. People are appointed to the Chair position without consideration for their ability to be an effective leader or their ability to be an effective facilitator. Board Chairs permit CEOs to take over and own communication with the Board. I know a Board Chair that never, in four years of being Chair, had any communication with Board members that had not been scripted by the CEO. He never sent an email to the board members, never picked up the phone to call any Board member. Only the CEO had direct contact with the Board members. So how did the CEO’s performance review get done if the Chair abdicated responsibility? A consultant was brought in to do the work that the Board Chair should have done and guess what, the consultant was selected by the CEO.

I have interviewed many CEOs over the years and here are some revealing comments from the mouths of CEOs: “It would be a great job if it wasn’t for that darn Board.” “The Board just gets in my way.” The Board can’t have a meeting without me.” “The Board only knows what I choose to tell them.” “I let the Board get really involved in the small stuff—it occupies them and keeps them away from the big issues and out of my hair.” Comments like these represent a huge risk for the organization. A CEO who does not respect the role of the Board will not feel accountable or worse will run the Board (their boss).

I have seen many Boards which have not been able to organize and operate itself to make decisions without the CEO present. You can be sure that the CEO is enjoying it that way. Unfortunately it spells disaster for the organization.

Boards! It is time to take back governance. It is your responsibility to govern, not to perform tasks as directed by the CEO. Who works for whom?

 

Fay Booker is principal of Booker & Associates, a firm focused on promoting good governance, enterprise risk management and operational effectiveness- www.bookerandassociates.com.

Are You Practicing S.M.A.R.T. Governance? 

Originally published in The Bay Observer, Hamilton ON

Good governance is critical for the success of an organization. We continue to see weak governance at play in many organizations—think Nortel, General Motors, Enron, eHealth, and many organizations which don’t make the mainstream news.

A Board displaying S.M.A.R.T. governance will be strategic, will adequately oversee management, demonstrate accountability for doing the right job right, display respect for the interrelationship with management, stakeholders and within the Board, and is trustworthy and talented.

Strategic governance is focused on mission, vision and values and the organization’s strategic direction and goals. Strategic governance causes an organization to move forward, to be successful, 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. But do we have strategic thinkers around the Board table or at the Council table? This is not a trait that fits nicely on those darn checklists for skills based boards. Too many of the players around the governance tables are non-strategic and are focused on fiduciary issues and compliance. The lack of strategic governance is seen in organizations which do not move forward and at best continue to do the same-old, same-old. Did we see strategic governance in the stadium discussions? Or was it all about grabbing the dollars off the table regardless of long term consequences?

Management oversight is the most common governance activity. Over seeing how management is operating the organization is indeed a job for the Board. It is here though that many Board members dip dangerously into micromanagement. Holding management accountable for a positive employee environment, good customer satisfaction, effective operations, and financial health should be focused on the end results. Not on telling the CEO how to do it. Doing an annual review of the CEO’s performance is a must. How did the Board miss the generous spending, untendered contracts and self-dealing at eHealth?

A high performance Board is accountable and independent. The Board has a job to do and it needs to be assessed on how it has done that job. Boards do self-assessments. We know that there are flaws with self-assessments. Having an objective assessment conducted by a knowledgeable governance consultant is the superior method. However few Boards and organizations will invest in governance to actually benefit from this process. Remember when the Education Minister had to relieve the trustees from their duties at Toronto Catholic School Board due to misuse of expenses accounts. Were they conducting themselves in an accountable manner?

Respect is a necessary ingredient for good governance. Respect between Directors, respect by Directors for the expertise of management, respect by management of the role of the Board. If there is a lack of respect on any of these dimensions, there will be a detriment to the governance effectiveness. I have heard more than one CEO muse that his/her job would be so much easier if it wasn’t for the waste of time that the Board is. That doesn’t sound like respect to me.

Stakeholders place trust in a Board of Directors to do the right job in order to have a successful organization. This trust needs to be well placed. Boards can earn this trust by having Directors who possess qualities of integrity, competence, knowledge, and motivation to carry out his/her duties in the long term best interests of the organization. Directors need to exhibit strong ethical conduct, and honour a strong code of conduct. I have often heard the Board of Hamilton Community Foundation described as exhibiting the qualities where donors can place trust in the sound governance that it provides.

Boards need to be talented. 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, knowledge, 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 full understanding of the issues. Director education creates Boards with ever increasing capability which can benefit the organization.

Find a Board in Burlington or Hamilton that lives up to 50% of the above characteristics – you will have an average Board – but if you have one that lives up to 80% of the above, join it and tell me who it is!

All Boards should ask themselves if they practice S.M.A.R.T. governance: Strategic, Management oversight, Accountable, Respectful, Trustworthy and talented.

 

Fay Booker is principal of Booker & Associates, a firm focused on promoting good governance, enterprise risk management and operational effectiveness – www.bookerandassociates.com.