Building blocks

This section will discuss the building blocks of the proposed framework by discussing role sets, critical success factors, mechanisms and performance indicators.

Despite the absence of a universally accepted corporate governance paradigm, as discussed previously in chapter two, there is nonetheless some form of shared understanding about what the nature of board work is. Whilst corporate governance practitioners may not be able to operate within or articulate a neatly defined theoretical model, there is clear evidence that they are able to use some tools that enable them to fulfil their role sets, and these help practitioners articulate the inputs affecting individual and collective decisions. Firstly, in section 6.2.2 it was confirmed

that boards establish their own role sets, and that some specific tasks, such as strategy, have very high acceptance.

The proposed first step is to consider performance and how this can be achieved by the board. The inevitable answer lies in the carrying out of a particular role set. Its articulation requires a sufficient degree of specificity to be meaningful; for instance, it is not useful to simply state that the board’s role is to make clear decisions, although clearly that is its central role.

A challenge is proper articulation of that role set, because it has been shown that what is required for one not-for-profit organisation may be different to another because of varying factors such as size, history and so forth. It is for this reason that the board is best placed to identify and articulate its role set.

A good place for a board to start is by examination of what is already in place in the organisation, including:

• original documents, that is, governing documents such as the constitution, and board charters

• previous board decisions including policies, instructions and permissions • feedback on past board decisions, performance indicators and organisational

performance

• entrenched practices; for example, the board meets on Mondays at 6.30pm and the meeting must conclude by 9.00pm

• mechanisms, systems and tools used by and available to the board; for example, the board reviews the monthly management accounts or uses an annual program of work.

A legitimate role set may be to promote virtues such as accountability, transparency, ethical behaviour or control. It is important that the board reach consensus on the role sets selected; failure to reach consensus provides an opportunity to discuss until consensus is reached. One of the clear advantages that can be gained from the exercise of developing performance indicators is the potential to come to a shared understanding and agreement about board roles: the clarity that this can offer to not- for-profit boards should not be underestimated. As noted in section 3.1.3, not-for-

profit board members are usually volunteers and new to the practice of governance. They are often more committed to the cause of the organisation than to the professional practice of corporate governance. It is for these reasons that they are often unclear about their roles. Reaching a shared understanding of board roles is an important step toward improving their effectiveness.

Once consensus is reached, the next task of the board is to agree on which roles are most critical for the board at this time. These are the critical success factors. Again consensus is important. The individual board of the particular not-for-profit organisation should consider the appropriateness of each critical success factor and dismiss (or include), such that they do not exceed 12 in number.

From these critical success factors boards are called to consider what mechanisms they use (or can use) to influence the favourable outcome of each factor; these could be simple mechanisms, such as agendas, or may involve complex frameworks, such the BICF, or may involve principles and virtues such as ethics, transparency and so forth.

Put simply, the proposed new framework suggests examining corporate governance mechanisms currently in place in the particular not-for-profit organisation, which includes theoretical and conceptual models, frameworks, processes, systems, rules, policies and procedures. These will provide the process from which the critical success factor is achieved.

In section 1.5.1, it was noted that Cadbury (2000) argued that there is ‘no single right corporate governance model and the best approach is to start with whatever system is in place and seek ways of improvement, and they should be tailored to their particular circumstances’. It was also noted at section 5.4.3 that the action research study organisation started its journey by examining existing documentation—in this case, the board charter. It is for this reason that this thesis recommends starting the development of corporate governance performance indicators by considering the mechanisms currently being used by the particular board. This can be approached in several ways.

These mechanisms could be in the form of corporate governance charters, corporate governance statements, previous corporate governance performance reviews, current policies or even the organisation’s strategy. The mechanisms could be drawn from a holistic corporate governance theory or from some other source. For example, some of the most obvious factors that should be regarded as inputs are:

• individual board members intellect, previous experiences • board team dynamics

• shared understandings, for example, the board has reached a shared agreement on its role

• the environment the board, organisation and/or individual board member operate in, including problems presented

• resources available to the board and organisation including staff and volunteer intellect, consultants and people they know

• societal expectations including the law, ethics and morality.

Some of these factors deserve more discussion. A board decision to take direct action in the organisation is an interesting one. Despite the principle of unity of control, that is where the chief executive officer is held singularly responsible for the implementation of board decisions; in some circumstances the board may find it necessary, because of say a poor financial position, to empower an individual board member to act. This is not as some would see it. In fact, it is not a decision for the board to intervene, it is a decision to appoint a board member to intervene. If that board member seeks board confirmation of his/her actions or board instructions, these too are regarded as separate decisions.

Original documents, such as the constitution, often establish such things as the structure of the board, where its members are sourced, how often it meets and how the board will operate; these important factors affect the effectiveness of the board. Importantly, original documents may mandate how a board is to go about its deliberations and tasks. For example, some boards have chosen to utilise the Carver (1997) policy governance model.

Clearly all of these factors influence decision making by the relevant board member— how much influence they exert however is likely to be entirely variable. It is known

that individuals interpret factors in differing ways, that is, a particular factor may be highly significant to one board member but less so for another. It is this variability in decision-making styles, intellects, previous experiences and so forth that makes it difficult to predict and model. In theory, the sum of individual decisions ought to be a collective decision; however, these can only be derailed by factors such as corrupt practices, group think and dominant personalities, and these should be considered as inputs to the decision-making process.

Lastly, feedback needs to be considered. It can be solicited directly by the board or obtained by reflecting on the impact board decisions have had on the organisation. The financial results often figure highly in a board’s analysis, because the financial reporting and control function is usually very well developed, as the ramifications of a poorly developed control function may result in insolvency and the termination of the enterprise. However, this should not be the only system and tool used by the board. Others can also yield valuable data in considering board effectiveness or decision making. For example, the human resource management function can provide data on staff turnover, which provides feedback on the extent to which intellectual property is exiting the organisation or the culture the chief executive officer is creating within the organisation. This thesis argues that the utilisation by the board of the systems and tools available and those used in the organisation for measuring the board’s own performance, will improve the likelihood of success by the board in establishing its own performance indicators.

Once these mechanisms are identified the board (and consultant) should establish appropriate performance indicators which should achieve at least Caddy’s (2002) first two levels of validity. Where several potential performance indicators are available for a particular critical success factor and the process by which it is achieved, the final taxonomy described previously in section 3.2.3 should be employed. The next section describes the expected outcome of the new framework. Section 7.4.4 will then discuss the technical aspects of performance indicators in detail.