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.

Board Member Term Limits: Good or Bad?

I responded few days ago to a query on the BoardSource LinkedIn discussion group concerning what people thought the appropriate length of terms and term limits should be. This is what I said:

“There is a principle regarding one’s vision, when on a board, (and commitment to it) that a person's vision usually does not extend beyond their expected likelihood of being around. Six years create a very short memory and learning span. The usual reasons for advocating short limits don't hold water, including the "new blood" argument. We say, "Good ones (that we just lost due a limit) can come back on the board after the year off." but they don't. They are snatched up by another board or lose their interest. (I've served on 30 or more boards). If you are deeply attached to the idea of term limits, do what an excellent hospital board that I served on did - make it 12 or 15 years. That permits grooming of board leadership through committee service, committee chairmanship, officership, etc. There is still plenty of coming and going, by the way, simply due to life's vicissitudes. Getting new blood is a non-issue.

Creating a two term limit automatically creates nothing but freshman and lame ducks, be it city councils, county councils, legislatures, or boards.”

The “expert” advisors responding to this LinkedIn group discussion seemed, in the main, to be married to the idea of a limit of 2 terms of three or four years. My view is that term limits (not terms), especially single digits, more likely damage board performance for a number of reasons, and my comments addressed a couple of those. I wanted the readers to think more critically about their instinctive mantra of term limits. A couple did, but most continued to circle thoughtlessly around a two term limit in spite of its foolishness. It is such a popular idea that it is hard to think otherwise, even when the illogic and imprudence of it is staring you in the face.

Now if you are not interested in optimizing board decision-making, but have another trumping priority such as affording a lot of association members a chance to serve on the board, then admit it, and worry less about board performance. This latter priority will drive the organization toward being a staff driven board and organization. We have all been there. 

Another common reason I hear for term limits is to “get the dead wood off the board.” Come again? If you’ve got dead wood, have the courage and integrity to deal with it! And a bylaw provision regarding lack of attendance resulting in automatic removal doesn’t help.

Monitoring a Newly Hired Chief Executive & in Growing Low Trust Situations

An important principle of board governance, Policy Governance included, is that when trust in the CEO's performance is low, monitoring in some form is ramped up. The Policy Governance board’s values, and hence its policies, don’t change, but frequency and immediacy of monitoring increases. This behavior occurs typically under two conditions: a newly hired chief executive (whose competence is not yet demonstrated), and secondly, where there is a growing concern about compliance concerning a specific policy.

The former situation might result in monitoring those policies indicative of the health of organizational culture and of financial performance. They tend to be more directly and immediately impacted by the executive’s behavior in the first case and his grasp of financial leadership in the second, competencies of which the board needs early reassurance.

If the board is not a Policy Governance board, a board style typically reflective of low trust will result—questioning and probing increases and becomes more intense (often coupled with advice). This dynamic does not necessarily reveal the board members’ underlying values (which may vary between them, but never expressed) nor why the particular questions are being asked, reasons which the CEO must infer.

A board’s careful, more frequent monitoring of a new CEO is appropriate, but as demonstration of competence and reliability grows, monitoring frequency can be backed off to an annual frequency (except for financial management indicators).

How Does a Governing Board Pick Up on Lack of Operational Discipline in Its Organization?

The risk management literature includes as a significant risk, (leading to many other risks), the lack of organizational operational discipline. Operational discipline is the ability of management to see to it that organizational processes are maintained such that deadlines and milestones are met with the appropriate quality, payables are paid, financials are recorded, records kept, projects are on time, calls and inquiries responded to, etc.

The inability to do this spells not only accumulating problems, but slipping even further behind and, eventually, the failure to do something, or many things, that are critical, e.g., filing a key report, submitting a proposal, or paying a tax on time. If the lack of discipline is due to fundamental administrative ineptness in the leader, there will eventually be a meltdown. The governing board must detect this early and change leadership (quickly). This failure of operational discipline, one is tempted to think, is unusual, but when one realizes that about 50% of NP chief executives are barely competent, or frankly incompetent, (unable to successfully run the organization for a sustained period), it should not seem surprising. Consequently, a board must be vigilant.

How does a board pick up on this and diagnose it? First, a board must have written standards of performance, i.e., policies, of key operational indicators, boundary requirements, such as timely receipt of monitoring and financial reports, the paying of obligations, and filing of required reports. If it is a Policy Governance board, these will be in the policies, and if they are not, get them in! Secondly, it must monitor for assurance of compliance.

However, as things slip and don’t get done, management will always have reasons for not getting things done on time—excuses that sound like reasons, blaming being a common one. In a NP, ministry, or a church, the board always wants to be “nice,” even kind; so the board is inclined to cut management slack—and it is usually too much slack. The board will procrastinate doing anything perceived as negative. In fact, management will get good at keeping the board at arms length and, as things get worse, eventually resorting to hiding the situation—not fully divulging the true state of affairs. As the board attempts to press its questions a bit more, it will be resisted and diverted. How long will the board acquiesce? It should not at all! This behavior is a very dangerous sign.

The board must promptly discover the true state of things, and the root cause. Typically, in small to medium sized organization it will be the executive. The board must investigate, (preferably via an independent assessor), and act promptly. Boards often freeze at this point, procrastinating even more. But, the situation is fundamental and is not temporary, nor self-rectifying.

What is the Purpose of Board Governance? A Recurring Question

 I’ve noticed at academic gatherings, seminars, workshops, conferences on board governance, and articles the same question, in one form or another, is persistently asked, usually with the sonorous thoughtfulness of the professorial tone, “Of course, what is the purpose of board governance?” As though that is the real show stopper. It often is, because no one agrees! Obviously, this is an important question, because without an answer, one cannot do research on the effectiveness of boards regarding their governance! A large percentage of governance research asks, in one form another, the question, “Is the board happy.” Does it feel it is being a success? Or, does the board meet my particular criteria (that I invented)? But this is close to the blind leading the blind. In fact, in many articles governance is never defined. Governance becomes what makes the board feel good, even conviviality. Is there a consensus (or authority) on the purpose of board governance?

Most of the answers are attempts at behavioral descriptions, and the descriptions are made up of parts—behaviors—of what a board does or should do. Dr. Russell Ackoff pointed out that one will never arrive at purpose by naming parts. That is like trying to explain what a car is for by laying out the pieces and naming them—even explaining what each part does. We try the same thing with governance. The bar association manuals on nonprofit governance explain the board’s legal duties as though that description explains the purpose of the board. That is like explaining what the automobile differential should do, and then the transmission, and then the fuel injection system, and saying every car must have them, true, but those descriptions, even if exhaustive, do not give us the purpose of the car or what a car does.

Purpose is a systems concept. One must ask what the system is for. But unless one knows the large purpose of governance, how can one name the necessary components of governance? And how they must work together?

Thinking about the Dimensions of leadership

 Thinking about leadership and its multidimensionality - there are at least three dimensions to leadership, each very rich in its own attributes:

1.  The interpersonal dimension: does leadership know how to delegate, how to affirm, empower, correct, monitor, develop and encourage, etc? (The interpersonal is necessary to spark a high performance work group and…)

2.  The team dimension: Does leadership have the knowledge and competence in facilitating true optimal team dynamics for best collective thinking and decision-making (and performance) on behalf of the entity as a whole, and

3. The technical knowledge, cognitive ability, and competencies to respectably handle the technical requirements and “thinking” responsibilities of the job at the leadership level in question. (This side of the frame includes sufficient financial aptitude, strategic thinking, discernment and awareness, performance science, self-discipline, domain understanding, metrology (numbers thinking), etc.

(These are apart from, and in addition to, the vital core of values, virtues, and wisdom desired in one’s leader such as humility, integrity, caring, teachability, curiosity, goodness of spirit, tenacity, discernment, etc.)

No wonder leadership is difficult pull off and difficult to pin down. Each author/authority sees and focuses on a different part of the elephant. 

No one person possesses these to an ideal degree, but if one is missing or notably weak, it could be fatal to effective leadership.

 To paraphrase a saying from Tolstoy, “Every happy organization is happy in the same way; unhappy organizations are unhappy in their own individual ways.”

What NBA Team Performance Can Teach Executives

Around the 18^th of Feb. our local public radio station aired a study and discussion (probably an NPR program) that had looked at various NBA team performances but with an interesting twist. The researchers studied the performance of several NBA teams when selected players were on the floor versus the team’s performance when the player was not on the floor, perhaps expecting to gauge the positive impact the player in question had on scoring. What they found on occasion was a reverse effect. The team did better when certain players, players good in their own right, were not playing!

That reminded me of a comment made several years by a representative of the Chicago Bulls about their prize player, Michael Jordon, that they paid him what they did, not because he was a great basketball athlete, which he was, but because he sparked the team and caused everyone on the team to perform better as a team. That attribute is valuable. That was worth a lot, and the Bulls recognized it! Great insight. (What should we pay players to not play?)

It’s a lesson that boards and organizational leaders need to grasp. To optimize the performance of a team, the leader must pay attention to the “chemistry”—the interpersonal behaviors between staff/team members that play off each other to spark optimum decision-making and creativity. Several scholars of team dynamics have written about it, from J. Richard Hackman to Jon Katzenbach, to Meredith Belbin, but it sometimes seems that organizational leaders have failed to read or learn. It is a vital competency leaders must acquire to create great teams. 

Thought - Have you ever asked (or sensed you should) a member of your senior staff not to attend a meeting so the meeting dynamics will be better?!

Leadership and Learning, a Catch 22

There has been an emerging line of interesting research on feedback and learning, which should be of interest to those interested in self-improvement, particularly when it comes to leadership. There is an inherent Catch 22 concerning leadership development; that is, as one becomes more successful and rises in one’s leadership role, the temptation is to develop a higher opinion of oneself - i.e., become less humble. Less humility generally blinds and causes one to be less teachable—less open to learning, especially when the information is contrary to the person’s perception of himself. But, the challenge is that the people skills in leadership become evermore important; one already has demonstrated the technical competence and mastery, and now what becomes important is the ability to lead people and groups (teams) of people. Yet, there is a diminishing return on the effort (and pain) to further improve our leadership—our ability to positively influence people. At “higher altitudes” of leadership the attributes that differentiate good leadership become more finely tuned so to speak - more subtle, yet critical for effective performance as a leader, and the effort to discover them and the pain of confronting them more difficult. One must learn some painful things about oneself, but on the other hand, one is also likely to be less open to that kind of feedback.

Research by Dr. Ayelet Fishbach (University of Chicago B. School) and Dr. Stacy Finkelstein (Columbia’s School of Public Health) supports the notion that when we are novices it is positive feedback that we need to keep learning, encouragement for what we doing right, but as we become good and more expert at what we do, it is negative feedback, correction and criticism, that is most “efficient” for our continued improvement (think of being coached in a sport). Yet, as noted above, it is the negative feedback that is most difficult for a successful upper management level person to swallow.

The lesson: to become very good and achieve mastery and expertise in leadership, the attribute of humility becomes increasingly important, enabling curiosity about our effect on others and progressive learning when it is tough to hear. The book Denial studies the Managements of well known companies that refused to hear bad news (and fell), and Marshall Goldsmith’s book, What Got You Here Won’t Get You There deals with executives that have a hard time hearing the bad news about their habits, but must to grow.

Can Leaders Learn - continued

How does an executive coach, like Marshall Goldsmith detect whether an executive is redeemable? My friends who do that work for a living say you can tell within seconds. It is based on how the executive responds to the report on the feedback (e.g., a 360 round of interviews of employees and peers) from the coach regarding what his employees (and others) say about him, even when extremely painful (and it usually is). In other words, malleability reveals itself within seconds. On the other hand, denial, blaming, excusing, etc. will begin in everyone else within 24 to 48 hours. They may appear to receive the information with equanimity, but immediately their thinking is saying, “This cannot be true about me.” “There is some mistake.” “The question weren’t asked properly,” or “people are out to get me.”

This characteristic of receptive malleability or openness, or teachability (even through pain), is an attribute of humility. The old English word is meekness. Meekness as used in Greek and in the New Testament had little to do with softness or weakness and everything to do with excellence under humble control. The Greek word in classic Greek was prautes and was used to characterize a well trained war horse that would be highly responsive to his rider, the cavalry soldier, even in the terrorizing heat of battle, a horse so big and powerful that he really didn’t need to pay attention to anyone! But was responsive when it counted. This is an attribute of a superb leader as well. The leader must be teachable, must be able to listen genuinely and effectively, must care about his employees, must be able to say, I might be wrong,” must be able to commend and give credit readily and generously. This in addition to the strategic technical skills it takes to run the organization. Patrick Lencioni is right (in his book, The Advantage), however; if a leader cannot create a healthy organization in terms of a high performance interpersonal culture, all else is for naught.

Can Leaders Learn? Especially Inept Ones?

The literature on leadership competence, at least in the nonprofit world (and one military paper I’ve read), estimates that between only 25% to 50% of current leaders of ministries and nonprofits are sufficiently competent to run their organization. Flaws run from not having financial acumen to serious and debilitating interpersonal leadership characteristics. Al Lopus of Best Christian Workplaces survey services once told me that a significant percentage, upwards of 50%, of the Christian ministries they survey have significant trust issues in their cultures! Lack of trust almost always derives from the latter class—interpersonal ineptness in leadership.

The question, then, is, can these executives be helped to become effective leaders that people want to work for? The answer is, “not easily and not usually.” They can be helped more easily with technical deficiencies. There is a saying in the personnel world that people are hired for their technical competence and fired for their interpersonal incompetence. In my experience that is certainly true.

In order for a leader to change or improve his or her interpersonal habits, he must admit and own often serious behavioral flaws that make him a jerk in the eyes of others. Marshall Goldsmith in his book, What Got You Here Won’t Get You There addresses 20 of these behaviors. He also explains what it takes to effect a change, including a meaningful apology to the staff! —And then a request for help from those same people. Most of his clients are at least motivated because they are under the gun of receiving no further promotion unless the behavior is fixed. Directors of nonprofits are not under such pressure, and are usually oblivious to their damaging behavior, and usually their boards are only vaguely aware of the serious cultural deterioration going on in the organization.

The Danger of the Term “Risk Appetite” When Discussing Governance

The governance literature, including Policy Governance® writers, commonly use the term risk appetite when referring to designing board policies dealing with risk—the limitations or values-based no-nos the organization must avoid. Do we really mean we are adjusting, by policy, how risky to permit the organization to be?!

The concept of “risk appetite” comes from the investment world where it represents the willingness to trade increased risk for a higher probability of greater gain. We understand that, in the investment world, there is a putative tradeoff between risk and gain. That principle seems true in other areas of living as well. To do great things, we are told, we must step out of our comfort zone, out of the box, and take risk.

The truth is much more complicated. For example, entrepreneurs are usually thought of as risk takers. But this is not an accurate characterization. Research finds that entrepreneurs are, in fact, risk averse; they obsess about minimizing risk to accomplish their objective of creating a product and a company. They do not want greater risk so they take great pains to reduce it while proceeding. Inventors commonly see little risk (except their time and possibility of attendant cost,) but can achieve great gains. The Wright Brothers were very careful as they iterated their way to finding what design principles would permit their invention to actually fly. That care and minimization of risk paid great dividends.

More soberly however, there are risks we do not want at all, if possible. Board policies, for the most part, actually address these, and “risk appetite” does not apply. The answer is "as little as possible, even none, please." In the world of organizational risks we should try diligently to minimize risk associated with organizational efforts (operations, HR, customers, assets, environment, etc). The domain we are in often is the greatest determiner of risk—working with kids, camping, health care, carnival rides as part of a fundraiser, etc. What would a high risk appetite look like in terms of assets? Loose controls because we don’t want to bother?! What about operations? No attention to safety for the same reason? We need to think carefully about the way we use terms, their origins and implications when imported into another part of life.

On the Importance of an Organizational Financial “Conscience”

Over the years watching nonprofits, ministries, and churches financially crash, I have become convinced, that even the smallest of organizations MUST have someone competent to serve as a "financial oversight officer" or a financial leader (under the pastor, ED, or CEO) who is the financial strategist and financial conscience for the organization, (a term that came from a friend who fixes organizational messes). This person, he or she, may be the Executive Director, but if the ED has no financial sense, the organization must have a person who thinks in terms of financial strategy and risks and who can even push back against his boss, the ED, and even educate the leader. 

This person may be a volunteer or part time. He or she does not need to be the financial processor (bookkeeping and accounting—that can even be farmed out, including the generating of the reports), but there must a person reporting to the CEO (or the CEO himself) who has the savvy and the interests of the financial strategy and well-being of the organization on board in some manner. 

I do not recommend a separate board member because then the board has two people reporting to it, introducing authority and accountability confusion. 

The Importance of Momentum: a Problem for Boards

 Momentum, (and maintaining it), is infrequently mentioned in discussions concerning leaders; (however, Jim Collins discussed it in Good to Great in terms of spinning a fly-wheel and accelerating it). And, Brian Tracy in his little but powerful book, Eat That Frog, stresses not only initiative (a bias for action), but the importance of sustaining momentum once one has started on an initiative, this to sustain the discipline and energy required to complete what you have tackled. 

I wholeheartedly agree. I immediately saw especially the difficulty for boards. Repeatedly I have seen boards get concerned about the need for an action or excited about getting governance training, such as being trained in Policy Governance, developing much needed policies, or improved dynamic, only to procrastinate the action or the training. A board elects to be oriented or receive introductory training and then does nothing—no decisions, no calendar, no deadlines, no action, nothing. This kills momentum and kills the energy of the initial start. This phenomenon applies as well to tough decisions, e.g., dealing with a CEO or a financial issue—putting it off...and off, ...(perhaps "until I’m off the board" (or out of Congress)).

To solve this, I’m convinced the board needs to vote intent immediately while it has energy and a sense of urgency—and clearly express its intent. Boards are very susceptible to loss of momentum. Time kills one’s sense of urgency. Boards meet infrequently. Procrastination of a decision, any decision, diminishes the sense of urgency that originally triggered it. (This is true personally as well.) An opponent of a proposal on staff or on the board, the CEO, or the Chair, who does not want action will sometimes urge delay for just that reason—slow the staff or board down and maybe they’ll forget about it (he hopes); the sense of urgency will dissipate and the board will return to its normal reactive passivity. By the way, this procrastination is different than taking time to understand and reflect. If that is needed—do it…and maintain the momentum! Set the next step, the date due, and the person or committee accountable.

Board member turnover worsens this dynamic. The new member(s) comes with no history, no commitment and no sense of urgency.

Consequently, the role of the chair (or a team “captain” playing whip) is vital. A passive and lazy chair is death to effective governance.

(Published on website 1/14/13)

RMB

Accountability of the Board and Knowing the Organization’s Increasing Risk

 In our last blog we talked about collective accountability and the difficulty boards have recognizing it. In a past opinion, the Chancellery (corporations) Court of Delaware has found that boards have a “higher accountability” as the organization approaches a high risk zone, e.g., the “zone of insolvency,” (i.e., is getting dangerously close to insolvency). I would slightly modify the court’s choice of words only to point out that it is not it’s accountability, per se, that changes, since it has always had the accountability, (which doesn’t change), but it’s duty and responsibility of heightened attentiveness and rigor of caution to what monitoring is revealing and the board's duty for action. 

Unfortunately, nonprofit and ministry boards, especially, are notorious for ignoring danger signals, or if they recognize them, hoping they will go away or fix themselves and that the executive director will change the present course of fiscal disaster. This is especially true if the executive director is founder or long term. The board’s loyalty and desire to be “nice” rather than tough, mitigates their joint sense of accountability toward maintaining a healthy organization. Board members individually know the organization is headed toward trouble and privately feel the “board should do something” but have dissociated themselves from the urgency for action the accountability should produce. 

(Originally posted on our website 1/7/13)

RMB

The Challenge (and Danger) of Collective Accountability

 Recently a judge in New York has found a way to accomplish something that is normally difficult to impress upon board members. “Joint accountability” is a term used to apply to groups such as boards that are collectively accountable with each person carrying the same accountability as all others on the board. They all share in the same accountability. Unfortunately, this is a difficult concept to reify for a group—that of mutually shared accountability. Patrick Lencioni addresses it in his book, The Five Dysfunctions of a Team, explaining that without it, team effectiveness is mitigated. Shared accountability, in turn, says Lencioni, depends on commitment (by each member). Nevertheless, several elements found frequently in board governance diminish the sense of shared accountability, size (too big), poor attendance, hiding, failure to individually engage, e.g., to participate, or abstaining when voting, not owning board decisions once made, etc.

In the Dec. 10^th NY Times was a story of the board of a nonprofit charity that rents affordable housing to students. The board members were fined roughly $1 million each for “stunning” negligence by “breaching” the duties of loyalty and care in permitting the organization to engage in fraud via inurement—self-dealing with a corporation owned by the NP’s executive director. In spite of the fact that the ED mislead the board, the court held that they had a duty to monitor organizational transactions to assure avoidance of conflict of interest and fraudulent inurement. Trustees also had, themselves, some individual “consulting contracts” with the organization, which perhaps helped blind them to other forms of perfidy.

Accountability is real. However, when society invented the board as a means to oversee corporations about 500 years ago it introduced a group dynamic that, by its nature, often impairs a member’s individual personal sense of accountability for the quality of shared governance. This judge found one solution!

(Originally post on our website 1/2/2013)

RMB

Pastor also Deemed CEO by IRS, Consequently subject to fine

In structuring church governance it is very difficult to avoid including the CEO role (of the church as an incorporated organization) as intrinsically within that of being the pastor, since all staff are generally appointed by and report to him. This defacto dual role of the pastor brings sobering liability as illustrated by the IRS case below, upheld by the Federal District Court.

 “A federal District Court in North Carolina has affirmed a Bankruptcy Court decision holding that the founder and “Chief Apostle” of a church, who had the powers of president and CEO of the corporation, is personally liable for payment of withholding taxes for church employees when the church failed to remit the amounts due.  The Court has rejected a claim that an interpretation of her powers, based in part on a reading of the church’s bylaws, violated the Apostle’s and the church’s rights under the First Amendment of the U.S. Constitution. (Vaughan v. Internal Revenue Service, E.D. NC, No. 4:11-CV-222, 7/16/12.) (From NP Issues news page Oct-Nov. 2012)

I consistently argue that a vigilant (and diligent) governing body, elders or otherwise, is the best protection a pastor can have. But oversight diligence has to be via a set of articulated principles by which the church is run, i.e. called policies—covering all areas of risk to which the church is subject.

RMB

Reacting to the HBR Article - Oct. 2012 - the Rise of Big Data and the implications for Nonprofit and Ministry Leadership

I was visiting with a friend who chairs a nonprofit ministry board, and her board wants to understand how the organization is doing in terms of accomplishing its purpose and to assess its strategy. This is an increasing expectation of nonprofit boards. This means that the senior leadership team will have to figure out how to measure its progress toward the desired outcomes, impacting and changing lives, and that is not just counting client encounters! Or some event-based “dashboard.” It will call for a thoughtful approach, even inventiveness, in metrics and analysis.  

The series of articles in this past Oct. issue of the Harvard Business Review reminded me again of an often overlooked KSC (knowledge, skill, and/or competency) needed by senior executive leaders, that of metrology. We are (usually) quick to acknowledge the need for financial understanding by a chief executive to at least the level needed to engage in the financial leadership of their organization, but the lists I see by writers on leadership rarely mention any need for an adequate understanding of numbers, measurement, and interpreting their relationships (metrology). The HBR articles reminded me that the growing complexity of the organizational world, including the nonprofit world, will increasingly require leaders to grasp numbers and analysis sufficiently to make sense of the sea of data available and to then lead their organizations into improving the understanding and insight they will need to form shrewd strategy in these complex days. 

The same demands are occurring on the donor side. Nonprofits are looking for ways to understand their donors and the shifting topography of donor landscape, especially their donor landscape. There is much available in customer analytics but less regarding donor analytics, a much less tangible area to operate in.

All this adds up (especially when you throw in financial data) to an executive leadership that must become sufficiently analytics savvy to effectively and strategically lead.

(Originally posted on our website 12/18/12)

RMB

What Does the Ford Fusion Have to do with Governance?

Well, Ford Motor Company has done it again. The 2013 Fusion was named Green Car of the Year by the Green Car Journal. To me this represents the results of a process that Toyota calls kata or another variation on kaisen — persistent continuous improvement—finding your way into a better and better future product through small continuous increments, learning as you go.

What does this have to do with leadership? With good leadership—Everything. Ford, once discovering continuous improvement as the process toward excellence in the future, stayed the course for 15 or more years now. That takes determined and knowledgeable leadership. GM was herky jerky regarding CQI, on and off, and it proved seriously damaging. They were the one, along with Chrysler, who needed a Federal rescue and a remake. Ford did not, even through the toughest of times.

Excellent leaders seek excellence, if not perfection (think of Steve Jobs for all his distractions as a personality—he gave Apple a culture of perfection to the absolute extent possible). And seeking excellence takes a long view.

Strangely, governing boards, who would never tell their managements not to seek excellence, don’t seek it themselves in their own governance. I commonly hear the old saw, “Well, I believe if it isn’t broke, don’t fix it,” from board members who are perfectly happy doing what they have been doing for decades.

There are three areas that boards need to continuously seek the most effective way, the structure, or shape, of the governance (size, committees, membership, input structures, officers, dates and times, etc.), the process the board uses to achieve creation of the governing "products" (decisions, policies etc.), and the dynamic of the board (its manner of conversing and decision-making). All three must be optimized. This takes persistent learning and diligence, not something the average board is used to being or doing.

(This was originally posted on our website Dec. 10, 2012)

RMB

Constraining Expenses: The Bain of Organizations

 I currently sit on three nonprofit ministry boards. Two of the three (and their chief executives) struggle with constraining expenses within declining revenue. But, after watching the behavior these days of for-profits, I’m also concluding that even for-profit organizations have a hard time addressing and reigning in costs, especially as revenue drops. John Seddon, the UK consultant and writer on systems thinking and lean management, says that focusing on costs will invariably result in increased costs. Focusing on excellence in customer service (and what the customer wants and needs) will result in lower costs, sometimes dramatically lower costs as well as the likelihood of increased revenue. It is much easier for us executives to work on planning to increase revenue. (Although this may be an exercise in hope rather than strategy.) What Toyota did over 50 years is amazing since its focus was Kata - constant process improvement to improve product value while doggedly removing unnecessary cost (“waste”) - creating a entire culture of workers motivated and skilled at that while never losing sight of the customer.

Not-for-profits (except perhaps health care) are generally not as customer focused (in terms of “product” satisfaction) and usually are much more revenue focused, paying little attention to cost management and unable to cut costs even, in many cases, with disaster staring them in the face.

They and their boards attend development and fund raising seminars and training and rarely courses on better, tighter management or financial leadership, rationalizing their actions in spiritual or ideal terms. In ministries, since it is the Lord’s work, He’ll provide - on the revenue side. I’ve never heard a prayer for wisdom on how to cut back. (Though I trust such have been offered somewhere.)

Cost management takes a completely different mind-set or attitude - lean thinking, being creative, going against conventional wisdom, reconstructing processes, etc. This is true in spades for educators.

(Originally posted on our website Dec. 4, 2012)

RMB

On Leadership, a Slippery Idea

    

 I read a lot on leadership (since board governance is a form of leadership). I am struck by the number of authors who try to pin it down to a few, (e.g., Kouzes and Pozner)—or many attributes. (John Maxwell comes to mind). The numbers of ways people find to dice up leadership boggles my mind …and confuses. It ranges from such terms as “influence” (not helpful—too broad) to three or five items such as in Kouzes and Posner’s “Five Principles,” to Maxwell’s 21, to … 

That should tip us off that leadership is one of those abilities we recognize when we see it, but trying to get a net around it is another issue. Yet academics and consultants keep trying.

I would tend to describe “leadership” as a constellation of attributes that equips and enables one to align and influence others to move in the direction desired by the leader. Somehow successful movement toward an objective should also be a criterion, since (successful) strategic thinking is considered a vital attribute of leadership. And leadership is definitely situational. Successful leadership in combat does not (necessarily) translate to successful leadership in a nonprofit ministry but, nonetheless, shares several attributes. Note, this “definition” so far is value neutral. Good leadership adds virtue and values. I would also add wisdom, as Biblically defined - thinking well is inextricably intertwined with rectitude. So a good leader is virtuous and wise as well as possessing a host of value-neutral attributes enabling aligned, directional, successful influence.

Oh well. That is my first, or twentieth, shot at it. And I haven’t begun to touch the components of the attribute constellation.

(Originally posted on our website Nov. 26, 2012)
RMB

Penn State President indicted, a lesson in responsibility

Recently we all learned that the former Penn State President, Graham Spanier, has been indicted by a Pennsylvania grand jury for alleged crimes relating to the Sandusky sexual predator scandal with seven counts of various types, but essentially dealing with complicity in covering the crimes in various ways after the President’s office learned of the allegations. We learned from the State Attorney General that the cover up conspiracy cascaded itself up from the athletic director through a vice president (Financial and Business) to the President.

This illustrates our previous blog concerning the difference between accountability and responsibility. You generally can’t go to jail for your accountability (Spanier was accountable, under the board for the entire University), but you can go to jail for what you were personally responsible for (or for not doing), in this case failure to report, and actively covering and subsequent perjury.

The lesson? When something arrives on your desk you become responsible for it as well as accountable for it. If you hear of something going on that is illegal, immoral, imprudent, risky, you have a duty (responsibility) as part of your accountability to investigate, but your investigation also engages your responsibility. The old ostrich technique will not work.

Take a lesson. Executive leadership and governance is morally serious business. I wonder if the Board is nervous.

(Originally posted on website Nov. 19, 2012)

RMB

On Seeking Expertise as a Condition for Board Members and Training the Board Instead

Posted originally as note on a LinkedIn Policy Governance® thread, 7/12/12

 Boards often (usually?) have the idea that "you've got what you get" as board make-up, so they strive to appoint at least some, or even most, people with business competencies relevant to running the place. But Policy Governance boards must represent ownership (in a wise way) and so must look for people who are part of the broader ownership but who can rise to the conceptual challenge of creating and understanding great Ends and how they direct the organization - not necessarily financial statements or investment policies. This former approach creates a tension and the potential for boards to abrogate their decision-making and accountability concerning business-related polices and monitoring to the domain "experts" on the board. 

Over the years, after working with a big auditing firm (Capin and Crouse) and fellow consultants, we concluded we needed to change the paradigm concerning board member "expertise." - That, instead, boards, as a whole, seek and get sufficient training in the domains in which they need enough understanding to know whether the reasonable interpretations and data the board is getting meets reasonableness criteria and are satisfied by the supporting data. Management's monitoring reports should aid in this process but not enough. The IPGA workshop I did with Eric Craymer on risk governance stressed this point. The workshop that Sue Radwan did with Paul Siers at the Detroit IPGA Annual meeting on investment policy development had the same message.

A board, in its entirety, needs enough knowledge to know what it is talking about in its policies and understanding of the monitoring it receives. Yes, you can teach a mom to read a well done financial status monitoring report so she doesn't need to default her governance to the CPA on the board.

RMB

A Different Kind of Risk

(July 31,2012)

A Different Kind of Risk

In June of this year I presented, with a colleague, Eric Craymer, a workshop on risk governance at the International Policy Governance^® Association annual meeting in Detroit. We synthesized our experience and the recent risk governance literature and discussed it in the context of Policy Governance.

However, more recently as I reflected on my experience and studied the history of organizations of faith, particularly those alleging to be evangelical, I noted a class of rather serious risk unique to them—that of defecting their original fundamental beliefs, the most critical of which, I believe, is their high view of Scripture as inerrant. Experience shows that, for these organizations, abandoning inerrancy begins an inevitable and (nearly) irreversible slide away from all their previously held fundamental beliefs—typically toward more post-modern positions and usually pro-naturalistic science positions. Eventually their doctrinal statement will be changed, a pastor, or president and faculty  hired that is mixed or largely disbelieving in the institution’s original fundamentals, the original support base defects, and the products (such as graduates, if a college, and intellectual products) reflecting of the more liberal position.

How can such an institution or church prevent, detect, and deal with this very serious, even fatal, risk? What is the board’s role? Since the board is the highest and prevailing authority, possessing full accountability for the organization, it also holds accountability for sustaining the doctrinal stand of the organization!

Here is my quick list for a Policy Governance board. There may be other options as well.

1.)    Thoroughly understand the issues (doctrinal positions of the organization) and why they are considered important and the risks concerning them. Seek outside expert input from like-minded people (theologians, pastors, experienced presidents, etc). Many board members are business men or women, executives of other ministries, etc. and, while knowing and believing the components of the doctrinal statement as laypersons, will not understand them to the depth appropriate in a Bible college or seminary setting. If they are to govern an academic institution, they especially must have sufficiently deep understanding to assess a reasonable interpretation of their doctrinal policies.

    Church elders also (or other equivalent church officers) must include the study of their church’s doctrine as an important part of being a board member. Most lay elders or board members cannot detect error that may have crept into the church via a Bible study or Sunday School teaching, (or the pulpit). Strangely, even staff can hold differing views on key doctrines, such as soteriology, in the same church and the board be total oblivious!

2.)    Craft and/or modify the necessary board policies dealing with doctrine in sufficient detail to the point where “any reasonable interpretation” will be acceptable to the board. Note that in the area of doctrine and theology, words can be slippery and “work-arounds” by creative faculty, or a pastor, might be attempted in the future.

3.)    Carefully recruit and vet a president, executive director or pastor, one who enthusiastically endorses the position expressed in policy. Research the candidate’s past education, papers, articles, talks, and books, etc., besides the performance and references of the candidate. (Including any Ph.D. or Th.D. thesis).

4.)    Monitor the CEO (president, pastor, etc.) carefully initially. I know pastoral candidates that have lied to their board or search committee while secretly intending to change the doctrinal position of the church or institution. Consider the newly hired official to be “on probation” for a year and/or be prepared to terminate and have the spine to do it if necessary—quickly. Boards have the baffling capacity to overlook being lied to and not see it as a fundamental character issue in their CEO or pastor. (Otherwise, a power battle will develop, and the pastor has the advantage of the pulpit; the results will not be pretty and be very damaging to the church and to lives.)

5.)    Avoid short term service cycles for board members. Board memory is crucial.

6.)    Select board members with the same attention to the candidate’s doctrinal positions as given to the selection of the CEO or pastor and assure that he or she has sufficient understanding of the organization’s doctrinal statement.

7.)    Bylaw strategies: Make the doctrinal statement irrevocable and unchangeable, if possible, (this applies especially to churches with congregational control over the bylaws). Be advised, the problem with using this device is that, as a board learns more, or needs to address a particular attack on its doctrine, it may want to refine the doctrinal statement to improve its precision.

8.)    Have a bylaw provision permitting the elders (or equivalent board) to unilaterally terminate the pastor during the first year without requiring a congregational vote.

9.)    For a Christian college or university, a Policy Governance board must include some form of monitoring the classroom and the intellectual products of the faculty as part of data supporting compliance with policies concerning doctrine as well as the other board policies dealing with other institutional matters. Simply signing concurrence with the doctrinal statement is insufficient since faculty members can be very inventive with words and meaning, and in some environments are permitted to sign “with reservations.” In the higher education academic environment, academic freedom, an Enlightenment concept thought to facilitate truth-seeking and protect “intellectual integrity,” perhaps appropriate to secular higher learning, becomes an assumed rule also in faith institutions, and this eventually impedes or even prevents faculty products from being monitored for compliance if the institution permits this assumption to become a “rule.”

 Richard M. Biery, July 30, 2012