Governance Vs. Management
Now, consider the source, Kenneth Lay, former CEO of Enron, April 1999.
A new corporate governance paradigm was formed unquestionably due to the horrors of Enron. With the Sarbanes-Oxley Act, governance has become a matter of federal law.
Historically boards were told to have their NIFO--"Noses In, Fingers Out" of the businesses they are governing. They have also been expected to know what's going on, the risks, understand what's working and what is not. They have always been expected to continually nose around, but not to directly interfere. That is quite a balancing act.
As of late, with these rising expectations and stricter federal governance mandates, I am hearing increased grumblings from CEOs saying that their boards are so intent on holding everything in check that they are now micromanaging the CEOs.
People too often confuse and blur the line between governance and management. This holds true for directors and managers as well. The term "governance" has now been associated with the word "control" and I suspect this is where the confusion starts. The spirit of governance is not about control. It is about providing organizations with the "big picture" by which good management decisions can be made. That's the board's job--policy making. Management's job is to carry out that policy with suitable procedures and projects. The board may provide advice, but the board should not detail exactly how management should accomplish the directive. In short, the board sets policy, and management carries it out.
In principal this sounds straightforward, in practice, things are far more complicated. The reality is that the legal bar and consequences have been set higher for board members post-Enron and post-credit crisis. It is understandable that directors are tempted to breach protocol and sink their "fingers in" deeply into the details of the organization.
So how do directors maintain adequate control without the appearance of meddling? Should boards keep their "fingers in" and risk disempowering and distracting management from leading operations of the company? Should boards second guess decisions potentially paralyzing the organization?
"Fingers out" does not mean "mouths closed" though. Directors should ask questions, the tougher the better to force management to think before they act. Also, directors should try to foster relationships with management outside of the board room to create a less formal and threatening channel for mentoring and influence. And when it comes to those meddling "fingers," best not fight the thirst of directors to want to dive into operational details. Allow for some special board sessions to focus on issues at a deeper level.
The primary focus of a board should be articulating company strategy--and not stepping on the brakes, but rather getting ahead with a foot on the accelerator. Rather than micromanaging, an effectual board should encourage good risk management efforts and a monitoring system of progress and compliance with legal requirements.
JOANNA MAKOMASKI, the former risk manager for an energy delivery company, is a specialist in innovative enterprise risk management methods and implementation techniques with V3 Advisory Group.
August 1, 2010
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