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While the current report of embezzlement at Eaton Rapids Housing Development Authority reported in the April 6, 2004 Lansing State Journal is sad, it is not an isolated event. It is becoming more and more common to read similar reports in the daily news. Each story is slightly different, but at the same time hauntingly familiar. It goes something like this (for each set of parenthesis, pick one of the words within them):
The (charitable organization, private company, public company) is (missing funds, being investigated, conducting an audit) because (it cannot account for funds, fears the accuracy of its numbers, has allegedly mis-spent appropriated funds). The potential source of the problem is the very trusted (clerk, CFO, CEO, Executive Director, board, Treasurer, management team, General Manager). As a result, and in order to fix the problem, the (CEO, board, government) is requiring (outside directors, a change in management, a new audit firm, additional financial controls).
Unfortunately, the solutions generally offer only incremental improvements to a small piece of the problem. The real problem is one of governance.
Who is supposed to represent the interests of the owners, be they shareholders, taxpayers, or a community? Who is supposed to assure that the right things happen and that bad things do not? That would be the board.
The blame for failure at the board level to accomplish these two tasks is not as often the people as it is the system. For some time, our organizations have functioned under a misunderstanding as to the board's role and its effective functioning.
Board work is often believed to be playing either support to or watchdog of management. It has a poorly defined process for getting its work done, beginning with the definition of the work itself and continuing on to the structures and processes with which it conducts it. As a result of this:
- The reason for the organization to exist, what it is there for, is not addressed.
- The board focuses on management minutiae rather than providing it with a framework of values for managing by.
- It does not clearly assign both the authority to accomplish the organizational purposes and the accountability to perform them to management.
- Because it trusts the individual who is accountable, it rarely, if ever, actually checks to see if the right things are happening and the bad things being avoided.
- It does not understand its job to include the above and, even if it did, lacks the structure and processes necessary to carry it out.
As a result, bad things happen, and the boards, and the public, are totally surprised.
The underlying systemic problem will not be solved by addressing the mechanics of how the board operates within the current system. Rather, it will be solved by changing how boards see their role in the organization and by providing them with a system of governance that offers the structures and processes to support them in that role. The new role is that of organizational leadership, representing the ownership whose interest they theoretically are there to stand for.
There are many governance processes available that can improve how the board does its work. There is only one known system of governance that addresses the role of the board, principles for governing, structures for healthy relationships, and processes to assist appropriate behavior in an integrated and complete package.
This governance system was invented by Dr. John Carver out of his own frustrations as a CEO of community mental health organizations and it is called Carver Policy Governance?. In Policy Governance, the nature of board work and the relationship between the CEO and the board are designed to overcome the flaws that lead to disaster and wasted resources. Among these new principles and processes are:
- The board is responsible, in policy, for defining organizational purpose in three very distinct categories; what benefits are to be created, who are the intended recipients of those benefits, and what is the value of creating the benefits for the identified recipients.
- The board defines in advance those operating methods and conditions that it will find unacceptable.
- The board formally recognizes that it represents the interests of the owners.
- Board work is clearly defined, including its job description and its process of deliberation.
- Through group deliberation, the board forms a set of policies which reflect the values and perspective that they hold to represent the interests of the owners. These direct both the CEO and the board itself and provide a framework for further decision making.
- There is a formal process of delegation that assures authority and accountability for organizational performance to the CEO.
- Each and every policy, both those directing the CEO and the board, are monitored on a regular scheduled basis.
- Processes to assist the completion of the work exist.
Be proactive. Prevent bad things from happening to your organization. Instead of incremental fixes, fix the system.
Steps for the Board to Improve Accountability and Safety
- Recognize that the board has a special and unique job to do.
- Formally recognize that it is there to represent the interests of the owners.
- Provide the CEO with clearly defined expectations of organizational outcomes.
- Provide the CEO with clearly defined limits on unacceptable operating methods and conditions (including financial planning, operations, and conditions).
- Have a clearly defined process for delegating items 1 and 2 to the CEO.
- Regularly and formally monitor the CEO's achievement of the outcomes and compliance with the limits.
- Provide the CEO with written policies that form a framework of values, perspectives, and priorities which can be used for their decision making.
- Make the CEO accountable to the board as a whole, not to the chair or individual board members.
- Grant prior permission to all CEO actions which support the desired outcomes and avoid the limitations.
- Hold the CEO accountable for total organizational performance, but do so by ensuring that they have been delegated the full authority to accomplish the outcomes and that they are able to operate without board interference in daily operations.
Based on the Principles of Carver Policy Governance®
About Eric Craymer and Susan Stratton
Susan and Eric have independent consulting companies but have joined forces to create Partners in Policy Governance® which is dedicated to assisting boards in becoming more accountable and effective in their governance. Eric may be reached at eric.craymer@PolicyGovPartners.com and Susan may be reached at susan.stratton@PolicyGovPartners.com.
The Partners in Policy Governance website is at www.PolicyGovPartners.com
