November 17, 2011

When Boards Attack

Posted in accountable, governance tagged , , , , at 8:57 am by The Sandbar Group

I was talking with an Executive Director whose is beginning to feel attacked by her board.  A few Board members have heard complaints from a few members and decided to investigate.  They commissioned a survey which demonstrated that eighty percent of the members are “satisfied” or “very satisfied” with the organization.  However, when the survey asked for areas needing improvement, members listed several problems, peeves, and displeasures that could be rectified.  The Board’s top leadership viewed this as an indication of serious discontent and is now setting up membership focus groups to discuss how to solve this boatload of problems.  Should the Executive Director be worried?  You betcha.  Time to dust off the résumé.  Is this a hatchet job by malevolent members of the Board?  It may be, but then again it could be something even more subtle and difficult to deal with.

Witch hunts are not always malevolent

There are always problems in organizations.  A leader might say something impolitic or thoughtless; people may simply disagree about a decision that a leader makes.  That’s just a part of life.  Disgruntled people often try to spread their frustration to others by characterizing the leader in a negative light.  The leader might be described as inept, out of touch, overly zealous, too liberal, too conservative.  The disgruntled person will then share selected stories that demonstrate the negative label for the leader.  Those labels can function like a virus. Once the virus spread and another person accepts the negative label of their leader, the infected person will begin to see the negative behavior that never seemed to bother them before.

People will find what they are looking for

This process of only choosing the examples that support a person’s conclusion is called “confirmation bias” and it is a terrible disservice to the organization.  At their best, board members who fall prey to confirmation bias will make bad decisions based upon a distorted view of reality.  At their worst, boards who do not prevent their own confirmation bias will conduct witch hunts, weaving together threads of picayune complaints into a noose to hang their Executive Director.

Look for confirmation bias and protect your organizatoin

All humans suffer from confirmation bias; it’s a natural brain glitch.  However, we can recognize that it happens and take measures to prevent it.  Here are some board practices that are meant to reduce the likelihood of confirmation bias by creating reasonable, set criteria for judging the Executive Director’s performance.

1. Describe what your Executive Director is supposed to achieve.  Let the Executive Director develop a reasonable metric for measuring the achievement.  If the metric seems reasonable to the Board, use that metric.  For example, if the Board of a YMCA wants the children living near the river to know how to swim, let the Executive Director figure out how to measure the number of children who live near the river and what a reasonable number of those children the YMCA should to teach.

2. Place reasonable limits on your Executive Director.  If the Board is worried about sloppy communications which reflects badly on the organization, it should require that the Executive Director not allow sloppy or confusing printed or online communications.  Again, let the Executive Director develop a reasonable way to measure whether something is sloppy or confusing.  If the Board agrees that it is a reasonable measure, the Board should use that measure.

3. Use the standards listed above as the only criteria by which the Executive Director should be evaluated.  Neither fishing for problems nor ignoring problems should be acceptable.

Confirmation bias leads boards to overemphasize negatives or, conversely, ignore problems that should be addressed.  As the main body that oversees the organization, the Board must have a clear, unbiased understanding of the organization so that it can make decisions that are both fair and wise.

September 3, 2011

Should the Executive Director select new board members?

Posted in Uncategorized tagged , , at 12:50 pm by The Sandbar Group

Wise boards should seek the advice of their executive (or any staff members) when making decision. However, boards should also seek their own independent advisers as well. Here’s why (I know this will not make me popular).

The purpose of the board is to serve a group of people. Let’s call them the moral owners of the nonprofit. If a group has members, the members are the moral owners. If a group serves the arts, then the citizens of a particular area or maybe art-lovers may be the moral owners.

The board serves as the fiduciary of the moral owners meaning that the board represents the owners’ interests. The board delegates authority to the executive and directs what the organization should accomplish. It also provides oversight to ensure that the executive (and by extension the staff) is acting in the moral owners’ best interests.

Here is the problem. As executives, we all want to believe that we will work exclusively for the benefit of the organization, that we are forever above reproach. But the truth is, we all have our own interests that may diverge from the moral owners, and boards have no litmus test to separate the sainted executives who only work for the moral owners’ interests, from those of use who are simply human with our own self interest.
If we, as executives, cannot understand our own self-serving nature, we will never understand the purpose of boards.

This is why we want independent boards to watch over the executive. Sure, we are partners, but partners with different roles where the board must provide oversight. Boards that fail to do this are not performing their fiduciary role.

The executive should provide guidance to the board, but if the board knows is job and is competent, the executive should not choose board members because of the potential conflicts of interest.

However, many boards are not competent. In this case the executive should help the board to understand its role and help it to think through the issues for selecting new board members.

(This response is based upon the answer to a question posted on LinkedIn’s Nonprofit Board Forum)

May 19, 2011

Make Better Decisions Faster

Posted in non-profit, nonprofit tagged , , , , , , at 9:46 am by The Sandbar Group

We can’t make the decision

I am sitting in a community-wide meeting of members of the clergy.  They are rankled because a community organization requested the use of their mailing lists to provide a valuable (and free) service to some of their members of their congregations.  The clergy were told that their lists would not be used for any purpose other than this single mailing.  The head of this community organization told them that they had to decide within a month or the members of their congregations would not be able to participate.  The month is almost up.  Some of the members sitting around the table are upset that they only had a month to make the decision as to whether to release their list.  To be fair, there were other complicating factors, but there is general agreement that a month is not long enough for congregations to make such a decision.

The problem is often that the board of directors has retained too much decision-making authority.

Delayed decision-making costs your organization

One of the ways we burnout staff our volunteers is when they feel that they are pushing an immovable rock.  Volunteers feel this most often when asking for permission to pursue a project to benefit the organization, and they receive no answer.  It’s not that they receive “no” for an answer, at least “no” is an answer.  They receive no answer at all since no one has the authority to make the decision, or the decision has to go through myriad layers of staff, then subcommittees, then up the to the board, which may send it back to committee.  While this decision-making labyrinth seems natural to insiders, it saps everyone’s energy and is unnecessary.  Decision-making can be done better and faster in three easy steps.

Three steps to faster decision-making

1. Set criteria for decision-making.

Think ahead.  Board should be concerned about decisions such as protecting the information of their members, but they should also be concerned about safety, protecting their assets, budgeting and planning appropriately, treating people ethically, etc.  The list is not exhaustive, but it is important to think ahead.  Boards would do well to list these concerns, grouping them by categories.  Perhaps one of the sections is “Treatment of Members” and under that heading, the board could have a policy such as, member’s information should only be used for purposes that directly support the mission of the organization and should not be given to other organizations for purposes of sales or soliciting funds. This policy sets the ground-rules for how an organization’s information should be protected.  The board may choose different criteria, as is their right, but now any decision maker can use this policy to protect the information of members

2. Delegate as fully as possible.

Once the criteria are set, it is helpful if the board (or any supervisory body) allows subordinates to have as much latitude as possible.  Use the RAIN principle for delegating.  For each decision, set one person as the person Responsible for shepherding that decision.  Tell the responsible person who, if anyone, must Approve a decision, who must give Input regarding the decision, who must be Notified after the decision.  (RAIN: Responsible, Approve, Input, Notify) Allow the authority for the decision-making flow as far down the organization chart as possible.

3. Allow for reasonable difference of opinion

When authority is delegated, the newly empowered decision-maker must be able to render a reasonable judgement rather than divining what the person above might have decided.  For instance, if the Board of Directors of one of these congregations had delegated the decision-making authority to a member of the clergy, as long as the clergy follows the board’s policy,  then the decision could have reasonably been made in minutes rather than weeks.  The Board should expect that their policies are followed, and the clergy-person should expect that their decision is judged charitably.

Define->Delegate->Decide

Organizations are more hospitable to their staff and volunteers when their define their areas of concern, what would constitute a good decision, and delegate the decision-making as far down the organizational chart as possible.  Will the clergy around this table gain the ability to make decisions for their congregations?  At least they have a prayer.

April 18, 2011

Nonprofits Close, Let’s Rejoice

Posted in governance, non-profit, nonprofit tagged , , , , , , at 2:51 pm by The Sandbar Group

A recent New York Times article described a group of nonprofits which closed their doors, not because they failed, but because they succeeded.  These nonprofits successfully completed their mission and felt that the most responsible thing for them to do is to suspend operations and declare victory.  This is remarkable on many levels and a courageous act of good governance.  Here’s why.

Board don’t serve the organization

It is a common belief the board of directors serves the organization itself and must work to keep its doors open at all costs.  In fact, the board serves a group of people  called the moral owners.  Just as a government is owned by its citizens, the moral owners decide what the organization should accomplish.  Sometimes the priorities of the moral owners change as the needs of the community change.  The article cites one example of Malaria No More that distributed mosquito nets across the world, reducing the disease’s prevalence and danger.  In their case, they chose to go dormant for the next few years rather than close should we loose the ground gained against the disease.  The point is, the board looked around the world, decided that there were other priorities that were higher at the moment, and chose to allow scare funds benefit other concerns.

Governments should this responsive

Nonprofits serve a quasi-governmental role.  They are private groups that produce public good.  Wouldn’t it be wonderful if all organizations and government agencies who worked for the public good would look at the benefit they bring to society and courageously ask if there are other areas which could produce more benefit.  Maybe even the Tea Party would rejoice.

Focus on results, not organizations

The lesson for boards of directors is to focus on the results that your organization produces, not entirely on the organization itself.  If another organization in your community produces better results at a lower cost, it may be better for society for the inefficient organization to close.  Whether our mission is complete or another organization can produce greater benefit less expensively, boards must see themselves as servants of their moral owners.

April 8, 2011

Go Ahead, Change

Posted in Uncategorized at 11:35 am by The Sandbar Group

I run into a Dallas client at a networking meeting having worked with his board of directors on implementing Policy Governance. Previously, the board directly ran the entire organization which led to serious problems. There were questions of poorly managed funds, self-dealing, and a lack of accountability. But now, the board focuses on strategic issues and oversight while the executive director runs the organization.
Once we changed the nature of the board, we needed to create the executive director’s management team since previously, board committees ran everything. We established a few volunteer “middle managers,” who answered directly to the executive director.
Sitting at the networking meeting, I ask how the management system is working. He tells me, somewhat apologetically, that he did away with the middle managers. “It just didn’t work in our organization.” I ask if the committees still report to him. “Yes,” he tells me, “this works much better.”

Organizations benefit in several ways by removing the board from managing the organization. The board can focus on strategy; it can hold the executive accountable more easily. But one of the unappreciated benefits is that the organization can change its management structure more quickly.

Imagine that the board had created this management structure. Chances are that this structure would probably be described in the bylaws of the organization which are very difficult to change, or, at the very least, the entire board would need to be convinced that changing the management structure is important. Organizations are often stuck with poor management structures because they are written into governance documents or because board members may not understand the management dynamics. By allowing the executive director to shape, and if need be, reshape the management structure, he is able to experiment and adjust, key principles in continuous improvement.

The the executive director I say, no need to feel sheepish about making changes. You are the executive and you are accountable. If you think it is necessary, go ahead, change.

February 21, 2011

Good Governance Averts Crisis Despite Perceived CEO Mistake

Posted in governance, non-profit, nonprofit, policy governance tagged , , , , , , , , at 10:42 am by The Sandbar Group

One board member angrily complains that an letter improperly solicited the members of their organization. Accusatory emails shoot back and forth and the temperatures of the Board members and CEO begins to rise.  “This was the old way of handling problems,” one board member comments.  However, they had recently implemented a new way of governing and it was time for its first test.

In Policy Governance, there is a specific approach to addressing problems which prevents situations from spinning out of control.  Here is how this organization addressed the emerging problem and prevented a crisis.

The President and the CEO acknowledged it was a real issue.

Policy Governance creates a system by which the Board can control the organization without micromanaging.  Well thought-out systems are important, but a board is a human system comprised of people and their feelings.  By telling the aggrieved Board member that the problem is being taken seriously and is being addressed directly, they buy themselves time to deal with the issue in a meaningful way.  The challenge is to appropriately follow through so that the Board provides direction without usurping the CEO’s authority to run the organization.  That’s where Policy Governance comes in.

Has the Board Already Prohibited Such Action?

The Board had created a list of problematic situations that they wanted the CEO to avoid, such as treating their members unprofessionally, financially imperiling the organization, etc.  This list became the basis of the Board’s policies prohibiting the CEO from allowing these situations to transpire.

The President, the CEO, and the agitated Board member talked about what had actually happened .  There was no question that the CEO had the right to send a solicitation in the name of the organization.  There was also no expectation that the CEO needed to read the minds and sensitivities of Board members or individual members of the organization regarding sending out solicitations.  However, in their discussion, they revealed an area of sensitivity that the President and Board member thought the CEO needed to consider.  However, the President and the single Board member do not have the authority, by themselves, to tell the CEO what to do or how to do it.  Only the Board, as a whole, can do that.

The Board checked their policies to see if this particular situation regarding the solicitation of certain members had already been barred.  If it had, the CEO had some serious explaining to do.  In this case, the Board had not prohibited this type of action.

Fashion a Policy; Board Approves

The Board Chair, with input from several Board members and the CEO, created a policy that prohibited these kinds of situations in the future.  The President brought the policy to the Board which discussed and ultimately approved it.  The Board recognized that the CEO had the authority to take this action in the past, but they thought it was in the best interest of the organization as a whole to slightly limit the CEO’s authority in this one, narrow area.

Monitor, Monitor, Monitor

Then the Board directed the CEO to provide information at a future meeting that the policy is being followed.   This gave the aggrieved Board member even more confidence that her issues were being taken seriously and the needs of the members, whom she represents, were being well represented.  In Policy Governance, the Board monitor every one of its prohibitions each year, if not more, to ensure that the CEO is acting in accordance with the Board’s directions.

Strong Governance Systems Prevent Crises

Dealing with aggrieved members is a typical problem that can blow up into a serious crisis.  If the challenge is handled poorly, it can leave residues of hurt feelings and mistrust that undermine the strength of all of the leadership.  Policy Governance provides a coherent and robust system that clearly defines the roles of the Board and CEO and creates a roadmap for constructively addressing all governance circumstances.

February 15, 2011

Stop Asking Your Executive Director to Do Your Work

Posted in governance, independence, non-profit, nonprofit, policy governance, Uncategorized at 5:08 pm by The Sandbar Group

Nonprofit board members are in a difficult position.  They are often not trained to fulfill their role as a member of the Board and must rely on the advice of the Executive Director in order to fulfill their job.  The problem is, one of the jobs of the Board of Directors is to hold the Executive Director accountable.  That means that the Executive Director is actually placed in charge of the group which is supposed to oversee the Executive Director.  Do you see a problem here?  We shouldn’t blame the Executive Director.  Someone has to provide direction and leadership.  If no one else will, the ED is forced to step in.  What should boards do?

1. Do Tell the Executive Director What to Produce

Every organization exists to produce something of value.  Among other things, business usually produce wealth.  Nonprofits usually do not produce wealth, but they do produce beneficial changes to our society.  The YMCA produces children who can swim and will not drown.  Religious organizations produce people with a sense of meaning and connection in their lives.  Food banks produce people who are not suffering from hunger.  These are the ends of our organizations.  The Board’s job is to understand what situations need to improve and direct the Executive Director to improve those situations.  If we divided the work of nonprofits into What and How, the Board’s first job is to define What benefit the organization should produce and let the Executive Director figure out How to produce it.

2. Don’t Tell the Executive Director How to Run the Organization

Boards do have to care about how the Executive Director will produce the results.  Executive Directors have the experience and expertise to run nonprofit and should be held accountable for the effectiveness of the organization.  When Board members tell them how to do their work, you remove the responsibility from the Executive Director and become accountable in their place.  What you should do it inform the Executive Director about the standards you expect for their work.  For instance, if the Executive Director is planning on making a large purchase of a product over $1000 you may want the purchase to be made after receiving a few competitive bids.  You are not telling the Executive Director what to buy or even which item to choose, but you are setting the standard for prudent business practices.  If you do not know what constitutes a prudent business practice, that is a perfect topic for an upcoming board meeting rather than listening to endless reports.

3. Learn What a Board is Supposed to Do

It sounds basic, but many (to many) board members and even Board Chairs do not know what the Board of Directors is actually supposed to do.  They know that there should be meetings with lots of reports, but can they clearly state what the Board is supposed to produce?  Not a chance.

The clearest and most well thought out prescription for what a board should do is called Policy Governance.  Read this excellent article by John Carver.  Policy_Governance_in_Non-Profits

November 3, 2010

City of Frisco, Getting Governance Right

Posted in governance, policy governance tagged , , , , , at 7:37 pm by The Sandbar Group

I attended the Frisco City Council meeting last night and was very impressed.  The Council uses Policy Governance as their governance system and you could see it very clearly, especially in the attitude of the Mayor.  Several times, Mayor Maso insisted on providing sufficient time for citizen comment.  In the future, the Council is planning on meeting with developers who want to influence the new zoning ordinance.  The Mayor and the entire City Council was more than happy to meet with them, but following the Mayor’s lead, they made sure that the citizens of Frisco had time to add their comments and concerns as well.

If this is any indication of the mindset of this Council, the citizens of Frisco are in good hands.

May 26, 2010

Sufficient Oversight on a School Board

Posted in governance, policy governance, Uncategorized tagged , , , , , , , at 10:49 am by The Sandbar Group

One of the dangers of using a particular governance model is that one can become orthodox in its application.  For instance, I am a trained Policy Governance consultant, meaning that I was personally trained by John and Miriam Carver, John having created Policy Governance and Miriam as one of its leading theorists. However, once we leave the Policy Governance womb, we have to make decisions as to whether the model is producing the benefits for which it was created.  When Policy Governance is employed, does it serve the interests of the “moral owners” of the organization?

In her recent critique of Policy Governance as employed by the Clark County School Board in Nevada, http://npri.org/publications/it-makes-us-all-look-ridiculous, Karen Gray  that Policy Governance is not working well and rises specific instances where she argues that the level of oversight is insufficient.  Let’s look at her argument and see what we learn.

Staff raises

According to Gray,

Recently, trustees received public criticism and what amounts to an implicit scolding from legislators for approving approximately $100,000 in additional benefits for Clark County’s top five ranking employees during the current deep recession while also calling for “shared sacrifice.” Then it was revealed trustees never even looked at the employee contracts prior to approving them.

The first thing one does when addressing an issue from a Policy Governance perspective is to review the current policies regarding compensation.  Currently those policies say:

With respect to employment, compensation, and benefits to employees, consultants, contract workers and volunteers, the Superintendent will not cause or allow jeopardy to fiscal integrity or to public image.
Further, without limiting the scope of the foregoing by this enumeration, he or she will not:
1. Change his or her own compensation and benefits, except, as his or her benefits are consistent with a package for all other employees.
2. Promise or imply permanent or guaranteed employment.

The Superintendent is required to provide a report to the Board demonstrating compliance with this policy.  His report had better show that his compensation and benefits are consistent with a package for all other employees.  If he cannot reasonably do this, he is out of compliance and should be held accountable.  In addition, a negative article in the Las Vegas Review-Journal claiming that the legislators admonished the Superintendent, raises the possibility that his actions have led to “jeopardy to public image” which he is required to protect.  Of course, the Superintendent may argue that a negative press about the raises were not directed at him.  In fact, it was not the legislature that was directing their criticism at the Clark County School District, it was Stephen Augspurger (see below).

But controversy over the Clark County School Board’s decision to award its top staff more than $100,000 in new benefits was likely part of the motivation behind the mandate, said Stephen Augspurger, executive director of the Clark County Association of School Administrators and Professional-technical Employees. (Emphasis added)

When the Superintendent submits his monitoring report to the Board, demonstrating that he has not caused “jeopardy to the public image,” the Board may choose to admonish, scold, or even fire him if they feel that his actions were not in keeping with a reasonable interpretation of their policy.  This seems to be an appropriate mechanism for oversight, if it is actually used by the Board.

Ms. Gray would argue the cow out of the barn.  If the Board chose to admonish the Superintendent, wouldn’t it be too late?  This is a valuable criticism to consider and is a recurring theme which I will address below.

Unilateral suspension of a school policy

Gray makes in interesting assertion.

When the board finds the superintendent — or the board, itself — has acted contrary to the board’s intent, the board must amend, adopt or repeal board policy to give new instruction.

For example, after Clark County School District Superintendent Walt Rulffes in March unilaterally suspended a school district policy to convert 12-month schools to nine months, trustees eventually revised policy GP3 to require that any waiver of school district policies or regulations be approved by the board.

If, as Gray accuses, the Superintendent “unilaterally suspends” the Board’s policy, then the Board is well within its rights to admonish, punish, scold, or fire the Superintendent.  But that is really not what Gray is saying.

It is inaccurate that the Board cannot act if the Board finds that the Superintendent has acted contrary to its policy.  I believe she is pointing out that if the Board fails to write a policy that clearly expresses its intent, the Board can’t hold the Superintendent responsible for failing to read the Board’s mind.  If the Board wants to say something, then it should say it clearly and put it in writing.  Imagine that the legislature passed a law saying that people could not water their lawns more than once a week.  You, being a law-abiding citizen, choose to water your lawn on Thursday.  On Friday, you receive a citation for breaking the law.  You complain to the DA, “We were told we could water our lawns once-a-week.  I only watered my lawn on Thursday.”  The DA tells you that the legislature intended the law to mean that you could only water your lawn on Saturday, since there is only one Saturday in a week.  You protest, “You can’t hold me accountable for a law that is unclear.”  But that is exactly what Karen Gray is complaining about.  If the Board does a poor job legislating (creating a policy) and the Superintendent reasonably interprets and abides by the policy, Gray wants to blame him, rather than simply fixing the policy.  If the Board’s policies were inadequate, Gray has a legitimate complaint against the Board.  But why is she complaining about Policy Governance?

Prevent Every Problem Before It Happens – Good luck with that.

Karen Gray brings up a tension that is inherent in any situation where authority is delegated to another person.  Whenever a Board delegates authority a Superintendent, it must decide how closely they wish to scrutinize his decisions.  If the Board requires that every decision is scrutinized before the decision is actually made in order to prevent problems from occurring, then the Board has all but seized the Superintendent’s power (the classic definition of micromanagement).  This happens where there is no trust between the Board and the Superintendent.  If a Board does not trust their superintendent then they would want to keep him weak to limit the damage that he may produce. By the Board monitoring the Superintendent’s decisions after they are made, they create a strong superintendent by providing broad authority while maintaining a reasonable degree of oversight.  There are two questions that emerge from when to monitor a superintendent’s actions: 1) How important is it to have a strong Superintendent?  2) Are there any decisions that are so important that the decision must be monitored before the decision is executed?

Strong Superintendents

There are several important benefits for having a strong Superintendent.  With a strong Superintendent who has the authority to make decisions, the Board can hold the superintendent accountable for the decisions that he makes.  If a decision is left to the Board ask a whole, it is much more difficult for the public to hold an individual Board member accountable for a bad decision or for lack of achievement.  Second, if authority to make decisions is maintained by the Board then every decision can become increasingly political.  After all, the Board is a political body.  When management decisions are made with political considerations, we often get poor results.  (I’m writing from Dallas where the Dallas Independent School District management decisions have often been infused with political considerations because of the direct meddling of the DISD Board).

Approval Before Execution

I do believe there are times when certain decisions are so important that a Board would want to review them before they are executed.  These decisions might center around risking significant assets of the district, for instance, purchasing land.  Because the amount of money is so great, the Board may want to ensure that the decision is prudent.  The wrong way to do this would be for the Board to examine a proposal and then give it an up or down approval.  A better way to do this would be to create a policy that sets standards for how decisions should be made.  For instance, if there was a policy about purchasing new buildings, it might say:

No building may be purchased until the Superintendent has demonstrated the following to the Board:

  • There is clear plan to pay for this building as evaluated by an independent financial professional with expertise in the financing of school buildings.
  • There is a clear educational need for the building that furthers the ends (educational results) directed by the Board.
  • The building has been inspected by an independent expert who has determined that it can serve the functions for which it is intended.

While it goes against Policy Governance orthodoxy to demand a monitoring report before an action, by using this policy, the Board is not second-guessing the purchase of the building; nor are they approving whether one building is preferred over another.  The Board is ensuring that the Superintendent is making a reasonable and prudent educational/business decision based upon his professional judgment and the judgment of other independent professionals.  This is a way to address the concerns brought up my Karen Gray while maintaining the benefits of a Policy Governance approach.

Barry Diamond is a governance consultant in Dallas, TX.

He can be reached at Barry@TheSandbarGroup.com or (972) 392-1200

May 6, 2010

Executive Director/CEO Gives Away His Authority

Posted in governance, non-profit, nonprofit, policy governance tagged , , , , , , , , , , at 2:04 pm by The Sandbar Group

In the “traditional” board model where the board serves as an extension of the management, there is a dance between the CEO and the board.  The CEO provides information to the board which then deliberates over that information and approves a next step.  But what if the CEO already has the authority to make the decision?

One CEO reported to the board about the progress of several projects under his direction.  He showed the board time lines, budgets, copies of potential contracts, etc.  He was being dutiful in that he was trying to keep the board well-informed.  However, much of the information did not require any board action, it was just informational.  For instance, the contract that he showed to the board was with a well-known and respected company and it seemed to be reasonably drawn.

However, one of the board members with a self-perception of expertise in the area of the contract had some questions about the agreement. There were some aspects of the contract that he would do differently.  The board member raised his questions and several other board members expressed concerned that they may never have known about the problems with the contract had this first board member not raised the issue.  Suddenly, the board member who had claimed expertise and questioned the contract had volunteered to review the contract with the company.  The board quickly agreed, feeling that their newly realized concerns would be addressed.  And just as quickly, the CEO’s ability to contract with other organizations disappeared under the board’s micromanagement.

What would have been a better way to handle the situation?

The board should think ahead about the types of activities in which the organization engages.  This board knows that they will be engaging contractors, therefore, it should research what restrictions it should place on its CEO when engaging in a contract.  For instance, if it is concerned that someone with expertise should review an agreement before entering in a contract, then the board should demand as much in a policy.

The policy might read:

The CEO shall not enter into any contract of over$1,000 without having the contract reviewed by someone without conflicts of interest and with expertise in the appropriate field of the contract.

In the above situation, the board member questioning the contract may have expertise in the particular field, but then again, he may not.  It is difficult for the board to assess if his expertise is applicable, but it is extremely difficult for the CEO to reject using that particular board member’s input, even if the board member’s expertise is clearly insufficient.  After a contract has been signed, the CEO should be required to submit a report to the board demonstrating that the contract was, in fact, reviewed by a person, of the CEO’s choice, who had appropriate expertise.

CEOs should not treat their board as an advisory committee since there is no reason to believe that the board contains the necessary knowledge.  The board should proactively think about the types of situations in which the organization engages and think about the types of problems that might occur.  By expressing these concerns as Executive Limitations policies and demanding that the CEO follow those limitations, the board is able to protect the organization and preserve the CEO’s authority to make decisions.

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