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As we are too frequently and sadly made aware by recent headlines, both for-profit and non-profit organizations may have trusted employees and volunteers who steal from them. The cost today is obvious, the lost funds and the reduction in programs and services which they would have funded. Then the recognition sets in that there are future costs. Donors, investors and customers may have lose faith in the organization and be reluctant to provide additional funding. These lost funds reduce the goods, services, and excess revenues that could have been realized. But there is another, less obvious, and potentially higher cost that may be revealed by the headlines.
Embezzlement can occur in otherwise great organizations for many reasons; leadership who does not understand finances and must rely on others, incomplete or inadequate financial controls, no controls, or lack of the proper board oversight. But what is the probable root cause of the above reasons? Often it is lack of a strong and effective process of governance.
Every organization is formed to fulfill some purpose. Resources are pooled to create some positive change in the world. A for profit company is in business to meet customers’ needs with goods and services at a profit in order to create wealth. A non-profit is often in business to meet specific human needs that the for profit world will not or can not provide.
But what if the reason for bad things happening is that the board has not adequately defined that purpose or set policy against those bad things that it fears might happen? What if the mission has never been specifically defined in terms of what benefits should be created and what supporters are willing to pay for those benefits?
The result can be organizational drift and underperformance, a decrease in impact. Without clear instruction of what it exists for and what operational methods or conditions are off limits, management must take its best guesses. They may be busy doing a great many good things but are they the right things and the absolutely best things to be doing? These questions can not be answered without the board addressing the issues above.
A board has the ultimate and primary duty to see that the organization achieves what it should and avoids unacceptable situations. It then delegates much of the actual performance of this duty to the CEO. Unfortunately, the method for a board defining purpose and delegating responsibility and accountability for it is often missing or ineffective. Traditional board governance leaves gaping holes in the protection of organizational mission and assets.
There is a system of governance out there that directly addresses many, if not all, of the weaknesses underlying traditional governing structures and processes. It was invented by a man named Dr. John Carver who, as a CEO working with a board, became totally frustrated at the waste that poor governance can lead to. It is called Policy Governance®.
Some of the key elements of the Carver Policy Governance® system addressing the weaknesses include:
- A policy development process that makes sure that the right questions are asked and that leads to a complete and coherent set of instructions for the CEO.
- Requiring the board to specifically address what benefits are to be created, who is intended to receive those benefits, and what an adequate value of benefits produced is worth.
- Proactively addressing the bad things that could happen in a set of policies that sets those methods and conditions off limits to the CEO.
- Clear, concise, and fair delegation of organizational performance to the CEO.
- Active and scheduled monitoring of organizational performance against board criteria.
- Proactive monitoring of the board’s completion and fulfillment of its own work.
Can a more complete system of governance prevent bad things from happening? Unfortunately no; bad (or weak) people will find ways to make bad things happen. But what a more effective governance system can do is greatly reduce the risk of those bad things from happening and greatly increase the achievement of the intended purpose for the organization’s existence.
Avoiding the Hidden Costs of Embezzlement
- Train the CEO to understand something about finance and accounting.
- Provide adequate financial controls.
- Provide effective board governance.
- Define and prioritize what it is the organization exists for; how does it intend to change the world, who should intentionally benefit, and what is that worth?
- 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.
- Hold the CEO accountable for total organizational performance, but only after the board has clearly defined what they are accountable for.
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
