How the Board Learns Strategy through Careful Ends Monitoring

 In the Policy Governance^® world a well done operational definition (previously referred to as a reasonable interpretation) of the intended End as part of the monitoring process should reveal to the board the essential strategy of the organization directed at creating the intended Ends. And, it should reveal the critical mileposts against which the board can assess the progress toward Ends.

There are times when achieving the Ends must take place through an uncertain and ambiguous world. It is not a linear sequence of predictable actions and results (it rarely is). This means that little steps are best experimentally taken toward the Ends. It also means that the organization must develop the competence at doing that — creating a theory of how things are and then creating a hypothesis on how to move forward, executing against that hypothesis and then analyzing the results. Progress? Theory confirmed? To what extent? —> Install the process that brought the improvement and repeat. Theory —> hypothesis for improvement —> try it out and measure results. Better results? Hang on to them and repeat. This is the essence of getting better and better, eventually excellent. Don’t be afraid to experiment —make small bets as the book by that title suggests.

This is the essence of the PDCA cycle that Deming taught. To pull this off, the organization must create a culture that permits, enables and strengthens its capacity to improve. A culture of curiosity, collaboration, not blaming, but a systems-focus, willingness to listen to negative information from employees and customers, a learning culture, etc.

How does the Board know all this is going on and what progress is being made? It certainly won’t wait for the Ends to be created. Reporting can be part of the incidental information report and/or part of an Ends monitoring report reporting on progress along the roadmap laid out in the operational definition. Further, I believe that these reports also be presented verbally to the board as well as in writing. The give and take, (not meddling nor “advice”), will clarify for the board the effects of the strategy as being executed. The board can assess the operational definition and the progress being made for completeness and desired effect.

An Expensive Aspect of Risk Often Overlooked by Organizations

 Even organizations that are fairly sophisticated concerning their approach to risk, fail to consider an area that might well be costing them much more than they dream — the health of their employees. Companies are aware of employee injuries and work-related issues and the costs attendant to being lax about worker safety in all its aspects. That is not what I am talking about. If the organization were to just look a bit beyond work-related injuries and think about the cost to them, both directly, including lost productivity and health care costs, (if self-insured) or indirectly (if being experience-rated by a carrier or plan).

The typical management isn’t aware of what can be saved by proactive attention to the preventive health of employees. The employer of all people, other than the employee himself, (and then maybe more), has a reason to keep an employee healthy, not only the care costs, but the lost productivity and/or replacement cost for early loss of an employee.

There are two branches of strategy an employer can pay attention to - primary prevention (prevention before there is any illness), including being sure the employee is up to date on all recommended immunizations, insisting on wearing a seat-belt, creating knowledge (free assessments), assurance of early and proper prenatal care, incentives and enablers for weight control, exercise, and for a healthy diet.

I was consulting to a large international ministry several years ago on this subject and suggested several preventive initiatives the organization could take, including the policy of insisting on the wearing of seat belts. It turned out that it had a significant number of boomers who did not wear their seat belts. These folks were located all over the world in places like Rome! And Paris! The CFO (who was over medical care) asked me in all naivety why they would want to have such policies and spend that money. He was oblivious to the risks the organization was exposed to. AND one year later one of their missionaries who was not wearing his seat-belt had a crash that resulted in injuries requiring expensive medical care and years of therapy and low productivity. All would have been prevented if he had been belted in. (The layman often under-estimates the protection provided by wearing a seat-belt.)

Secondly, early secondary prevention is also valuable. Catch a developing problem early and correct it — early indications of adult diabetes, hypertension, bone loss, and other circulatory threats developing. When a knowledgeable consultant runs the numbers for an organization, usually hundreds of thousands of lost dollars are preventable. Employers often expect the provider to think in terms of prevention. Don’t count on it. Providers are not trained in prevention and do it frequently because someone makes them (unless they are very progressive and experienced such as Kaiser). Historically, providers were paid for piece-work and still are in many cases. It was sick patients that made money! Not healthy patients; - talk about perverse incentives working against employee and employer interests! It is a mental habit hard to break. Furthermore, insurance companies don't take a long view since they do not know how long those employees will be on their rolls. Employers create the incentive for insurers to think short term by re-bidding coverage regularly. Preventive benefits are long term and are likely NOT to be to the current insurer's benefit!
Consequently, employers must themselves become proactive with savvy intentionality across the spectrum of their employees' health. They will mutually benefit, often sooner than they think.

Board Governance is the Nexus of Governance and Good Delegation

Good board governance must both achieve the fundamental purpose of governance and do it using principles of good delegation while doing it as a group. Not easy.

Wikipedia defines governance as (with little editing) the (authoritative) oversight means of  assuring, (commonly on behalf of others), that an organization produces a worthwhile pattern of good results while avoiding an undesirable pattern of bad circumstances. ...Not bad.

Good delegation includes such characteristics as 1.) providing sufficient freedom (assuming the knowledge, competence, & equipping) of the delegatee to accomplish the expected result, 2.) clarity of the delegated expectations, 3.) the genuine transfer of accountability (accountable for the delegated results/ends), the above resulting in empowerment and ownership of what is delegated, with 1.) coherence of the delegation process, the expectations, and accompanying authority (non-contradiction of authority, accountability, and instructions), 2.) clarity of the line between delegator and delegatee - the role boundaries of each, and 3.) the ability to achieve assurance of performance (results).

 Thus, board governance is the nexus of these — meeting the purpose of governance (direction and protection, as Jim Brown would say, with assurance) and conforming to good delegation at the same time.

Therefore, board governance is the assignment, with one voice, on behalf of a vested constituency, coherent expectations of good for intended recipients (results or ends), while stipulating the avoidance of undesired actions or consequences, and checking, and, using delegation principles of genuine empowerment with genuine transfer of accountability, clarity of expectations and roles, and an assurance mechanism.

Bad board governance violates one or more of these principles.

Tired Chairman Syndrome - Resulting in Lack of Initiative and Leadership

I trained a multimillion dollar ministry board in Texas in Policy Governance a few years ago, and the board and CEO had responded well. I had taught, explained, and facilitated the board’s first year of planning its annual agenda - The board decided what it wanted to accomplish with mileposts for each board meeting and the board’s final or main objective for the year. After the first meeting was to have happened I called both the CEO and the Chair and asked what had been accomplished. It turned out that the chair had done nothing to accomplish what was needed for that board’s milepost other than preside over routine reports. Exactly the same thing happened for the next, and the next board meetings—all the way to the end of the year! About half way through the year the CEO expressed his disappointment and exasperation to me with this very bright chair who just couldn’t take initiative and execute.

When the Chair left that initial planning board meeting knowing his responsibilities, he seemed knowledgeable and up for it. But when he got home and occupied in his profession he never quite got around to carrying out his part of the bargain. The CEO and staff stood ready to help him but no leadership, no instructions, no requests, no guidance; nothing. He, too, had come up through years of passive governance and waiting for someone else to lead, even craft the agenda, (the CEO), and his inertia and procrastination were revealed when he had to truly lead his board. Perhaps to be kind he needed serious time and project management training.

Lazy Board Syndrome: A Governing Board is a Special Form of a Team

A client board's chairman has become a pretty good friend over the last 2 years or so. He was complaining he was having difficulty getting board members to carry out their agreed tasks between board meetings and be prepared to report or provide the product of the task to the board at the next board meeting. (This is a Policy Governance board.) I told him it might be due to lazy board syndrome. Boards get used to passive governance - years of just showing up and reacting to reports, giving advice and/or critiquing. Then go home. So when the board switches to Policy Governance, they start to have governing responsibilities, and that accountability is a new experience. Using Patrick Lencioni's model of the high performance team (see his book, The Five Dysfunctions of a Team)  - the board must learn to hold itself accountable in a gracious but firm way.

What is the Effect of the CEO also being Board Chairperson?

There is an active discussion around corporate governance right now on a LinkedIn group, debating the issue of insiders (especially the CEO) being a voting member and chairman of his or her board. The consensus of the participant professionals seems to be that a separate chair is “better.” (I agree). But, the problem is that research, which uses stockholder value as the outcome indicator shows very little, if any, effect between an independent board and one where the CEO is also the chairperson.

Here is the dilemma as I see it, especially viewed around the issue of perhaps one of the most dangerous risks for an organization—denial, the inability to face the truth when threatened. The danger of denial is enhanced when we are in the trees and cannot see the forest AND, we also grew the trees, we are also vested in the trees (activating the “sunk cost” bias in our thinking). This is the case with insiders on a board. They are among the trees and know them and like them. It is well accepted that both being in the trees and invested in them—having a stake in the trees such as “it is your project” (think Bay of Pigs, or Kodak)—militates against a dispassionate view of the facts when they are in opposition or threatening.

Distance helps perspective, one argument for an independent board. However, with governing boards, the dilemma with distance (i.e., independence), is lack of sufficient information to compete with insiders. It is the insiders (including the CEO) who have by far the most information, have the time and resources, spent time on it, and think they have considered every angle to rationalize and support their conclusions. The poor outsiders haven’t a chance with that asymmetry of information!

Distance works when there is parity of information all around. The big picture combined with no bias helps greatly in avoiding denial. However, in the current constructs we use for board governance, the two seem mutually exclusive —more of one results in less of the other, a perverse and unfortunate “system” indeed, to the detriment of the ownership.

HBR Article on the Three Rules for Making a Company Great & the Application to NPs

The April issue of the Harvard Business Review had an article on Three Rules for Making a Company Truly Great, looking at fundamental, value-based principles behind the strategies of corporations that have accomplished sustained success exceeding others (on an ROA comparison basis) over a long period of time through thick and thin times. The three rules are 1.) Better before cheaper, 2.) Revenue before cost, and 3.) There are no other rules.

In other words, the core focus and, therefore, competency of these organizations is that they first got good at building better products and successfully retaining that position. They worried about pricing second. If, as an organization, you understand and apply the improvement sciences, you will become very good a creating product (material or human service) with quality at, or below, competitors' costs, because part of the quality skills is elimination of waste (streamlining) while progressively getting better and better.

The second rule or fundamental principle is in the domain of financial strategy, paying attention first to your financial strategy and getting good at maintaining revenue over cost (creating and sustaining margin). Again, if you think about it, the core competency is understanding and applying the ability to get better and better, i.e., more savvy, but this time in the realm of  understanding what creates your margin, especially without jeopardizing sufficient revenue to assure the margin your strategy requires.

In both rules you must become a learning organization and translate that learning into getting better and better—one, in creating product or service quality, and two, in managing your financial strategy wisely with the primary focus on revenue, not cost-cutting. (A cost-cutting mentality leads to parsimony and is invariably expensive and potentially fatal.)

I believe these rules can be applied to nonprofits and ministries; except you aren’t selling product, your revenue flows from those who love your mission and your ability to achieve it. See the connection? Get good at creating the Ends, and revenue is easier. But never lose sight of how your revenue is generated. Quality (excellence) and revenue are coupled. Understand that.