Tuesday , 7 February 2023
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Clearing the governance fog

We have seen great progress on adoption of good governance at most organizations. Those who do not achieve good governance often end up in the same place as names like Enron, Worldcom, Sears, WE Charity.

The covid environment has thrown some governance into disorder. In speaking and listening to Directors over the past few months there has been absolute extremes in the approach during this difficult environment. Some Directors state strongly that the Board must get into operations and help out the CEO during the difficult time. Other Directors state strongly that the Board must become more strategic and look forward instead of spending so much time looking at history – windshield vs. rear view mirror. Some Directors state that now more generalists are needed on the Board – to give the CEO ongoing advice. Other Directors are advocating for more specialists on the Board – to give the VP Finance direction, to give the VP Technology direction, to give the VP Operations direction. In March some Boards moved to meeting weekly with the CEO to understand how the organization was coping with the pandemic situation and then instructing the CEO on how to operate in the new environment. I heard Directors say that the bonus metrics for the CEO have been tossed out but they still expect to pay a good bonus to the hardworking CEO without any reference to financial affordability. These are extreme positions and have tossed some good governance principles out the window.

The CEO, with the senior finance person, the senior technology person, the senior operations person, the senior human resources person, are still the subject matter experts in how to operate the business. The stakeholders need the Board to provide oversight but not replicate the management team. The management team is working flat out in dealing with movement of employees to provide for their safety in the work environment whether on the company premises or their homes. The management team is working to provide products and services to customers in a safe manner under the new conditions. The management team is watching the finances with a particular focus on cash flow.

One of the risks all businesses face and usually plan for is a significant disruption to the business. In B.C., companies often use an earthquake as an example. In Quebec, a long ice storm could be the example. Business continuity plans and disaster recovery plans are developed by management and tested periodically either through a real life experience or a desk top exercise. I worked with an organization where one year the exercise was centered on the CEO having been kidnapped and held for ransom. Now it seems like a logical example will be the company’s technology being overtaken by bad actors and held for ransom. In risk workshops when we tried to get the participants to use a pandemic as the example, all we get were snickers and denial – “aw that will never happen.” Never say never. So did organizations and did the Boards properly consider if risk management practices were complete? 

It is time to return to good governance where the Board governs and management manages. Management still has the same responsibilities – provide reliable products and services to customers, provide for a healthy working environment for employees (which covers more than social distancing), and prudently conduct operations in accordance with the organization’s mission, vision, and values and within financial resources. These are same areas of focus that management has always been responsible for but they now need to accomplish this within the environment of the new normal. For example providing a working environment which encourages employee engagement is still a focus for management. How that is accomplished now is different where employees are at a distance and operating in an alone environment. This is a demanding time for management – achieving organizational success while adapting to a new environment.

Some Boards need to pull back from having fingers in the operations. Indeed the Board still has to provide oversight of the operations – the stewardship of the organization. Oversight is not doing management. The Board sets the why and management determines the how.

An important activity of the Board now should be a solid review of the organization’s strategy in light of the experience of covid. Does the strategy need to be amended to recognize limitations or new opportunities? What impact has the new normal had on the company’s products and services and will this change going forward, are there supply chain limitations, are there material changes to the production process, does the company require different talent than before, are there new financial limitations? These are the questions that the Board needs to dialogue with management – not at an operational level but at a strategic level. Good governance is not asking a question about laptops for all employees. Good governance is about looking forward and setting direction with management and then reviewing management’s plans to achieve the future. Good governance shows leadership and stability at all times even in difficult times.

Fay Booker is principal of Booker & Associates, a consulting firm focused on promoting excellence in good governance and enterprise risk management.

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