Roles and Responsibilities

Much of the meeting is verbal so there must be a disciplined approach to what is talked about, how it occurs, and when it is done. It is not acceptable for directors to talk about any issue that comes up. They must address the right issues, at the right time and in the right form.

Board monitoring – management reporting

Monitoring is at the heart of the board’s job. In essence, it is the means by which the board discharges its accountability to provide assurance that the criteria it has set for the carrying out of certain actions and the achievement of certain outcomes have been met. Bearing in mind that, in the first place, the board set these criteria for a purpose – to protect and enhance the organisation on behalf of its owners/key stakeholders – the board is obliged to then ensure its instructions have been followed.

But monitoring can be problematic for boards. In the absence of a clear understanding of the purpose of monitoring and an agreed process based on sound governance principles, this board task, perhaps more than any other, can inhibit the creation

and maintenance of a sound board-chief executive relationship and reduce overall governance effectiveness. Among the inhibitors to effective monitoring are:

• The board has no criteria against which to monitor the chief executive’s actions and reports.
• Board members bring their own subjective interpretation of the board’s criteria and judge chief executive compliance on the basis of how they would have met the criteria themselves if they were in the chief executive’s shoes; and
• The reporting submitted by the chief executive either does not address the board’s criteria or the chief executive presents too little or too much data.

Monitoring should be systematic

Reporting to the board can be the bane of many chief executives’ lives. Few boards give explicit instructions to their chief executive about what is to be reported and thus what will be monitored. Many, if not most, chief executives are left having to second-guess their board’s requirements. Unsystematic reporting leads to unsystematic monitoring. This does not work for either the chief executive or the board.

The following three principles guide the board and the chief executive in determining what is to be monitored and therefore what is to be reported:

1. The board, in the first instance, must determine what results or actions it wants to monitor and capture these in policy as performance criteria to be met.
2. When the board has set criteria for what must or must not be done, and what must be achieved, the chief executive is obliged to report against these criteria; and
3. The board should make clear to the chief executive how (i.e. in what form) specific matters should be reported.

Monitoring criteria made clear

One of the reasons why so few boards make clear to the chief executive their monitoring requirements is that, in many cases, directors do not know what they need to monitor, other than in the most general terms. They know they need to monitor the organisation’s finances, but exactly what financial information should they monitor? They know that certain operational elements are critical to the achievement of the desired outcomes, but which of these are relevant to the board and which are strictly management matters? They know they should be adding value to the work of the chief executive and staff, but how can they when they don’t know enough about the work to be done or when, in some instances, the issues are so technical that only specialist staff members understand the issues? So what should they monitor, and how?

Understanding the business

One of the common misconceptions about governance is that it requires a highly detailed knowledge of the business being governed. While it is true that all directors must understand, in a general sense, the business of their organisation, they do not need to be experts in that business to be an effective director – at least not in the sense that staff are, or are expected to be, experts.

The role of the board is to govern the organisation, not to manage it, and to this end, directors should be experts in governance not operations. However, the application of governance skills requires a sound background of organisational knowledge. This knowledge will typically result from past or current experience in the organisation’s business, but most commonly from reading, interpreting, questioning and monitoring the content of many chief executive reports.

The dual processes of reporting and monitoring not only keep directors informed about the organisation’s performance but are also excellent mechanisms for creating and growing a bank of organisational knowledge relevant to the board’s governance role.

Monitoring based on policies

When the board establishes a policy framework, it has the basis for systematic monitoring. Policies make clear what is, or is not to be done, and what is to be achieved. Monitoring is then made simple – has the chief executive complied, have the results been achieved, is the board working to its own policies?

Quite simply, board monitoring is a criterion-referenced activity. Boards that grasp this concept suddenly find their monitoring role to be not only much easier to define and carry out, but also much more effective.

In monitoring compliance with policy, the board must ensure the data it receives from the chief executive is presented in a way that enables understanding and interpretation. This requirement, too, should be presented as a criterion. Typically boards address specific areas of operational risk by developing issue-specific policies, e.g. in the various areas of finances, personnel, protection of assets, etc. In addition to these policies, we recommend the board develop a policy that speaks directly to its own needs for information and support.

A sample Communication and Support to the Board policy is included in the online board charter.

Respecting the CEO’s choices

Many boards are blessed with board members with extensive skills and experience in the business of the organisation, but these same board members become a curse when they try to superimpose their own version of appropriate actions over those of the chief executive.

Such board members are judging the chief executive not against the outcomes achieved (within the limitations imposed), but rather in terms of how they would have approached the same issue.

It makes little sense that the board should hire a competent chief executive and then tell him/her exactly what actions or decisions to take.

Allowing the chief executive to make the operational choices can be hard for some board members to accept, especially those with relevant expertise. But they must do so or they risk taking over the chief executive’s decision-making responsibility and undermining the board’s ability to hold him/her accountable.

Given that the board has developed a policy framework which provides a clear set of performance expectations for the chief executive, a board must allow the chief executive to exercise a reasonable interpretation of those policies. By this statement we mean a reasonable chief executive interpretation, not a reasonable board interpretation. If the board has not been sufficiently clear in its policy making – and it is unhappy with the outcome of the chief executive’s actions because of that – it is the board’s responsibility to amend the policy accordingly.

Boards should not fear this freedom of interpretation given to the chief executive for, in the end, they control the policy which determines the extent of freedom. The board, then, is the ultimate controller. However, it must exercise that control ethically and fairly.

Having placed the policy ‘goal posts’, the board must accept the chief executive’s efforts to achieve the desired outcomes. The goal posts should not be moved without making clear to the chief executive, ahead of time, that this is to occur and why.

The ‘reasonable interpretation’ concept, then, is consistent with principles of natural justice.

Too much or too little monitoring data

Too much data can be as inhibiting to effective monitoring as too little. Many directors find themselves having to pore over pages of often irrelevant information, feeling that, because the chief executive has presented it all, it must all be read. One of the competencies found among good boards is that they have made clear to the chief executive not only what they want reported and how, but how much reporting data is necessary to enable effective monitoring.

What good board papers look like

Ensuring the papers directors receive are of a consistently high standard and include the information required for sound decision making should not be left to chance.

The first step in achieving this is to understand the board’s expectations of the papers and reports, and to fully appreciate the required writing and content standards. In some cases it may be necessary to educate the board, the chief executive and the staff as to such standards.

The next step is to ensure staff have the knowledge and ability to meet these standards.

Even when this is achieved, a board should be prepared to reject papers that do not meet its requirements. It should return them for redrafting. It is a hard but important lesson for staff to learn that meeting the board’s expectations about the quality of papers and reports will not only improve the quality of the board’s deliberations and decision making, but also assist staff to avoid delays and unnecessary extra work in the face of deadlines.

Write to the board’s issues and concerns, not management’s

A simple but effective principle will ensure all reports and papers presented to the board are written ‘upwards’, relevant to the board’s interests and concerns rather than asking directors to come ‘down’ to management’s interests. The principle is:

Commence every report or board paper with a statement made by the board in its policies or statement of strategic direction, e.g. a specific outcome, or that relates to something drawn from the constitution or some other document written at the board level.

If no such statement or governance context exists, the writer should ask him or herself, “Why am I writing this?” The answer could be because the writer wants to tell the directors about something that he or she is doing that they want recognition for.

Or it could be because the writer thinks the matter is interesting (to him or her) and therefore the board might be similarly interested. Alternatively it could be because

the writer wants to alert the board to a matter that, in their opinion, should be documented in policy or in the strategic plan. In such instances the writer would state this and provide the context for the issue to be presented. In all other cases, the writer should cease writing and if, after examining their reasons for writing the paper or report, the answer is that there is no board context, the writer should stop writing and save both his or her time and the board’s.

Report length

Whether a report or board paper is written in haste or at leisure, the writer should keep in mind that there is a heavy demand on an individual director’s and the board’s time, and that not all directors will have an intimate knowledge of the matters which a board must consider. A particular challenge, therefore, is to strike a balance between the need to provide sufficient information and explanation on the one hand and the desirability of precision and brevity on the other.

Unless a special case can be made, board papers should be no more than four to six pages long (including appendices). This initially determined limit might be somewhat arbitrary but it can be adjusted as experience is gained over time.

It is important for staff to understand that a well-formatted and well-presented paper will help directors to quickly absorb the content of the paper.

Tell them what you are going to tell them, then tell them, and finally remind them what you have told them.

Good presentation can greatly assist directors to engage with papers prepared for their consideration. There are several dimensions to this.

Consistency of format is important. As shown in the sample board paper layout in the online resources, every paper should begin with a reference to the board’s issues and concerns. There should also be a statement of intent or outcome sought from the paper, e.g. for information only, for a decision, background to a policy issue, etc.

If possible, the paper should indicate which Key Result Area it is addressing. The paper or report should end with either a recommendation, if appropriate, or a very brief summary of the content, of not more than two or three sentences.

The five broad sections of the report are:

1. The purpose of the report and outcome or intent of the paper
2. The context and brief background if required
3. The content
4. Summary
5. Recommendations.

Brevity, simplicity and clarity

Papers for the board should not only be concise (only including essential information), but should also be coherent and logical, because brevity without clarity helps no one.

Papers for the board should be written as simply as possible and in plain language. It is a good discipline that papers being prepared for the board – even one comprising industry insiders – should not assume the readers have expert knowledge. That is not to suggest the writer should ’talk down‘ to the board, but that the use of expression and language should support accuracy of interpretation.

Inevitably, some directors will be better informed about an issue than others. For the same reason, a board paper should not assume that readers have a photographic memory about relevant past history. Each board paper should be self-contained and not force the reader to refer back to previous board papers or to recall past decisions.

Accuracy is also vital. It is easy to overlook simple spelling and punctuation mistakes that, when read by someone else, jump off the page. When this happens frequently, it can convey an impression of sloppiness that can easily undermine confidence in the conclusions in the paper or report. Good proofreading is indispensable.

When what is reported and concluded lacks substance and reliability, more far- reaching consequences are possible.

In summary, a good board paper:

• starts with the governance context for the paper or report;
• is structured so that content is relevant and the key issues stand out;
• avoids unnecessary detail – summarises instead (where detailed information is vital to the issue this is placed in appendices);
• avoids unnecessary jargon, abbreviations, etc.;
• uses diagrams and charts to aid interpretation and understanding;
• has clear recommendations so that decisions the board is asked to make can be easily and logically assessed; and
• is accurate and free from basic spelling, punctuation and grammatical errors.

In terms of layout, a good board paper will also:

• use headings and subheadings, short sentences and paragraphs, and bullet points where possible;
• number all paragraphs for easy reference;
• have all pages numbered, including the appendices;
• use bold text for headings of a size that is easy to read; and have plenty of ‘white space’ – avoiding cramming on the page.