1 LEADERSHIP ACUMEN. Issue 21 April/May 2005. Doug Macnamara & Banff Executive Leadership Inc. Models of Corporate / Board Governance Governance can be defined as: the combination of policies, systems, structures and a strategic/operational framework; which the governing body puts in place to ensure the leadership of the organization makes appropriate decisions, and takes appropriate actions to deliver services in an effective and accountable manner. This includes transparent and equitable stewardship of resources which will sustain the organization, and keep it relevant to both the community in which it operates and the clients/customers it serves. Today and into the future, the standards for what makes Governance good are rising, and demanding more time and attention from those serving as Board members.
2 When one talks about a model for Governance , the model represents an approach to the combination of the above elements. Beyond attention to Processes, Policies, Structures, etc. there are considerable differences in the kinds of Board in the world today. And these unique forms of governing bodies drive specific considerations to the application of different Models . There are five fairly commonly identified Models in use today: Traditional, Carver, Cortex, Consensus, and Competency. There are of course advocates for each model which often focus on their particular model usually at the exclusion of the others though the Models are in fact not mutually exclusive. Indeed, each model focuses on an element of Governance important for the effective functioning of a Board .
3 Many Boards actually adopt a combination of these Models , in a blend appropriate to the unique features of their organization and Board composition. However, in and of themselves these Models do not provide a comprehensive prescription for Board work. There is much more to good Governance than simply adopting a particular model of Governance . Let's look at each of the mainstream Models in practice today. 1. The Traditional (Structural) Model This is the oldest model, created in the earliest of Corporate structuring (1700's) and passed down over the years into charitable and not-for-profit organizations, even government crown corporations. It is the template most law firms use to establish articles of incorporation even today.
4 It is somewhat out-of-date for today's realities; however it still useful. Acts of Legislatures also follow this approach in bringing into force the existence of a specific enterprise. The structural model has its foundation upon the concept that the Board is the legal ownership entity, and in some ways even more it is the body Corporate itself, a legal person' in view of the law. This is true whether the entity is a for-profit, not-for-profit, or charitable Corporation or even a Society. These structures have changed significantly in the eyes of the law since their earlier forms, and have evolved today to limit the liabilities of both the corporation and its directors. This structural approach also has evolved slightly differently in the Anglo/American accountability to widely held shareholders approach, compared to German/Japanese cross- ownership Governance , and also family-owned enterprises with either other family members or minor partners ownership structures.
5 A basis of this model is that the structure of the Board itself, and the way in which it makes decisions, holds meetings, and the parameters by which it must abide are put into an approved structure and format. Another fundamental concept in this model is that the Board only speaks as a Board , and members of the Board speak on Leadership Acumen 21 Models of Corporate / Board Governance Page 1 of 10. behalf of the Board but do not have an individual voice on the outside world. The Board chair is usually structured to be the voice of the Board , but again can only speak in a way authorized by the Board as a whole. The structural model will usually define the delegation of responsibilities from the Board to: (a) The CEO and Management, and/or (b) Board Committees (including Executive Committee).
6 Unfortunately, where this helpful model often goes awry, is that it is silent on the accountability mechanisms and expectations for reporting-back when the Board delegates its powers. Thus, any Board utilizing this model must create Policies or By-Laws to define responsibilities, expectations, and accountability requirements for both Management and Board Committees. The Board should also create clear job descriptions for Board members, Board Executive positions, the CEO, along with Terms of Reference for Board Committees. An Annual Board Calendar should also be developed to ensure specific annual/quarterly/monthly accountability and reporting (as appropriate) to the whole Board by Management and the Board 's Committees.
7 Another area of challenge comes when the CEO creates operating committees of management/staff that interface with Board committees of similar-sounding responsibility. For example there may be a Human Resources &. Compensation Committee of the Board , and there may also be a Management executive-level committee that addresses job classifications, benefits, promotions, high-performers, bonuses, performance management, labour relations and even discipline. Board committee members may interface with executives from the Management committee to gain information for the Board concerns around Risk Management, Transparency/Accountability, etc. and may inadvertently direct staff without going through the CEO, leading to confused staff and Board members crossing the boundary between Governance and operational management.
8 Traditional Models have also been used in the past to create large Boards with representative members from either geographic, family, or constituent elements, and may ascribe weighted voting to different ownership parties/classes. Trends recently have been to reduce the size of such Boards and seek Board members capable of real Governance for the whole, as opposed to simply representing constituents. However, this representative-ness . structural design is one of the most potentially debilitating aspects to proper Governance today. Constituency thinking or even negotiation behaviour at the Board table flies in the face of Fiduciary Duty to the good of the whole. Boards with this constituency or representative structure need to be able to engage the knowledge and perspective from different stakeholder groups, but still come together to focus upon and make decision in the best interests of the whole enterprise.
9 Thus, the Traditional model helps organizations define Board structures, but requires the Board to actively and specifically address appropriate processes (especially accountability and communication) through Policy or By- Law creation. It must also work very hard to not have its committees delve into operational matters and end-run the CEO in the process. And, it must remember its Fiduciary duty to avoid conflicts of interest and focus on the good of the whole. 2. Carver (Policy) Model This model popularized by John Carver over the past 15 years, is in his own words, a rigorous academic approach to a practice area that has had very little research over the years . The Carver model has 2 fundamental concerns: (a) Boards focus on defining the ends of the organization what the organization strives to achieve or in some cases what it must do in order to put itself out of business; and (b) Creating the policies by which the Board and Management must abide in its pursuit of the ends.
10 The Board 's main role in this model is to create policy to guide management in its operational work, and to guide the Board in its Governance work. Leadership Acumen 21 Models of Corporate / Board Governance Page 2 of 10. The policy approach favoured by Carver is through statements of limitation . In the operational environment, the Board 's policies define what the CEO is not allowed to do, the limits to his/her decision-making, and the guide- posts within which he/she must operate. As long as the CEO doesn't break these limitations, he/she has significant freedom to decide how, when, where to do things the means of getting to the ends. This is of course motivational to CEO's and recognizes the competence, knowledge and full-time focus that a CEO gives to an enterprise compared to the part-time focus given by Board members.