During our education on governance and directorship we are taught that “directors govern and managers manage”. The analogy of steering versus rowing is often used to describe the delineation of roles between directors and managers. Most directors are well aware of this.
It seems that many boards are challenged with the task of getting the ‘right’ balance between governance and management. Why is this so? Experienced directors are aware that every board is different in terms of the way they implement their governance role. Lack of clarity and agreement about this issue can be a source of misunderstanding and potential conflict around the board table.
According to Demb and Neubauer (1992) there are three main archetypal ways for boards to implement their governance role; named the watchdog, the trustee and the pilot mode. In summary, a ‘watchdog’ role is one in which the board provides total oversight and has no direct involvement in the company’s activities. The ‘trustee’ role is where the board behaves like a guardian of assets and is accountable to shareholders and society for those assets. In a ‘pilot’ role the board takes an active role in directing the business of the corporation.
There is no ‘right’ approach for a board to take. The stance taken by a board depends on the company’s growth and development, the nature of the industry, national legal requirements and culture and preference. To illustrate how these modes operate we use an example of how the board of Company X would address issues of workplace safety in an industry where safety was a major risk.
In the watchdog mode the board monitors the process of corporate activity. It is not necessarily a passive role. If Company X performed in this way they could take an active role in setting up mechanisms of safety and security as an issue of high risk and concern, and scrutinise in detail. The difference between an active watchdog role and a passive role would be the degree of scrutiny and interrogation of information that occurs. The focus of a board in watchdog mode is on monitoring and evaluation and confirming decisions made by the CEO.
This mode could be effective if all of the following conditions are met:
- Directors are satisfied that appropriate systems and policies are in place and have been demonstrated to be effective. The important point is demonstration or evidence of effectiveness rather than just the assurance of the CEO.
- Directors are satisfied that information reported by the CEO includes relevant indicators and other information that directly reflects the integrity of safety and security systems.
- The CEO is willing and able to guarantee that appropriate safety systems are in place and they have been tested and found to be robust.
- Contingency and business continuity plans are regularly reviewed and tested and the results reported to the board.
- Directors are able to exercise critical and independent judgment.
If the board of Company X was in trustee role it would ensure that activities enhance corporate value; that is, ensuring that assets used in the business such as natural assets, human, finance, reputation and others, would at the least avoid being depleted. The board would be involved in evaluating what the company defines as its business as well as how that business is conducted.
If Company X was in trustee mode it would be more actively involved than a watchdog board but still confirming management decisions. This involvement would be limited in the initiation and implementation of safety systems but substantially involved in analysing options, monitoring and evaluating results. The following actions would be undertaken in this mode:
- With input from the CEO the board would give direction to senior management to develop an appropriate safety and risk management system. The board would set the parameters and expectations and allow senior management to develop the detail.
- Directors would be actively involved in analysing options in the safety strategy.
- The CEO would implement the safety systems and the board would be intimately involved in monitoring progress and evaluating the results.
The trustee mode would give sufficient attention to the integrity of safety systems, regardless of whether the existing safety systems are appropriate or otherwise.
So how does this compare with the pilot mode? As the name suggests, in pilot mode the board would be actively involved in the direction, management, implementation and evaluation of safety systems. The board would be making more decisions than in the other modes such as the following:
- Deciding what constitutes a safety system and what is to be installed;
- Determining the degree and method of integrating systems with customers;
- Actively analysing options;
- Deciding how and when to implement changes to the safety system;
- Detailed monitoring of the safety systems, even when there is no evidence of problems;
- Close scrutiny and evaluation of the systems.
Pilot mode could be appropriate in situations where there was evidence of significant issues or after a safety issue had occurred and the board felt the need to directly intervene. Pilot mode would be more time consuming and involve greater degree of involvement by directors.
We can see from the above examples that a board can fulfil its governance role and be involved in decision making in a range of different ways, all of which are appropriate in the right circumstances.
It is important for boards to take a step back and reflect on the way they behave and ask whether the degree of involvement by directors is appropriate for this organisation, at this time, in this context. Whether the issue is explored in a board evaluation process or discussed around the table, it is important that all directors give consideration as to what is appropriate for your organisation and be in agreement about what is required. Maybe, just maybe, it is time to do things a little differently.