Is Board governance an institutional
lynchpin or a necessary bureaucracy
Josephine Oguta
Regional Governance Advisor
World Vision International
Why do Boards matter?
1.
Nonprofits are legally required to have boards
of directors
2. Boards are the holders of the fiduciary
responsibility of the organization
3. Boards are required to ensure the delivery of
the mission
4. Boards fulfill the tax-exempt status of the
organization
People often question whether boards matter
because their day-today impact is difficult to
observe. But, when things go wrong, they can
become the center of attention.
Extensive research and practice in Nonprofit
governance is based on the premise that well
performing boards coincide with well
preforming organizations
Ideally, the Board guides long-term organization
strategy, puts the key staff in place to implement
it, and monitors performance against the strategy
set out.
Consequently, bad organization performance
and governance begins with a Board not
fulfilling its key responsibilities.
Underlying assumption
The best management practices adopted by the
best managers cannot succeed in an
environment characterized by poor
governance
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What is governance
Meaning: The word comes from Latin and means to ‘steer’ or ‘guide’.
Its use in an organisational context goes back to the 16th or 17th Century
Definition:
• Governance is a process by which a Board of Directors, through its
management, guides an institution in fulfilling its corporate mission
and protects the institution’s assets over time
• Corporate Governance is the system by which corporations are directed
and controlled. The corporate governance structure specifies the
distribution of rights and responsibilities among different
participants in the corporation, such as the board, managers,
shareholders and other stakeholders, and spells out the rules and
procedures for making decisions on corporate affairs. By
doing this, it also provides the structure through which the company
objectives are set, and the means of attaining those objectives and
monitoring performance” OECD April 1999
What are the Responsibilities (duties) of the
Board of Directors?
• Duty of Care – paying attention; due diligence
• Duty of Loyalty – put the organization first; no
conflict of interest; no private gain
• Duty of Obedience – Complies with the law and
organizational decisions
Question: What could happen if these three duties
are not followed?
Attributes that contribute to Board
effectiveness
• Skills and knowledge: What are the skills that are
needed for the board to effectively execute its
responsibilities?
• Process: What processes are necessary for the board to
both understand and properly oversee the activities of
the organization?
• Information: Is the information received by the board
adequate to support effective oversight and decisionmaking?
• Behavior: Does the board’s behavior support and
reinforce strong oversight?
Some barriers to good governance
“The greatest threat to the not-for-profit sector is
the betrayal of public trust, the disappointment of
public confidence…” Joel, F. (1999)
ENRON DIRECTORS
• 1) Fiduciary Failure.
• The Enron Board of Directors failed to
safeguard Enron shareholders by allowing
Enron to engage in high risk accounting,
• inappropriate conflict of interest
transactions,
• extensive undisclosed off-the-books
activities, and excessive executive
compensation.
• The Board witnessed numerous
indications of questionable
practices by Enron management over
several years, but chose to ignore them to
the detriment of the company.
• (2) Lack of Independence. The
independence of the Enron Board of
Directors was compromised by financial
ties between the company and certain
Board members. The Board also failed to
ensure the independence of the
company’s auditor
NON PROFIT DIRECTORS
• 1) Fiduciary failure:
• Fundraising: severe fraud, misleading
fundraising, fundraising compliance
issues and Fundraising inefficiency(
excessive costs and unfair contracts)
• Protection of charitable assets:
stealing/embezzlement; excessive
compensation, egregious self-dealing;
misappropriation of charitable assets, non
disclosure of material facts to the public;
mismanagement of assets and inefficient
operations
• Ineffective organizations: ones that
do not accomplish their social missions.
• Inefficient organizations: ones that
get too little mileage out of the money
they spend.
• Private inurement: individuals who
control the organizations attain excessive
benefits for themselves
• Excessive risk taking
• 2) Conflict of interest
Board composition ( Who and what they bring)
• Quality of recruitment: Most
board members are appointed
based on their individual status
and skills
• Quality of Board orientation
and development: Little is
done to get them to operate as a
collective i.e. how do their
individual skills compliment one
another to fulfill the governance
role?
• Board capacity: A great team
of high caliber managers
/management experts with no or
limited governance experience.
•
Board diversity: Cohorts in
the Board
Understanding the sum total of individual units = 1
Quality of Board meetings
• The only structure legally provided for a Board to
deliberate and make decision on behalf of the
organisation is through meetings
 Meetings are also the cornerstone of how the Board
carries out its governance role
 Meetings must be effective and focused
 If an organisation persists in a pattern of unproductive,
listless, unclear or dreary meetings, it will soon begin to
lose commitment from its Board members
Effective Governance
Systems and structures can provide
an environment conducive to
good Governance practices, but at
the end of the day it is the acts or
omissions of the people charged
with relevant responsibilities
that will determine whether
governance objectives are in fact
achieved. For example, the
identification of the background,
skills and expertise of the people
who walk into the board room is a
good start, but it is what they do
when they get there that is
critical.
“Effective Board should think deeply about the
way in which they carry out their role and the
behaviors they display, not just the structure and
process they put in place” Financial Reporting
Council (FRC. UK)
Quality of Board Chair
• Ability to lead the Board
• Ability to listen to all voices
including dissenting voices
• Ability to manage the meeting
and agenda process & content;
• Candid enough to address
sensitive issues yet respectful
and supportive of the CEO ( the
critical friend)
• Sets the tone for the way the
board operates.
• Ensures individual Board
Member’s accountability for
personal and collective
performance
• Does not usurp Board
responsibility – is inclusive
Courtesy of ActionAid International
Board effectiveness
• The effectiveness of a Board strongly correlates to the
quality of its conversations
• Quality of conversation is dependent on;
▫ Leadership
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Quality and management of agenda
Quality of information: Management and Committee reports
Board’s understanding of strategy
Preparations, planning, involvement
appropriateness, timeliness,
quality of members, Passion, Trust, integrity, commitment
Common purpose and comfort within the Board
Quality & timeliness of Management reports to the Board
• What does the Board need
to know – not what you
think the Board should
know.
• Simple and focused on the
real question/issue
• Generates/ mines the
board value
• Bridging management
action and Board
requirements
Board Decisions
• Well‐informed and high‐quality decision making is a
critical requirement for a board to be effective and does
not happen by accident.
• Flawed decisions can be made with the best of
intentions, with competent individuals believing
passionately that they are making a sound judgment,
when they are not.
• Many of the factors which lead to poor decision making
are predictable and preventable.
• The irony of leadership is that people don’t
equip you with the knowledge to make the right
decision, and yet they expect you to make great
decisions and think you’re an imbecile if you
don’t
• The single biggest problem in communication is
the illusion that it has taken place.
Ambition vs Capacity
A danger often faced by boards
is trying to do too much with
too little information or doing
too little with too much
information.
Fatick, Senegal Truck Loaded with Peanuts
Image by © Sandro Vannini/CORBIS
ca. 1985-1998
Board members’ behavior
• An effective board should not
necessarily be a comfortable place.
Challenge, as well as teamwork, is an
essential feature.
• All Boards deal with difficult issues
and decisions; it is how they deal with
them that defines whether the
relationships are upheld, trust is built
and respect earned.
• As a Board, what you say or don’t say
has an impact on the final decision
and ultimately the quality of
direction given for mission
accomplishment.
• There must be mutual respect
between the Board and Management
with appreciation of the value that
each brings to the success of the
organization.
Governance and Management interface
• The relationship between the CEO and the Board is often
viewed as one that is very complex
▫ many CEOs have difficulty developing and nurturing a
health relationship with their boards, and managing the
anomaly of being managed and held accountable by a team
of individual volunteers rather than a specific individual as
is the norm in other organizational positions.
▫ Many Boards have a challenge of collectively managing the
CEO and tend to abdicate this duty to the Chair or a
committee.
Governance and Management interface
• In Daring to lead; it is evidenced that the successful
CEOs are those who invested at least 20% of their time
towards board governance ( majority invest 6% or less)
• A research on effective nonprofit CEOs argue that the
board -centered executive is likely to be effective because
he or she has grasped that the work of the board is
crucial in adapting to and affecting the constraints and
opportunities in the environment.
• Just as the Board has the responsibility to support the
CEO, the CEO has a reciprocal responsibility to support
the Board.
Effective Governance
Boardroom Leadership
Research shows that these types of nonhuman changes fail more often than
they succeed. That’s because the real problem never was in the process,
system, or structure—it was in Board behavior.
The key to real change lies not in implementing a new process, but in getting
people to hold one another accountable to the process - and that requires
Crucial Conversations skills.
Governance performance VS organization
performance
• There is a strong consensus that you cannot separate the two:
inefficiency grows out of inadequate board governance.
Inadequate board governance also creates the conditions that
make embezzlement, misappropriation of funds and selfdealing possible.
• The case of the domineering executive director/CEO and the
weak board seems to be quite typical across the sector.
• The issue is therefore not whether good governance is a
lynchpin to organizational success but how to get Board
members to govern to ensure institutional performance
(Nonprofit Coordinating Committee of New York)
The China Great Wall Example
In ancient china, the people desired security from the barbaric people in
the north, so they built “The Great Wall of China”. It was so tall that they
knew no one would climb and so thick that no one could break it down.
So they settled back to enjoy their security. However during the first a
hundred years of the wall’s existence China was invaded three times. Not
once did anyone manage to break down the wall nor climb over. History
tells us that each time they bribed a gatekeeper-who opened the gates.
The Chinese were so busy relying upon the great walls of stone that they
neglected to find gatekeepers who were men of integrity.
Acknowledgement
• The role of the Board in Enron’s collapse - 107th Congress, 2nd
Session ( 2002)
• Institute of Risk Management (UK)
• The Role of the Board of Directors in Corporate Governance: A
conceptual framework and survey: by Adams, Benjamin, Hermalin
& Weisbach (Working Paper 14486)