Policy Governance - Dr. Richard Biery on Boards and Ethical Leadership

Article on Governance and the Board’s Role in setting the Ethical Tone

Richard M. Biery, June 2002

Lack of governance integrity has reached such proportions that the very assumptions upon which our free market capitalistic investment system is based are being shaken. Why do I say governance and not management? What has happened to the board? We tend to ignore the board and focus on Management when yet another corporate malfeasance is revealed. But note that it is the governing board that is the method by which virtually all our institutions and organizations are ultimately controlled. Governance is the term for what boards of our companies and institutions do to control them. And its quality and integrity are critical, especially today. Robert Greenleaf, author of Servant Leadership and father of the contemporary servant leadership movement, pointed out that most of our lives are now lived in, with, and through institutions. Ideally, governance should include instruction and continuous assessment by the board regarding achieving organizational purpose while adhering to stipulated acceptable behavior. For example, concerning the latter, they should “set the ethical tone” and assure it. They rarely do, even in religious organizations, not from lack of character, but from lack of a process discipline.

Unfortunately, there is a large knowing-doing gap in board governance. Boards typically set neither the ethical tone nor the purpose-based strategic ends for the organization. Instead the prevailing board process today is custodial and reactive. It appears the Enron Board with its highly scripted board meetings never even stated policies regarding adherence to legality, much less prudence. If it had and then insisted on regular data proving compliance, Management would have had to lie to its board to do what it did. That still may have happened, but the board’s will would have been clear. Any smoke the board smelled would have had definite actionable policy violation implications. The board had no such policies and had even waived its own ethics code.

The usual form of board process, that of reports, questions, and approvals, does not constitute proactive leadership on the part of the board. It rather reveals a reactive and passive board. Integrity of governance is endangered, if not lacking, under such governance. Worse yet, passive boards unknowingly contribute to the corruption of the office of CEO because of failure to oversee power. Unchecked power, no matter the organization or amount of trust the board has in the CEO, is corrupting. The board becomes inadvertently complicit in permitting such corrupting power.

To achieve and assure governance integrity trustees must be trained in governance. Training and experience in management are, at best, insufficient for trusteeship. The trustee is not called to manage but to govern, requiring a different set of attributes and competencies. Neither is instruction in boardroom tips and good ideas adequate for governance competence, nor does it even enable a board to be proactively strategic or “set the ethical tone.”

Until boards see themselves, not only as the legal and moral agent or trustee for ownership, but as a vital part of the organization expected to added value for the owners (real or moral) and are willing to invest in themselves, they will continue governing (or not governing) as they always have. They may be earnest, well-intentioned, moral trustees, but their governance will lack the initiative and integrity necessary to protect the organization, risking failure in their fiduciary responsibility as trustees.

Policy Governance - Dr .Richard Biery's Checklist for PG Implementation

A Checklist for Determining the Extent Policy Governance^® is Being Used By a Board

Richard M. Biery, M.D., 2002

1. A board policy manual that deals at least with means (the three areas of board means, governance process, board-CEO linkage, and organizational means), including the monitoring report schedule, and policies are structured correctly within the manual.
2. An interim End policy is at least done, or (better) formally developed Ends policies are in the manual and being monitored.
3. The process for connecting with owners, (including a definition of owners), is established for each annual board cycle.
4. Monitoring is being done;
1. There are monitoring reports being submitted and recorded as recognized by the board.
2. The monitoring reports meet the criteria of a good monitoring report.
5. Ends-related education (expert and staff) for the board is planned as part of the annual board cycle.
6. A governance budget for the board is in place and is identifiable.
7. There exists a means to insure continuity of quality governance, (e.g., through a governance and nominating committee).
1. Criteria for nominees,
2. New members education strategy,
3. Board continuing education in governance.
8. An on-going method exists for board self-assessment, (preferably at each board meeting).
9. CEO evaluation is based on compliance with written policies, i.e., has the board kept its word?
10. There is an external audit that provides the board with assessment of organizational compliance with board policy as well as audited statements, (and an external auditor that is board selected).
11. The by-laws comport with Policy Governance.

Note that there are no structural tests here. Certain structural principles are important for good governance, but are not, per se, part of Policy Governance; these might include sufficient (or all) outside independent board members, the chair should be an independent member, size, etc.

Policy Governance - Dr. Richard Biery on the Role of Measurement

An Article on Ends and Measuring Under Policy Governance^®

Performance measurement is a hot business topic. The other day I was discussing with a management consultant the issue of whether the board gives the CEO the measurement it wants used or instead, as in Policy Governance, the board expresses its desired ends or results (in terms of what good, for whom, and the allocation of costs to the components of results or recipients or both), and Management identifies the best measurements to be used in its judgment, subject to any reasonable interpretation of the board’s words. It made much more sense to her, especially since that is what she was teaching to CEOs, that the board should proactively establish the metrics it wants reported on. It is unfair to the CEO, she maintained, to set goals and then not establish the measures. After all, “what gets measured gets managed.” That certainly seems a compelling argument.

Why does Policy Governance gives the CEO the freedom to establish the measures, provided those measures make a convincing case for policy compliance? What advantages does this present? To many in management science this seems backwards. We are enjoined in all the goals and objectives literature to set measurable goals at some level immediately below broad goals. Some writers stipulate that goals are broad and it is the objectives that should be measurable. In fact, there is not agreement in the management literature on this issue, (which demonstrates why not to use such terms when explaining to the board how to give purposing instruction to the CEO – purposes are best stated as ends, which do have a clear definition).

Why indeed describe the ends and not their measurement? For several reasons. Not having to worry about measurability permits the board to concentrate on saying what it wants with as much precision as it feels is necessary to be reasonably understood. There may not be measures for what the board wants…yet. It is much more important for the board to express what it want as precisely as it feels necessary even if the measures be imprecise, than to select a precise measure of what is not precisely desired! Furthermore, the board is not necessarily the expert on the metrics or measurement of the ends it desires. It is not expected to necessarily understand the measurement science available for the ends. Management is much more expert in the measurement arts and tools and can bring what it knows, or can develop, to the job of measuring the board-stipulated ends. Certainly the board can set ends in so precise a fashion that the measurement(s) become self evident, but that does not nullify the forgoing argument.

Another reason to let Management develop the measures is that the science of measuring is constantly changing. If the board tried to keep up and keep its measurement requirement up to date, it would be busy indeed. It would also have serious arguments about the best measurements, arguments in many cases from ignorance. The beauty of focusing on the ends descriptively (but as precisely as possible to convey what the board is expecting), is that they float above the vicissitudes of measurement sciences without losing their meaning and import. (This is also an advantage of an ends-focus instead of a means-focus. Means for achieving ends change and can change unexpectedly. Since sacred cows are much more likely to be means than ends, the focus on ends by the board solves the sacred cow question.)

What kind of measures should Management strive to find or develop? Can it just pick anything that suggests the ends? The data challenge for Management is to present information and/or data that convince the board that the ends are being achieved. The better the data, the more convincing the case. This frees (and motivates) Management to continue to improve the measurement science relevant to the end in question. If the board stipulated the end and the measurement, the measurement would be locked in until the board changed it, although the measurements available may have improved.

What about continuity? If measurement science is constantly improving, how can there be the continuity necessary to demonstrate progress? This argument is a red herring. All one needs to do is think back over all the improvements that have been achieved regarding measurement in a certain area and then ask oneself if whether continuing to use the same old measurement, although outdated, would have helped continuity or if switching to the newer, more precise measurement, harmed continuity. There are several reasons why improving measurement doesn’t harm continuity. Two major ones are that the new measurement may be available from within the old data, and another is that the issue is simply not important. If, for example, one can now measure to the one one thousandths and the old measurements were to the one one hundredths, we celebrate and go on! Or if we can measure the effect of a psychiatric treatment or a social program better than the measure we used before, so much the better. We adopt the newer measure.

Board work is conceptual work. The farther the board can wisely look into the future and describe its expectations in terms of the results it seeks, the more strategic it is. Being drawn into thinking about measurement will, perforce, pull the board back to the present, because by its very nature, the available measurement science is a contemporaneous art – always improving to be sure – but not out in the future where the board should be thinking. In other words, thinking about metrics and measurements drags the board backwards (and into details). It is best to let the measurements catch up with the board’s vision.