In economic “principal-agent” theory, governance is all about how scarce resources are allocated to the most effective uses.
“Principals” provide the resources – “agents” use the resources – and “governance” is the intermediary, arbiter or referee deciding between them.
In Associations, the principals are the members – the legal and beneficial owners. The agents are the CEO, management team and staff.
Governance is typically provided by a governing Board of Directors.
Boards fulfill their governance duties in different ways. It is often instructive to think of there being five different “types” of Boards.
These types of board tend to evolve over time in a predictable and observable fashion, what we call the “governance journey”.
When Associations were first founded, their boards are often “operating”.
They make all the day to day decisions as well as the strategic, because they have to – there is no one to delegate to. Everyone who is central to the Association are sitting around the boardroom table already: the founders, funders, workers and idea people.
As the Association grows, the operating board strikes various committees to undertake slices of its work – e.g. staffing, business development, membership, facilities, technology, fund-raising, standards, discipline, communications. But both the committees and boards are “hands-on”.
As Association grows further, the board hires staff, and delegates work to the staff. The board becomes an “intervening” board, meaning that it intervenes in operations when it feels it needs to, but leaves the rest of operations to staff to run. This is usually when staff does not have the capacity or competence in specific areas, or when board members have the desire and time to do the work themselves.
Lots of organizations, including Associations, can survive and even prosper under an operating or intervening board. Examples include many day care, housing, worker and small cooperatives. There is no clear line between who “does governance” and who “does operations”, but things get done.
Eventually, though, as an Association succeeds and grows further, the board will hire sufficiently senior, professional management (led by an Executive Director or CEO) that has the capacity, competence, desire and time to “do operations” entirely. They seek a complete delegation of authority for the day to day operations from the board. The board then becomes a “governing” board, a board that concentrates its time and energy on pure governance:
* Strategic direction: planning, delegations, risk management and resourcing, including setting policy for ownership, standards and cooperative services
* Strategic control: oversight, monitoring, evaluation and measurement
A defining feature of a governing board is that they “draw a bright line” between their responsibilities and those of the CEO and management team.
This separation of duties is central to the board exercising independent oversight and ensuring accountability of the management and staff, through the CEO.
The longer the CEO and board members remain in place, over time these relationships tend to become less formal, and this line begins to erode. The board migrates to a “collaborative” board, where the CEO is driving both the governance and operating agendas, and calls on the board to provide support, assistance and expertise from time to time.
While initially appealing, and typically the most satisfying board to serve on,
the risk to a collaborative board is that it has lost its independence when it comes to effectively overseeing the CEO and holding management accountable. In practice it is difficult for these boards to have a real say in strategy and risk, and even more difficult to replace a non-performing CEO.
This brings us to the fifth, and final, type of board, the “advisory” type. Here, all semblances of board activism and engagement has evaporated – the CEO and management team are “doing” both governance and operations, and only consult with the board when they seek input, cover, advocates, or wisdom.
The larger and more complex an organization becomes and the more principals (owners: members) it has, the more likely it is to slip up this governance spectrum and be marginalized as a “rubber stamp” body. The risks are obvious – the co-operative and its members have put all their eggs in one basket, there is complete reliance on a potentially “imperial” CEO, and sooner or later, the operational system will hit a snag and the board will be oblivious and helpless.
A post-script to the governance journey: when these advisory-type boards are hit with a crisis, scandal or meltdown (as they almost inevitably will be), they tend to overreact. They bluster and fire the CEO and senior management, even a few board members for good measure (especially if there has been a member revolt at the AGM),and then they force themselves to re-engage in the co-operative. But instead of stopping at a more sustainable governing type, many boards let the governance “pendulum “swing right through the middle, and revert to operating boards.[ii] This, of course, can be just as dangerous, because the board has taken over operations, which they are ill-equipped to do, and alienated their newly disempowered management team. Another crisis lies just over the horizon – a second operational failure, this time caused by an overactive, “micro-managing” board. So what to do about this?? Stay tuned for more…………………………
