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