Importance of Good Governance for CEOs

Chief Executive Officers (CEOs) and Boards enjoy a unique relationship, one that is built on key elements such as trust, professional integrity and honesty. The very survival of a CEO often comes down to their relationship with the Board.

In this case study I will be emphasising five governance issues, governance learnings and possible governance tools and resources available to assist Boards and CEOs.

In September 2008 the Board of an aged care organisation in far North Queensland, employing over 200 staff and one of the major employers in the town, determined that the relationship with the then CEO had deteriorated to the point where in their view termination was the only option. As the Board is responsible for the hiring and firing of the CEO they exercised their right and terminated the CEO’s employment. The purpose of this case study is not to examine the process around the CEO’s termination but more importantly what happened after and the governance lessons for all organisations and their CEOs.

Following the CEO’s termination the Board then proceeded to employ the new CEO who commenced employment in November 2008 one week prior to the Annual General Meeting (AGM). The AGM turned out to be a disastrous welcoming for the new CEO. The current Board was ousted and replaced by a completely new Board which included the previous CEO! This CEO was a member of the association. The Board hadn’t considered the past CEO’s association membership when terminating the employment contract.

Governance Issue No.1

The Constitution is a critical document. It is the rules by which an organisation must operate, including the Board and its members. In this example a motivated group of members including the previous CEO used the existing ‘rules’ in the constitution to gather enough votes and proxies to win all Board positions.

Governance Issue No.2

The Board was ousted by proxy votes in this case. Membership was only $1 for new members, so a small number of rebellious members could attend the Annual General Meeting holding a huge majority and win the election.

Governance Learning: Regularly review the constitution to ensure appropriate gates for control of the organisation are in place; otherwise you may be only one special general meeting away from being ousted.

Governance Resources & Tools: The Australian Governance System (TAGS™) has examples of constitutions in its tool box. It is also important to work with a credible legal specialist when looking to review the constitution.

Of course this wasn’t the only issue confronting the new CEO. In the weeks and months leading up to the previous CEOs dismissal the organisation had descended into a myriad of governance and operational disasters:

• Board discussions leaking to staff and the community
• A divided community, one in the “old” camp and one in the “new”
• Impending sanctions from the federal department overseeing all compliance and regulation of the facilities
• The media running front page stories and editorial on the “crisis” at the organisation
• Workplace health and safety claims
• Numerous Industrial issues.

The organisation now had a new CEO and Board. The CEO fearing a similar fate was awaiting him sought assistance to ensure the organisation was put back on a sustainable path.

The new Board of volunteers had little knowledge or understanding of their roles or responsibilities and importantly the risks in operating aged care facilities.

The Board with the CEO’s encouragement agreed to invest in governance training and development. This involved a number of workshops and training sessions for the Board members and senior staff. For many of the new Board members this process was very revealing. The initial governance training resulted in two of the new Board members resigning within a few months of the annual general meeting.

Governance Issue No 3

Ensure your organisation has a well-documented induction process for new Board members. It is important for new Board members to clearly understand the role of the Board and their individual roles but equally new Board members should clearly understand what their role is not. Michael Goldsworthy from Australian Strategic Services has a saying which I believe is important for Boards to understand; Boards Govern and Managers Manage.

Governance Learning: Of course it is not recommended to change all Board members at the one time. If your constitution allows this to occur consider a model where only a proportion of Board members are eligible for election each year. One common model is “a third, a third, a third”. Only one third of the total Board members are “up for” election each year. This will assist in providing stability of leadership to the organisation and limited opportunity for sections of the membership taking over the entire Board.

Governance Resources and Tools: There are many resources available on the web and TAGS™ also has a comprehensive induction resource.

To the absolute credit of those Board members who remained, they proceeded to work through some critical steps on the road to recovery and sustainability and ultimately a successful organisation. A summary of these steps is outlined below:

Step 1. Investment in Board training; leading to the development of the organisation’s Governance Improvement Plan. This plan is the guide for the Board to implement key governance issues over a twelve month period. The Board continues to review their governance plan annually.

Step 2. Develop an agreed strategic direction; The Board, CEO and senior managers gather to develop the strategic direction for the organisation  The strategic planning process was the first time these groups had worked together. It became a powerful learning resulting in the CEO being given his only mandate; the strategic plan.

Step 3. Get the structure right! The governance and organisational structures were revamped to ensure the right people were in the right positions to deliver the objectives of the strategic plan.

Step 4. Policy based decisions; the Board purchased TAGS™ and customised their governance policies to ensure they were making decisions under a policy framework, not just what suited them at the time.

Step 5. Board and CEO Relationship; the Board worked through how they wanted to work together and documented a code of conduct, confidentiality agreement and ensured all the CEO’s employment documentation were established and maintained. The Board established performance measures for the organisation and the CEO. The Board established a reporting schedule for the CEO and senior managers to provide opportunity of engagement and debate on important issues.

Governance Issue No.4

Governance policies. Boards often have limited or no governance policies. Worst still they live in a “fools paradise” believing the organisation’s operational policies are all that is required. Yes, operational policies are critical but they are definitely not governance policies.

Governance Learning: A Board’s responsibility is to guide and lead the organisation. To do this successfully the Board needs policies and procedures to assist them in making decisions.

Governance Tools and Resources: Completing a TAGS™ Board Due Diligence provides an idea on how the Board is travelling.

Governance Issue No.5

Many Boards take for granted the role of the CEO. The CEO is the only employee the Board is directly responsible for, so it is critical that Boards take this human resource responsibility seriously.

Governance Learning: Ensure the CEO employment documents are up to date and the Board has a regular performance review against agreed performance measures as part of an overall performance management system.

Governance Tools and Resources: Dashboard™ is a performance management system designed for Not for Profit organisations.

Four years on the organisation still has their ‘new’ CEO and enjoying the full support of his Board and the Community.

The organisation is performing strongly against all performance measures; stable workforce, full compliance, financial sustainability and resident satisfaction.