In the aftermath of Enron, Tyco International and WorldCom, with billions of dollars’ of investors’ money lost as the companies collapsed, the Sarbanes Oxley Act (SOA) was enacted to improve governance of publicly traded companies. The SOA has done much to improve organizational governance, requiring auditor independence, increased corporate and individual officer accountability, increased financial disclosures and specific requirements for Boards. While private and not for profit sectors could benefit from following the intent of these rules, good governance goes well beyond these requirements. Here are five things your board should consider:
- Board Composition. Boards should not be comprised of old friends or family members of each other or of the CEO – or even the same people who have served the organization faithfully for many years (see “Board Governance” below). Boards should be made up of individuals with particular skill sets that will benefit the organization. Board composition should include representatives from both inside and outside the organization’s particular industry. They should be leaders in their own right, possessing integrity of words and action, able to challenge executive mindsets, and absolutely ethical. For smaller boards, it is helpful to have board members with key functional background such as HR, IT or specific areas of finance.
- Board Clarity & Purpose. Good governance starts with board clarity – and passion – for the vision and mission of the organization. The values of the organization must resonate with the board. It is essential that the board be absolutely clear on its purpose and areas of oversight. Beyond the responsibility to hire, evaluate, and, when necessary, fire the CEO, the board must be clear on its role relative to its fiduciary responsibilities, its oversight of critical processes such as strategic planning, risk management, compliance; and in some industries, for quality improvement.
- Board Dynamics. In order to have a truly effective board, there must be trust that supports a willingness for open dialogue and debate. This is how serious issues are vetted out thoroughly, resulting in strong decisions that endure. Once the board has reached a decision, it is essential that the board speak with only one voice. The best boards have a growth mindset, willing to learn from the organization, from their own experiences, and from each other. This mindset creates an environment in which they are willing to evaluate their own performance on behalf of the organization, ensuring it is consistent with their purpose and goals, as well as the organization’s vision, mission and values.
- Board – CEO Relationship. Good boards understand that they have one employee, the CEO, who is held responsible for the performance of the organization. The CEO is directed to fulfill the mission of the organization, subject to certain executive limitations which require board approval. One of the most important board functions is to evaluate the CEO against criteria set up in advance, and to provide feedback in a constructive manner at least once, if not twice a year. Criteria used to evaluate the CEO typically includes key performance indicators or other metrics designed to measure the organization’s performance against its goals; consistency with organizational values and accomplishment of specific annual goals.
- Governance Structure. The way the board governs its own work can be considered its governance structure. While some of these elements might be included in the by-laws, many are typically left undocumented. Documentation is the first step to ensuring that everyone is on the same page. Governance structure includes the required number of board members (typically expressed as a range); what constitutes a quorum; how often meetings are held and the committee structure by which the board does it work. It includes how the board will nominate and elect new members, and how the on-boarding process will take place. Board governance extends to board expectations as to how agendas are structured, the timing and content of advance board packets, and how much time will be spent during meetings on hearing reports vs. diving into more strategic issues. An annual calendar provides assurance that critical reviews happen as to when critical reports or reviews will be held allows for the board to ensure their oversight processes are in place.