What is the purpose of governance?

"Governance is the use of authority to set an organisation's purposes, and to ensure it serves those purposes effectively and efficiently.“ (Chait, Ryan and Taylor)

“The fundamental reason for having a board is the need of those who morally or legally ‘own’ an organisation to have a present, informed, owner-dedicated, authoritative representative body to ensure the organisation produces and behaves as the owners wish.” (Carver)

Asks directors to do a big job in a short time Carries huge responsibilities and liabilities

yet is part time Requires partnerships yet there is little time

to build them Little professional development is offered Requires ‘outsiders’ to perform like

‘insiders’ Is an emerging and developing discipline Is replete with paradoxes

Good governance is a challenge ...

The role of the board

To control, direct and provide leadership to the organisation on behalf of an ‘ownership’ to whom the board owes its primary accountability.

Creating excellence in the boardroom

Not-for-profit organisation stakeholders

Legal owners – those who can approve constitutional matters, can put people on and off the board and can close the legal entity

Moral owners – those people for whom the entity exists but who have none of the powers of the ‘legal’ owners

Most others who interact with the entity are likely to have a business relationship – those people or groups with a legal or moral contract with the entity, with who its ‘does business’

The job of the board is to ensure that the organisation is well managed without the

board itself doing the managing.

Creating excellence in the boardroom

Legal Structures

Company Limited by Guarantee

A public company under the Corporations Act, Federal legislation, suitable to larger nfp orgs, provides tax free status, seen as a higher status incorporation than an association, directors’ duties specified, purpose driven

Incorporated Association

State and Territory legislation, purpose driven suitable for smaller nfp orgs, directors’ duties less well defined but common law requires the same standard as for company limited by guarantee

Trusts, specific legislation, e.g. church agency, co-operatives, aboriginal corporation

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NFP orgs are purpose/objects driven

Objects as defined in the constitution

Organisation is obliged to pursue its objects

In theory a member can bring an action against the board if the organisation moves away from its purpose

In practice it is very difficult for a member to seek a remedy for deviation from the stated purpose

The Act does not specify a specific duty incumbent upon directors to ensure that the company pursues its objects

Creating excellence in the boardroom

Constitution Is a contract between the members and the

organisation

Protects the members against undue exercise of power by the board – provides the basis for organisational democracy

Defines the organisation’s purpose and powers, eligibility for and categories of membership, annual meetings, composition and powers of the board, management of funds, appointment of auditor and winding up procedures.

Creating excellence in the boardroom

Constitution

Provides the basis for member control

Should not address day-to-day operational matters

Most State Acts provide Model Rules that form the basis for a constitution or can be adopted

Care should be taken to ensure that the constitution does not contain contradictory statements – when there is contradiction, the specific always overrules the general.

Creating excellence in the boardroom

Directors’ Legal Duties

To govern the organisation in good faith and in the best interests of the organisation as a whole

To exercise diligence and care

Not to make personal gain from improper use of directorship position

Not to make improper use of information to the detriment of the organisation

Not to trade while insolvent

Organisation Leadership

Effective leadership stems from a desire first to serve

Institutions need 2 types of leader: Those inside – day to day -

management Those who stand outside – but are

intimately concerned – oversee the active leaders – ‘trustees’

Oversight

Foresight

Insight

The best boards exercise effective remote control

The board’s policies:

Codify desired behaviours and

performance standards

define an accountability framework

(delegation to the chief executive)

create a framework for performance

monitoring and review

allow the board to ‘speak with one voice’

Oversee financial management Establish and review financial delegation policies Approve the budget Set financial performance criteria Receive and review regular financial reports Manage the relationship with the external auditor Sign the annual financial report

Financial Governance

Plan to have effective and efficient board meetings Review the structure and content of the

‘standard’ board meeting

Emphasise the future not the past

Address the most important strategic matters at the start of the meeting not at the end.

Consider the frequency and duration of meetings – does the board give itself enough time to have the discussions needed to provide effective leadership

When there are no paid staff

Be prepared to wear two hats, board member and operational volunteer

Split the board meeting in two parts – first adopt a governance focus and deal with governance matters, second adopt an operational focus

Allocate tasks, responsibilities and reporting requirements

Write the minutes in two parts to reflect the different focus

Enough control so that the board can exercise its duty

of care

Enough freedom so that the CEO can achieve the best

possible outcomes

Board support to the CEO

Expect the CEO to succeed and treat him or her accordingly

Be prepared to help him or her think through the hard issues

Make the board’s expectations clear and provide timely feedback

Understand the pressures faced and ensure that he or she is coping

Ensure that he or she is properly remunerated. Base this on benchmarks not your emotions.

CE Performance Management

Performance appraisal is continuous Is based on agreed objective (measurable)

criteria that are known ahead of time Process is fair and ethical (walk in the CE’s

shoes and ask, “If it were me, how would I feel?”)

Involves the full board Includes self appraisal Has a developmental/supportive focus Produces no unpleasant surprises for either

party Is carried out separately from the remuneration

decisions/processes

The strategic direction includes: The mission or purpose statement

A vision for the future

Corporate values

Key result areas – KRAs, 4 - 6

Organisation-wide key performance indicators KPIs

Together these should tell a story about the organisation and its desired future

Classes of information for governance:

decision information

– to determine the future

performance information

– to judge (and learn from) the past

incidental information

– optional as far as the board’s job is concerned

Information for governanceInformation for governance

© 2002 BoardWorks International