Read Lubna’s blog insights where she takes a fresh look at governance to create stronger countries and business
What is the difference between governance and management?
For anyone joining a board for the first time, one of the most important issues is to understand the difference between the board role of governance and the management role of managing. Effective boards understand and manage this difference. Dysfunctional boards do not.
Nowadays, directors of boards are expected to serve to make a difference, not just to be names on the letterhead and donors on a wall. The world is starting to expect a great deal more from its directors than even ten years ago and there are considerable risks. While no-one has been imprisoned from the financial crash – many feel this should have happened.
To look at the key differences between governance and management, I really like this explanation by The Wheel: “The governing body must govern; that is, it must provide leadership and strategy and must focus on the ‘big picture’. Governance is about planning the framework for work and ensuring it is done. As such, it is distinct from management (organising the work) and operations (doing the work). As far as possible, the governing body should therefore steer clear from making managerial decisions and getting involved in the day-to-day implementation of strategy.”
Today’s boards must be informed and want to be engaged, both to fulfil their legal obligations and to leverage their time and talent to advise management.
But the question is, at what point should the board cross the line and move into running the show? It’s tempting for directors to believe they are doing their jobs by interfering into management decisions.
I remember hearing one trustee of a charity who became exasperated because board discussions started diving into the detail of management – questioning staff appointments, looking at marketing activities and wanting to decide about the management of the building. The distinction between governance and management is inevitably harder in smaller organisations, especially in charities with few resources – but this level of detail should not be for the board unless there are serious issues.
In commercial boards, an understanding of the difference between governance and management rests on the tone of fiduciary responsibility and accountability to the shareholder.
The five primary roles are
- Choosing the CEO and senior executives
- Approving major policies
- Oversight of corporate strategy
- Oversight of risk programs
- Oversight of performance
Every board’s primary responsibility is to promote long term success of the company and deliver sustainable shareholder value.
The board needs to cross the line when one area is significantly under-performing and is putting the business at risk. If, for instance, sales were declining rapidly, then the board would be in its brief to ask for a review of the sales and marketing teams, including competencies of key personnel and the strategies and effectiveness.
All boards should look at these areas as part of their periodic review – some will be quarterly, some annually
- Group’s overall strategy
- Medium term plan and annual budget
- Financial statements and group dividend
- Major acquisitions, disposals and capital expenditure
- Group’s corporate governance
- Risk management policy
- Group risks appetite statement
- Review of management development strategy
The headhunters, Russell Reynolds, say that it is a director’s responsibility to act when necessary, “With the agreement of the chairman, directors don’t hesitate to act when the standards of governance and fiduciary responsibility require intervention. Directors are willing to get their ‘hands dirty’ when circumstances require a hands-on approach (eg crisis management).” The critical point here is that directors should act with the agreement of the chairman if they need to become hands-on. It is also useful to define the scope of what a non-executive will do if they are more involved in management for a specific project.
I hear time and again of directors who really struggled to be ‘non-executive’ when they first went on a board. It is a very different skill from being an executive.
Have you tips and experiences to share about sitting on a board?