As a follow-up to a recent post on Boards of Directors and corporate governance (http://wp.me/ptUlY-gq), this post addresses how boards promote success, can often drive mediocrity and in some cases prompt organizational failure. The take-away where success, mediocrity and failure occur isn’t structure, terms or committees rather, a consistent excellence or break-down in terms of structural clarity, roles, and organizational focus. Governance which exists, regardless of the framework, to enhance and perpetuate corporate/organizational value, reputational integrity, and shareholder/stakeholder security and return is the foundation for success.
If there is a single condition more preeminent than another that drives mediocrity and failure for a board it is conflict of interest. This condition is not unique to non-profits or for-profits but in my history, I encounter it more frequently in non-profits, likely due to the inherent lack of compensation available for directors. The non or limited compensation component in non-profits is more ripe for a “quid pro quo” reward structure in which, the director is a de facto player in the organization’s business via a vendor relationship of some sort. Even in the best of circumstances, the vendor representative on the board scenario defeats the concept of independence producing an air of duplicity and insider dealing. If judgment is clouded, opinions suppressed or decisions focused on the inter-relationships among directors and the entity beyond the absolute best interest of the organization, governance cannot be optimal.
Effective governance requires independence and to the greatest extent possible, a board level series of tests and policies that promote independence and police conflict. Below are the common tools I find most helpful in achieving and maintaining independence.
- Recruitment of individuals that are unrelated in any regard, to the organization (not vendors, no familial employment, no familial relationships, etc.).
- Policies that require annual disclosure of employment, board memberships for the director and director’s family, investments where applicable, etc. This is to insure that directors don’t have relationships, ownership, investments that mask independence. Note: Disclosure is not enough as once disclosed, remedy becomes the key.
- An annual review of major vendor relationships such that the same is given to each director as part of his/her annual disclosure. If a director is anything more than a passive investor in a vendor relationship, the director is no longer truly independent.
- In healthcare organizations, annual background checks with the OIG, licensing boards (where applicable, DEA (where applicable), and criminal checks are warranted.
- Policies that require reviews concurrent with major capital purchases, capital projects, mergers/acquisitions, etc. to assure that independence remains among the board.
The element second in importance to independence at the board level is role clarity and policies and organizational structure that clearly delineates the role of the board, the duties of directors, and the key performance elements for the board. Again, these pieces lacking is a certainty for organizational mediocrity and/or, potential failure. A board’s primary objective is to assure the viability, health and well-being of the organizational entity. In this realm, its role is clear. Where I have seen boards struggle and thus the organization, is when a lack of this clarity exists. Below is my top seven item list that identifies where boards can assure role clarity for the board and each director.
- The Board must have a job description or functional description and should each director.
- Shareholders (and for non-profits, stakeholders) must be identified (not individually necessarily). This element is where I see non-profits struggle mightily. For example, for a non-profit CCRC shareholders/stakeholders are not residents. Residents are customers, even in entry-fee communities. Shareholder/stakeholders are for certain, any holder of public debt and any holder of mortgage paper. Major vendors and insurers are stakeholders as well. The definitional clarity begins at the “organizational level” in terms of where lies, for a board, the duty to assure organizational stability, reputational solidity and organizational viability and financial fluidity. Yes, customers such as residents are tangentially impacted when things aren’t well-off but truth be examined, a debt failure causes irreparable harm to residents if a board isn’t engaged in securitizing organization viability.
- A formal function, policy, etc. for board performance review and director performance review.
- A formal function and structure at the board level for long-term planning – financial, strategic, etc.
- A plan at the board level for CEO review, retention and succession.
- A formal function for board development and education.
- A communication element for discussions/feedback from/with shareholders/stakeholders.
Returning to the title: Success at the governance and thus, organizational performance level is when the board is truly committed and has put into place, the structural elements necessary to fulfill the boards primary duties;
- Assure independence.
- Focus on the financial, reputational and legal risks and the securitization thereto, of the organization.
- Plan for and understand, the environment in which, the organization operates.
- Assure plans for operating in this environment meet and exceed, the requirements in the second bullet above.
- Understand and have policies and procedures in place, that clearly delineate the role of the board from that of management. Maintain a fertile environment for a qualified CEO to garner appropriate feedback, support, reward, and security. Boards need to assure, for the organization’s viability, retention of high-performing leadership and the succession thereof.
- Be open and literally virtual, to shareholders/stakeholders.
When I encounter mediocrity and unfortunately, failure or the likelihood of failure, I see the same set of issues repeatedly. As before, I have seen these most often among non-profits but not exclusively.
- Lack of independence for directors. In some circumstances, the conflict of interest is so clear (directors in high-level, influential posts with major vendors) and in some cases, subtle where familial relationship are involved. Suffice to say, in non-profits this is one is the most prevalent.
- Involved or have a tendency to become involved in operational issues. This element is perilous in so many ways. First, the board exists to function separate and distinct from management. A board’s job is to procure and secure, competent capable management not to dabble in operations. If management is underperforming, it is the board’s duty to identify the performance gaps and to assist management in achieving correction but not by becoming involved in operations. Likewise, boards that find the need to meddle don’t empower management to take risks, drive performance and seek innovation. Think about it: The presence of board members in operations creates sufficient tension for management and thus, management tends to guard what it does and how it does it.
- Insufficient knowledge for the industry that the board operates within. Boards need education sufficient to understand the key risks, shareholder interests, etc. in the applicable industry. Uneducated boards equal poor decisions.
- Lack of knowledge and engagement with stakeholders and shareholders. Remember, this is a key issue even for non-profits. My non-profit clients goof this one all the time. They believe that the shareholder/stakeholder is whomever they are serving (patients, residents, etc.) and thus, they lose sight of where the organizational risks and commitments (legal and other) truly lie. Boards engage shareholders and stakeholders, management engages customers. I can literally write dozens of pages of case studies where boards, especially non-profits, lost sight of (or never had in sight), the actual stakeholder/shareholder and ultimately, what happened and how painful it was.
- Lack of a risk management structure at the board level.
- Lack of a process and commitment to strategic and financial planning.
- No or a deficient process for board recruitment, review and performance measurement.
In the final installment of this three-part series, I’ll cover best-practices for governance, specifically in the healthcare/post-acute care/seniors housing environment. In so doing, I’ll cover the issues such that regardless of tax status (exempt or taxable), the information is relevant.