By Peter Crow, Independent Advisor on Corporate Governance and Strategy; Chartered Company Director
Boards and directors have become the subjects of much public interest in recent decades, especially following the succession of high profile company failures over the last 15 years.
Ongoing reports of moral failures, hubris, incompetence, judicial investigations and sanctions published in the popular press have heightened awareness of boards and board performance amongst a broader constituency – much of which has cast boards and the important role they can play in organisations in a poor light in the minds of some.
Despite the negative headlines that a few boards and directors have attracted, most boards are well-intentioned and most directors are committed to pursuing the best interests of the organisation. However, some directors reportedly struggle to perform their job as well as they would like, often because the appropriate role and functions of the board is unclear. Some boards, for example, take the role of the policemen, their primary task being to look after the interests of shareholders by ‘keeping the executive honest’.
Other perhaps more altruistically inclined boards, think of themselves as stewards – a resource to be used to support the chief executive in the achievement of goals. Yet others think in terms of the board and management as a team (albeit with defined responsibilities), whereby ultimate accountability for determining the overall purpose, the direction of the organisation and the overall achievement of agreed performance goals lies with the board and management is responsible for operating the organisation to achieve agreed goals and priorities.
Furthermore, the now-popular term ‘governance’ (and many variants, including IT governance, organisational governance and clinical governance, among others) is seen in some quarters as being a panacea for all manner of organisational ills. Consequently, the landscape has become complicated! It’s little wonder that many different understandings of the function of the board and of board management interaction have emerged and, therefore, that some boards and directors are not nearly as clear about their role and contribution as perhaps they should be.
Social enterprise challenges
While the introductory comments describe some of the challenges faced by profit-seeking companies and their boards of directors, the boards of social enterprises face similar challenges. The overall goal (social outcomes v. profit or shareholder wealth) and legal frameworks may be different, but the role of the board is essentially the same. Yet, when one looks at how the boards of social enterprises tend to operate, some interesting differences emerge.
Over the last 24 months or so, I have worked with several hundred board members, trustees and senior leaders across the education, community and social service sectors in the UK, Ireland, Canada, Australia, New Zealand and Singapore, to understand how boards and board members actually work, and to make recommendations to improve board and organisational effectiveness.
“Despite the negative headlines that a few boards and directors have attracted, most boards are well- intentioned and most directors are committed to pursue the best interests of the organisation. However, some directors reportedly struggle to perform their job as well as they would like”
That most board members of social enterprises are volunteers who are deeply and passionately committed to supporting their organisations serve their local communities is well known. Many also serve in the community as well. Consequently, board members are often highly knowledgeable of how things work and what it takes to get things done at an operational level. That many board members possess only a superficial level of knowledge about boards, governance and appropriate board interactions is perhaps less well understood.
Board members typically don’t know what they don’t know in this regard, leaving them ill-equipped to contribute effectively. Unless effective training and development is provided, individual board members and, sometimes, whole boards respond by adopting ‘default settings’ based on what they do know. However, these default settings – summarised next – can impair the board’s ability to make effective contributions beyond operational tasks and decisions (which should be the domain of management). As a result, the board’s ability to make an effective contribution in an effort to influence the overall performance of the organisation is compromised.
Propensity to detail Many board members of social enterprises have a natural affinity for ‘detail’. Whether it is listening to detailed reports about specific situations or working through financial statements line-by-line, board members’ behaviour can be typecast as ‘liking to know what is going on’. In one discussion with more than 40 education sector governors, two contributors spoke passionately about the importance of board members conducting hands-on classroom inspections. The governors wanted to see what was happening in classrooms for themselves. “How else can we know that the children are safe and that the headmaster is reporting accurately?” they asked.
Narrow view Board members of social enterprises are often recruited from within the sector or the organisation’s membership, and they may potentially remain active contributors at an operational level as well. Board member candidates make themselves available to contribute around the board table because they are interested, knowledgeable, or, more simply, because they want a hand in decision making. To utilise relevant sector experience at the board table is good, but only to an extent. A homogenous group with similar backgrounds and thought processes is more likely to make similar assumptions because they look at problems from a similar perspective. They will probably also hold similar biases and have similar blind spots. As a result, viable and strategically important options may not be identified, simply because alternative viewpoints are not explored.
Activity without a clear purpose Many board members come from a background of ‘doing’, as highlighted above. Consequently, satisfaction is achieved from seeing visible progress and from making hands-on contributions. Activity-based reporting is common (performance is measured in terms of KPI achievement) and decisions are made on the basis of budgets and merit alone. Over time, the clarity of purpose that was so lucid when the organisation was first formed fades away. The organisation is left to wallow, following processes, performing tasks or perhaps, unknowingly moving towards a whole new raison d’etre.
While many social enterprises can continue to survive like this (some for extended periods), these ‘default settings’ can result in organisational stagnation, frustration among some board members (especially new members), poor organisational performance and, potentially in more extreme instances, disenfranchisement and collapse. Whereas board members generally arrive as enthusiastic contributors who are committed to making a difference, time and activity can see them worn down. What can be done?
Effectiveness lies in looking ahead
If the boards of social enterprises are to make effective contributions, the challenges and risks represented by these default settings need to be addressed. Boards need to lift their collective eyes from detailed operational matters and what has happened in the past, to focus their attention on strategic considerations and the road ahead.
A useful starting point for this transition is the very word that has contributed much of the confusion – governance. The English word governance is derived from the Greek kybernetes (to steer, to guide, to pilot, typically, a ship). Thus, governance is an action word – one associated with setting direction and with navigating or guiding something towards a longer-term or major goal, with a purpose in mind. With this understanding to the fore, the role of the board then is to determine the overall goal and direction, and to actively oversee management to ensure the organisation implements the plan to head in the right direction and effectively so. Boards that wish to make effective contributions can do this by focussing their attention on the purpose of the organisation and several practices of strategic management.
Purpose Purpose answers the ‘why’ question. The reason the social enterprise exists – its purpose – needs to be both determined and agreed. Best expressed as a statement of belief, clarity of purpose provides the motivation for all organisational activity. It becomes the North Star against which all major options tested and decisions made. Great purpose statements are those that, when pursued, result in effort being aligned and a significant impact being made. However, purpose ‘leaks’. Therefore, board members and the chief executive need to return to it – often – to remind themselves why the organisation exists. The message should also be repeated amongst staff periodically and whenever a new board member is appointed.
Strategic management The practices of strategic management are well known in management research and in practice. Whereas strategic management has historically been seen to be a task of management (excepting approving strategy), emerging research conducted in the UK, Europe and New Zealand suggests that better outcomes might be possible if the board is actively involved in the practices of developing strategy (together with management); making strategic decisions in the context of approved strategy; and, both monitoring and verifying strategy implementation and the subsequent performance of the organisation.
“If the boards of social enterprises are to make effective contributions, the challenges and risks represented by these default settings need to be addressed. Boards need to lift their collective eyes”
Necessarily, ongoing involvement requires board members to be strategically competent and actively engaged in the work of the board and for the board to both support and constructively control management in their implementation of agreed strategic priorities. Here, strategic competence includes the capability and cognition of board members to ask appropriate questions, make adjustments and apply requisite skills with a strategic mindset. Good strategic competencies have been associated with good organisational performance.
Other factors worth considering
Group dynamics The boards of social enterprises tend to be large. Many have more than 10 members – some as high as 18! Larger board membership is often justified on the basis of ‘sharing the load’ and ‘not placing too much power with a small group’. Yet academic studies have shown that the optimum size of a high performing team is between five and nine members, with six being the ideal number. Beyond six, cliques start to emerge and the likelihood of free riding (also called ‘social loafing’) increases. Boards are no exception.
Diversity Mixed boards have been heavily promoted amongst the board and governance community in recent years, especially in the Western world, as a means of broadening the discussion at the board table. Diversity can be great for ideation and for debating strategic options. However, it can also be bad for cohesion. That’s because the board needs to operate as a team. Academic research suggests that some similarity between board members is good (i.e. shared understandings, of purpose especially, but not the same physical attributes) because it enhances effectiveness in performing complex and unpredictable tasks, such as board decisions! The point here is that sameness is good in some ways (operating basis and purpose) and diversity is better in others (ideation and debate). Striking the balance takes maturity.
While not a silver bullet, this brief commentary suggests that board effectiveness is largely dependent on the expertise of board members and what they do when together in the boardroom – the board’s active and ongoing involvement in the organisation’s strategic thinking and strategic management practices – through the consideration of strategic options, strategy development, the making of strategic decisions in the context of approved strategy and the monitoring and verification of strategy implementation – appears to be significant. If strategically competent board members work together in this way, within the context of an agreed purpose, improved board effectiveness is not only possible, it is also potentially sustainable.
About the Author:
Peter Crow is a chartered company director, and an independent advisor on corporate governance and strategic management to boards and directors around the world. He has worked in the world of business and served in the third sector for over thirty years. www.petercrow.com