WHAT IS IT?

A board or committee of an organisation with decision-making powers is formed to govern.  For such an organisation, governance defines the relationships amongst the directors or committee members, the Board or Committee as a whole, senior management, stakeholders (including consumers and employees), and others interested in the affairs of the organisation, including regulators and auditors.

Governance encompasses the processes by which an organisation is directed, controlled and held to account.  That is, the processes whereby decisions important to the future of the organisation are taken, communicated, monitored and assessed.  It refers to the authority, accountability, stewardship, leadership, direction and control exercised in the organisation.

(Adapted from the explanation by the Victorian Public Sector Commisson at www.ssa.vic.gov.au/governance/nature-of-entity-a-governance-implications/governance-implications.html).

VALUE PROPOSITION

The principal features that drive the value added by professional governance services are the ASSURANCE, INSIGHT AND OBJECTIVITY provided to the governing body which is responsible for managing the organisation.

These services are essential to you because it is not feasible for the governing body itself to meet all of the compliance and other requirements associated with governance or to perform the detailed analysis and interpretation required to manage the organisation successfully on a daily basis.  This is work for the management team and a qualified specialist(s) with strong experience and knowledge in the field.  The need for such skills may not be full-time in smaller organisations.

Irrespective of whether or not the role is full-time, part-time, performed by employees or outsourced, the value added is substantial – in at least three areas:

• Assurance (for the governing board and senior management) is derived from effective governance, risk management and control processes.

THE GOVERNANCE PROCESS

The governance process relies on a series of plans, policies and procedures put in place by the governing board and against which the board seeks to measure the organisation’s performance with respect to:

• Implementing its strategic and business plans;
• Implementing the organisation structure required to deliver the governing board’s strategic objectives and directions;
• Implementing the policies and procedures approved by the governing board;
• Implementing the safety, information and quality assurance systems required for the organisation’s activities to be efficient and effective;
• Applying the delegated authorities approved by the governing board;
• Responding appropriately to the governing board’s defined appetite for risk and related risk management activities;
• Meeting suitably frequently with the aid of sufficient papers to provide the information required and to support the decisions made;
• Safeguarding the organisation’s assets and managing its liabilities;
• Requesting and considering a wide range of timely reports on management’s and the organisation’s performance and financial position -and taking remedial action if and when required;
• Overviewing its competitive position and growth and development options;
• Monitoring consumers’, employees’ and stakeholders’ satisfaction;
• Behaving ethically, legally and in compliance with all of the relevant requirements; and
• Representing the organisation with third parties, including governments, funding agencies, donors, industry groups. regulators and other supporters.

ISSUES IN GOVERNANCE

Strategic vs Operational Focus

It is absolutely crucial that ‘management is left alone to manage.’  That is, that the governing board confines its attention to strategic matters plus reports on progress over time.  There are some operational compliance matters that will need the board’s attention but the main focus must be strategic.  This is sometimes easier to say than to achieve.  A short review of recent agendas, minutes, committee structures and operations, etc. can re-focus the board members on the most efficient and effective role they can play if the general view is that they have strayed from the best way.

Role of the Chairman of a Board

The Chairman of a Board is literally its leader and the figurehead for the whole organisation – supported by the Chief Executive Officer as the leader of the organisation on a day-to-day basis.

The Chairman of a Board is also a member of the board and so the observations below for that role also apply here.  In addition, the Chairman is the organisation’s most senior public face with respect to marketing, fund-raising, issues management, press releases and interviews.  Internally, it is expected that a Chairman will cause board meetings to operate efficiently and effectively within reasonable time constraints, chair the annual meeting where one is held, coach and support each board member to maximise their participation and contribution to the work of the board and manage a frequent, effective, unrestricted and professional interface with the CEO.

In my view, assessing the effectiveness of a board’s performance is very useful and delivers improvements directly.  But I think that a Chairman evaluating an individual board member’s performance should be handled very carefully, especially if that board member is an unpaid volunteer.  Sometimes that process must occur to resolve a serious or divisive issue but most board members, most of the time are doing their best to add value.  I think, rather than assessing an individual’s performance, the Chairman should work with each board member individually to set common objectives and agree on specific aspects of the individual’s role that match their strengths and capabilities.  When that process is complete, the results can then be shared with the whole board.

Another important role of the Chairman is to conduct the CEO’s performance appraisal, preferably with the assistance of two other board members who, together, may form a Remuneration Committee of the Board.

Role of a Board Member

In broad terms, the role of a board is similar to that of a trustee, with responsibility for guiding and advancing the interests of the organisation, to the exclusion of personal or other business interests of any kind, towards meeting its objectives successfully and developing over time.  In practice, that role includes attending meetings, make suggestions for improvement, asking questions to ensure their understanding of the information presented, representing the organisation at third party gatherings including making speeches and presentations (often reserved for the Chairman) and serving on one or more board sub-committees.  Also they appear to be required by law to apply any technical expertise they have to relevant issues.  On the other hand, absence of formal training or experience in an area such as finance or the law is no excuse for relying entirely on others – every board member must understand and appreciate all issues at least at the level of a ‘reasonable’ person.

Conflicts of interest must be declared as soon as they are foreseen and not just when they actually arise.  The board member is then obliged to respond to the conflict or potential conflict in whatever way the board (or the Chairman) requires.

Options for an Organisation Structure

The best structure for your organisation is not just to create a hierarchy to get things done – although  that’s obviously important.  We need to start at an earlier point and link the type of organisation and business model to the strategic plan and what the organisation’s board requires it to deliver over time.

There are several options for structures based on the type of business model that is established, taking into account:

• Functionally-based, i.e. sales, production, distribution, finance, etc.
• Centralised or decentralised operations;
• Geographically-based where there is a spread of locations – each location has a range of required staff and management personnel;
• Service-based structure around customers’ or clients’ in particular products or services, e.g. acute, aged and primary care, mental health, etc;

These options may then be modified in the light of particular business needs, including:

• Vertically or horizontally integrated production or both;
• A specialised, narrow product or service range or a widely diversified range;
• Ability and need to duplicate the business model in a large number of locations;
• Relevance, if any, of franchising which would change the business model and organisation structure significantly;
• Quality management over a wide range of locations, products, processes, etc;
• Opportunities and issues created by modern electronic communications systems; and
• The relative importance of proximity to customers and/or immediate responses to customer or consumer complaints, etc.

When all of these factors (and probably some others as well) are taken into account, you may have a very different looking and more effective structure to recommend to your board.

Board Members’ Access to Staff and Information

A board member may approach an executive or other staff member directly with an observation(s), accusation(s) or a request for information.  The chief executive officer (‘CEO’) should be notified of the particulars of these communications immediately – or, where necessary, the Chairman of the Board.  This may sound bureaucratic and disrespectful to the board member but it is best to operate that way so that no-one is ‘left out of the communication loop’ and staff are not diverted from the priorities the CEO has set for them.

Occasionally a board member may assert that they require particular detailed information about an operational issue.  Leaving aside conflicts of interest and malfeasance, it is usually appropriate to provide that information but with heavy emphasis on the strategic aspects of the request and confirmation that such detail cannot and may not be provided in the future.  All such requests must be required to go to CEO in the first instance, not directly to any other staff member(s).

Governance within the Organisation

In addition to the organisational governance that is the main subject of this page, there is a need for governance at other points within the organisation’s activities.  These points include, for example, governance of a project the organisation is undertaking with respect to the personnel or committee responsible for monitoring its resourcing, progress, spending, timeliness, etc.

Board Members’ Education and Training

Although all or a  majority of board members may be from outside the organisation and be separately qualified and experienced, the board should organise, on a systematic and regular basis, to receive training at least on the latest governance and industry-related issues and trends.  Where applicable, individuals may also benefit from attending relevant training conducted by the Australian Institute of Company Directors and/or the Australian Institute of Management or other provider.

Quality Assurance – Continuous Improvement and Accreditation

These processes provide valuable assurance to the governing board about how safely and well the organisation’s services are being produced and delivered and so form a key element of its governance:

• Quality assurance and continuous improvement systems and procedures;
• The QA and, where applicable, accreditation processes play an important role in managing particular risks or groups of risks, especially in the production and service delivery spaces.

RESOURCES AND TOOLS

• Form for a person to consent in writing to act as a board member;
• Position descriptions for the role of a Board Chairman and a Board Member;
• Templates for board committees’ terms of reference;
• Standardised templates and forms for strategic and business planning and reporting;
• Organisation chart, delegations of authority and reporting lines approved by the governing board;
• Templates for efficient and effective board agendas, meeting procedures and minutes;
• International standards and other supporting materials issued by global and industry standards-setters;
• Board and committee performance assessment questionnaires;
• Control assessement checklists or questionnaires;
• Templates for contracts, performance measures and performance evaluations for a chief executive officer; and
• Form for declaring pecuniary interests and actual or potential conflicts of interests.

FREQUENTLY ASKED QUESTIONS

1.     What is the right amount to pay the chief executive officer?

The best remuneration arrangements at any level are those that are designed to meet that organisation’s and that employee’s particular needs.  Often this is a delicate balance because these objectives can conflict.  The answer involves meeting at least the following criteria:

• The right person for the job is recruited and retained for a reasonable period of service;
• The total remuneration reflects evidence-based, open market conditions adjusted for any specifics that need to be met in the particular case.  (Human resources consultants can assist with this kind of comparative data.);
• The components of the total remuneration are structured to meet the individual’s particular needs, depending on their circumstances in relation to, for example, property debts, school fees, overseas travel, etc; and
• The remuneration must be designed to deliver maximum tax advantage and be on the understanding that, if tax laws change so as to disadvantage the employee, the components can be renegotiated.

2.     Should board members be paid?

There are a few matters to be considered here:

• The amount of time to be devoted to board and committee meetings, preparation and other time involved gives one indicative source of the effort required;
• The extent to which the role will or may provide the board member with business contacts and other relationships of non-monetary value to them;
• The extent to which non-monetary benefits are provided – such as free entry to the organisation’s or other industry events, complimentary dinners or other outings provided by the organisation;
• The extent to which the organisation’s objectives are community-based, charitable or philanthropic and may be construed to mean that a board member’s time and expertise is to be donated;
• The extent to which the board member is providing formal professional advice directly to the organisation that, in any other circumstances, would attract a professional fee; and
• The preferences of the board member who may, for example, choose to donate any fee paid to them back to help meet their organisation’s charitable purposes.

In general, my view is that board members should be paid, even if only to demonstrate that the organisation recognises that their contribution has a real, tangible value.  How the board member chooses to dispose of the payment is a matter for them.  The gross amount would usually be assessable income and be subject to Pay-As-You-Go withholding paid to the Australian Taxation Office.  A donation to the organisation would usually be tax deductible if the organisation is a Deductible Gift Recipient.

3.   Is  s director or board member liable personally for any negligence, illegal acts or other malfeasance of the organisation they serve?

This is a very complex question and cannot really be answered without a particular case in mind and with the benefit of comprehensive legal advice.  But we can draw some general inferences here:

• The most comprehensive law dealing with duties of directors is the Corporations Act 2001 (Cth), which, at least to some extent, appears to codify the Common Law.   Incorporated entities other than companies can be expected to be bound by similar requirements, including care, diligence, honesty, restricted borrowing from the entity, etc.
• An incorporated body can be sued in its own right for damages or other remedies.  A director or board member may be joined in that action if they are accused of complicity or active involvment in the act(s) complained of.  In these cases, personal damages, financial penalties and/or custody would usually only apply where an illegal act was proved or if negligence and breach of the duty of care was established.
• A member of an unincorporated body or club, committee, etc. remains personally liable for their share of the debts of the body to the extent that the body is insolvent.
• Directors and officers’ insurance has an important role to play here to protect the governing board members from claims for actions in which they played no part and for which they were responsible only indirectly.

If you are dealing with any of these issues, it is essential to seek sound legal advice.

4.   Where can I get expert help with my organisation’s Governance?

Simply .  .  .

Call me on:  +61 417 373 589

Email:  peter@strategicassurance.com.au

Visit (by appointment only):  Level 7, 470 Collins Street MELBOURNE VIC 3000 | ABN 62 064 547 275