The Real I ssues Maria Capozzi, MPA Principal, Governance Services - - PowerPoint PPT Presentation

Crow n Corporation Governance:

The Real I ssues

Maria Capozzi, MPA

Principal, Governance Services

August 2 5 , 2 0 1 4

The Canadian Society of Corporate Secretaries

1 6 th Annual Corporate Governance Conference

Banff Springs Hotel | Banff, AB | August 24 - 27, 2014

AGENDA

1.

Introductions

2.

Public Sector Governance

3.

Real Life Case Studies

–

Dealing With Sensitive Issues

–

Strategies to avoid the pitfalls

4.

An Effective Board?

5.

Pitfalls to Avoid

6.

Discussion

Maria Capozzi, MPA

• With Manitoba OAG since 1997
• Conduct board governance audits & evaluations

– Best practice reviews include: Study of Board Governance (2009 & 1998); Audit Committees (2006); Appointment Process (2012); Ethics (2014) – Governance assessments include WCB, Crocus Investment Fund, St. Boniface College, Lions Housing, School Division, Rural Municipalities

• Currently on Manitoba ICD executive committee

– Enrolled in Winnipeg’s first ICD.D class this fall

Introductions

Office of the Auditor General

• Independent Office of the Legislature

– Appointed for 10 years – Report to Legislature, not to the government of the day

• External auditor to government

– Audit of the Public Accounts – Performance audits of government programs – Special audits and investigations – Governance reviews

Introductions

Roundtable:

• Organization & Role ?
• Example of a tough board challenge you’ve

faced or currently dealing with?

Introductions

“Corporate governance today is harder than ever.” “Governance in the public sector differs from governance in the private sector.”

– Is public sector governance harder than private sector governance?

True or False?

Public Sector Governance

 When the shareholder is government, the

issues are considerably more complex

 Yet much LESS research and guidance on public

sector governance !

– Can’t always apply best practices from the private sector or non‐profit sector – But need to stay on top of best practices in these sectors because they impact public sector, or will affect over time.

Public Sector Governance

CEO Government

Board of Directors A Three-Legged Stool:

• $$
• Mandate
• Information

Management & Organization

BOARD

Government

Responsible Minister & Department

Public Sector Governance

• Advise
• Advocate
• Accountable

“Effective Board governance is a key component of ensuring that Crown

• rganizations are well run, operate

within their legislative mandate, avoid inappropriate risks, and provide services to citizens in an efficient and effective manner.”

Survey of Board Governance in Crown Organizations, 2009

Public Sector Governance

Unique challenges of public sector governance:

• 1. Financial issues are more complex  there is no
• ne ‘bottom line’

– Have to be financially prudent, but also fulfill a public policy mandate.

 Fiscal...Social…Environmental…Political…“bottom lines”

– Never enough $$  especially in key social services like Health

Public Sector Governance

Unique challenges of public sector governance:

• 2. Board control over key areas may be limited

– Hiring and firing of the CEO  not always in the purview of Crown boards

 CEO compensation may be set by govt

– Board composition and appointment process

 Government appoints Board members  Chair selected by government

– Strategic planning choices and risk tolerance

Public Sector Governance

Unique challenges of public sector governance:

• 3. More rules, constraints and sensitivities

– Mandate constraints will always exist

 Bounded by Legislation; legislative change takes time

– Policy and Financial decisions  Budgets may be set by government

 Doing what’s best for the organization may conflict with the

public policy objectives of government

– More regulations, policy requirements and ethical guidelines

Public Sector Governance

Unique challenges of public sector governance:

• 4. Accountability issues much more complex

– 1 Shareholder  But often no clear direction – Numerous/varied stakeholders  even indirect stakeholders may carry considerable weight – Multiple accountabilities and reporting requirements

 Discuss and clarify  Accountable to whom and for what?

– Relationship with Minister may have significant impact

 Approach/personality of Minister; Minister’s understanding of

issues  Ministers change without warning

 Board has responsibility to speak truth to power, AND abide by/

implement government direction well.

Unique challenges of public sector governance:

• 5. A Special Duty of Care owed to citizens  Must

safeguard the public interest

– Accountability for use of public monies – Setting appropriate policies  Following them !! – Monitoring the organization and its performance – Ethical Leadership – Transparency Lack of it places accountability at risk

Public Sector Governance

A Special Duty of Care is the responsibility of all

• rganizations who spend other people’s money

DEALING WITH SENSITIVE ISSUES

CASE STUDIES: REAL ISSUES

Lets Talk Sensitive Issues

• 1. Real Case Scenarios

– Discussion at tables first

• 2. How good governance policies, processes

and frameworks help overcome issues

• 3. Why are these issues so difficult to deal

with?

17

CASES

SCENARIO #1:

– Board member has begun personal relationship with a member of senior management. – Relationship disclosed by employee to CEO, and by Board member to the Chair – Is this a problem? Why or why not?

Real Life:

• Female BM; Male employee  Disclosed to full Board
• BM recused if/when necessary; Manager had limited involvement with Board
• BM served out remainder of term then left Couple still happily married today

 Ethics and Conflict of interest policies

– Have policies and procedures in place

 Policies specific to the Board, as well as for

• rganization

– Sign annual declarations

 Conflicts come in many varieties. Real vs perceived

conflicts  deal with both.

 Term Limits  Process for removal of Board members

19

CASES

SCENARIO #2:

– Board member has become “too busy” to attend meetings. – What do you do?

Real Life:

• Letter written to Minister saying that as per policy, this BM is considered to

have ‘resigned’, and request a new BM be appointed.

• In this case, “too busy” was a euphemism for dysfunctional board BM did

not know how to deal with issue.

 Have attendance policy

 By-laws should allow for removal of a board

member

 Term limits  Board evaluations

21

CASES

SCENARIO #3:

– Self‐assess as highly effective Board that works well together, even though represent different stakeholder groups – 97% unanimous decisions – Is this an effective Board? Why or why not?

Real Life:

• Chair was a bully  pressured BMs into unanimous decisions
• Unanimity is not an indicator of effectiveness  stifles independent opinions,
• pposite of governance theory

Reaching Consensus

 Consensus does NOT mean unanimity.

– If insist on unanimity, independent opinion may be silenced.

 Consensus is a process  What does consensus mean?

– Means all can live with/support the decision, even if it is not necessarily your first choice.

Resolving Conflict

 Criteria for reaching consensus

– Everyone has had an opportunity to provide input. – Everyone believes they were heard & understood. – Everyone able to state the decision clearly. – Everyone agrees to support the decision in what they say and what they do

 Ultimately Board takes collective

responsibility once decision made

– If you can’t do that....have the courage to resign.

CASES

SCENARIO #4:

– Contentious decision needs to be taken around a strategic issue Board is divided – Chair pushing Board in particular direction, says it is the will of the Minister – How do you handle?

Real Life:

• Meeting delayed – decision postponed
• Chair called each dissenting BM into his office for private discussion
• Special meeting called (limited notice)  unanimous decision made

 Have a policy for decision‐making

 Voting Majority ?  Culture should make it ok to have nay vote.

 Get it in writing  Fiduciary duty

 At end of day, do what’s best for the organization  If can’t live with the decision, have courage to

resign.

26

Good Board Culture

 Board Theory: To bring together individuals

with diverse experiences, values and perspectives ‐‐ and through discussion and debate of those views ‐‐ Board assists

• rganization in reaching informed, well‐

considered decisions.

– Diversity of thought crucial to effective governance – Need active participation by all members – Need a way to resolve conflicting opinions

What is Active Participation

• 1. Bringing your views to the table

– Board culture that encourages openness, candor, and respect  allows your views to be expressed without fear of criticism or censure.

• 2. Listening with an open mind to others’ views

– Trying to understand the concerns of others – Not talking all the time (or just waiting til your turn)

• 3. Working to resolve conflicting opinions

– Board should not avoid conflict, but have process in place to resolve conflict in timely manner

What is Active Participation

 Common mistake to consider someone to be

a “good team‐player” if they are agreeable, accommodating, similar socio‐economic values, and a “good fit”.

– NEED diversity of perspective ! – A “good” Board member who never contributes or adds to the discussion is JUST AS INEFFECTIVE and dysfunctional as one who always disagrees or is

• verly aggressive.

Board Culture

 Board Meetings

– The place to review, argue, critique, comment on a decision is at the Board table.

 Members must feel free to express views, opinions openly

– Once decision is made, members take collective responsibility

 Maintain solidarity on behalf of the Board

– Board should be a source of countervailing power to the CEO, not adversarial power

 A constructive tension

 “Most Board members seem hesitant to question, clarify and

discuss for fear of being considered negative.”

 “Our challenge is trying to get thoughtful discussion to take

• place. Come to think of it, maybe just discussion – it doesn’t even

have to be thoughtful.”

 “It takes a lot of confidence to ask questions and debate on the

• Board. Most Board members seem to just agree with the CEO…

need less of this and more input, discussion, critical analysis on the part of most Board members.”

 “Too many useless people appointed to Boards who do not add

value, they don’t speak up or share opinions.”

Survey Respondents

OAG Survey- Actual Quotes

CASES

SCENARIO #5:

– Prominent Board member who is well‐known and connected  very vocal and monopolizes meetings – Has become the informal leader, usurps the Chair – Is this a problem? Why or why not?

Real Life:

• Chair was weak at running meetings. Strong BM brought in new approaches
• Evaluation process put in place  assessed processes, Chair, as well as

individual BM evaluations

 Role of Chair  The 4 T’s

 Mobilizing Talent  Building Trust  Managing Tension  Investing Time

 Board evaluation process

33

CASES

SCENARIO?:

– Others ???

CASES

SCENARIO #6:

– Successful new program, generating good revenue – Complaint about quality of programing to Board – Management reviewed situation and reported all

• k; just a disgruntled client.

– Is this an issue? Why or why not?

Real Life:

• Board knew little about program  provided no oversight; asked no questions

about the “great success”, yet Board approved bonus payments to mgmt

• OAG audit substantiated whistleblower complaint; quality of program lacking;

student numbers inflated (ie. overcharging Province)

Fraud

 Fraud can happen anywhere

– Board needs to remember that there is a plausible explanation for every fraud.

 Fraud is committed by trusted employees  Ask questions – watch for changing mgmt values or style

– Board member needs:

 A questioning mind  critical assessment of evidence.  Willing to suspend judgement about honesty of mgmt  Be sure a prudent and reasonable person would exercise

the same level of due diligence in a similar set of circumstances.

Fraud

 Fraud – mitigate the risks

– Have good ethics policy and program ensure employees aware and trained

 No policy, procedures, or internal control can 100% stop

fraud from occurring.

– Good program results in a corporate culture that does not tolerate fraud, or identifies it quickly.

 Only small % always ethical, most of us can be swayed by

the circumstances. If see/perceive employees getting away with it, 66% of us will be emboldened to do so as well.

– Transparency is a key disinfectant  shine a light in dark corners

Dealing with Sensitive Issues

 Why So Difficult To Raise These Issues?

– Involves feelings  we hate dealing with feelings! – Many Directors and CEOs uncomfortable / unfamiliar with these types of discussions

 Avoid short-term pain of dealing with issues, but results in long

term problems

– Our individual vulnerabilities also come into play

 Fear of criticism (our personal concerns of adequacy)  Fear of offending others

– Ask questions, acknowledge emotion, listen actively

 Don’t assume understand people’s intentions No fault/blame  Focus on substance (what needs to get done) and process (how to

move forward to get it done)

38

AN EFFECTIVE BOARD

Effective Governance?

HOW EFFECTIVE IS YOUR BOARD?

 Is your Board working hard?  Is your Board clear on what it needs to do?  Is your Board achieving results?

VIDEO

Link

VIDEO

WAS HE… …WORKING HARD? …CLEAR ON WHAT NEEDED TO BE DONE? …ACHEIVING RESULTS?

BUT WAS HE EFFECTIVE ?

Your Board may be working hard…

But HOW EFFECTIVE is your Board?? Effective Governance?

The Myth of Governance

MOST COMMON BOARD MYTH: If the organization is doing well, the Board is effective and providing good governance.

NOT TRUE !!

The Truth About Governance

 Board Effectiveness ≠ Organizational

Performance

– Cannot assume a financially successful organization has good governance.  Nor vice versa. – Need to differentiate the effectiveness of the Board, from other organizational indicators.

Evaluate the Board on how well it is fulfilling its governance role & responsibilities.

Governance Challenges

• How do you know if providing good

governance?

OAG Survey: 88% report they govern effectively, YET only 56% of Boards said they conduct evaluations.  93% said are effective because providing good service.

• Real question is  What value does the

Board provide?

– How do you know if providing good governance? – Why do you even need a Board?

What Is Governance ?

Corporate governance is the system by which organizations are directed and controlled.

Cadbury Committee (UK)

 Requires clarity on roles, responsibilities and

relationships

 Incorporates the 4 pillars of good governance

4 Pillars of Governance

 Leadership:

– Setting the long‐term strategic direction and empowering management

 Stewardship:

– Shepherding resources belonging to others

 Responsibility:

– Evaluating organizational performance and holding management accountable

 Accountability:

– Reporting to stakeholders

What Is Governance ?

DI RECTI ON

Stewardship Leadership

CONTROL

Accountability (Reporting) Responsibility (Monitoring)

Management & Organization

BOARD

$$

Funders/ Government Owner/ Shareholders

Source: Adapted from Brown Governance

Governance Issues

 Almost always occur because Board stops

focusing on either direction or control:

– Sometimes due to Board’s lack of involvement in setting strategic direction… – Most governance issues result from lack of control/monitoring.

 Board must provide vigorous and competent oversight!

 QUICK AUDIT: Where’s your Board’s focus?

– Look at your Agendas  Are each of the 4 pillars being dealt with?

Why is it SO HARD?

 There is no one “right" way

– Every Board and each organization is unique – Not a compliance‐based process  No checklist can give you good governance

 Governance is a dynamic process

– Integrated process that is dependent on members, emerging issues, specific situations, etc. – The organization’s context and environment changes over time What used to work may not work anymore

Why is it SO HARD?

 Effective governance is more than just good

structure and process

– Relationships & human behavior are the most critical component of governance.

“Board dynamics may be the single most important factor in determining board effectiveness.” (Leblanc & Gillies)

– Board can meet all common governance guidelines/ compliance requirements, yet NOT have good governance.

“What makes good Boards great are not rules, regulations and mandates, but simply how well people work together.”

(Harvard Business Review)

Board Evaluations

 Need to know WHY you are doing it 

different reasons lead to a different process

– Compliance requirement? To report on Board’s success to funders? – To make changes to Board processes / culture ? – To assess overall impact of Board on organization?

 Evaluation should not occur for its own sake,

but to enhance the Board’s governance.

– Evaluation process should serve as an objective catalyst for improvement and change.

How to Evaluate the Board

 How to evaluate?

– No “one size fits all” approach  Be careful of the internet!

 Standardized checklists are not enough

– Understand your unique context/environment, and tailor process to suit your needs – BEFORE evaluating performance, need agreement on roles, responsibilities and expectations

 Clear mandate; Shared understanding of corporate goals and

how Board contributes to success

 A Charter of Board Member Expectations

How to Evaluate the Board

 How to evaluate?

• 1. Decide purpose & parameters of evaluation

 Helps derive the criteria/performance indicators

• 2. Assign independent board leader to oversee process

 Governance Committee; Lead Director; etc.  NOT the Chair! Nor management Board responsibility

• 3. Consider use of external support

 If first time, can help develop appropriate process  External analysis keeps results objective & confidential

• 4. Solicit feedback from all Directors

 Also feedback from senior management

What to Evaluate

 What to evaluate?

• 1. Board processes and structure

 Meeting processes, Agendas, Committees

• 2. Board information

 Information needs being met

• 3. Board culture

 All feel comfortable expressing views, even if conflicting  Effectiveness of Chair

• 4. Board impact

 Strategic impact & financial impact  Overall impact – what value does the Board provide?

Evaluating the Board

 Results should be communicated to all

Directors

– Provide key insights and recommendations  Evaluation should be a catalyst for change – Priorize the recommendations and set new performance expectations based on the feedback

 Evaluation valuable, if handled well and used

appropriately

– Evaluate all levels: Board as a whole, Committees, Chair and Committee Chairs, and Individual Directors

Evaluating Directors

 Peer Evaluations

– Overcoming resistance

 Clear focus on how and why – what is rationale?  Do Board evaluations first  Never start with individual

director evaluations

– Have clear expectations of Director performance

 No surprises  assessed against agreed-upon criteria  Charter of Expectations

– Confidential process  use external support

 Results confidential to directors  report to full board at

aggregate level only

 No attribution of comments

Evaluating Directors

 Peer Evaluations

– Must ensure a RESPECTFUL process

 Questions about Board role and the agreed-upon

expectations, not personality traits.

 Never denigrate people or relationships

 When handled well, Directors welcome the

input and serves to improve performance.

– Example: BMO Charter of Expectations

 Winner of Conference Board of Canada’s National

Governance Award

 At that time, ranked 2nd in Globe & Mail’s Board Ranking

KEY PITFALLS

Where can things go wrong?

Pitfalls To Avoid

Areas That Impact Board Effectiveness:

• 1. Board–Management Relationship
• 2. Board Information
• 3. New Initiatives
• 4. Board Oversight

 Be clear on roles; respectful relationships

OAG Survey: 90% of Board members say not overly involved in day‐to‐day management issues  BUT

• nly 55% of management agreed.

 Board to monitor organizational performance

– Hired management to manage  To DO – Board  To provide OVERSIGHT

• Over = Above; not within
• Sight = To look; not touch
• 1. Board-Mgmt Relationship

Board’s Role  Oversight / Monitoring When needed  Micro‐Monitoring

But NEVER Micro‐Managing!

• 1. Board-Mgmt Relationship

“A wealth of information creates a poverty of attention...” Herbert Simon, Nobel Laureate

• 2. Board Information

 Boards often get too much information:

– Information too detailed; not understandable / useful – Always good news – Only hear bad news after the fact

OAG Survey: Almost half of Board members (47% ) report feeling overwhelmed by amount of material they receive.

 Significantly higher today used to be 19% !

• 2. Board Information



Quality of information received is key contributor to good decision‐making

– Board has a duty to demand and expect appropriate information

Governance Information≠ Management Information



Board Agendas belong to Board, not CEO

– Identify what strategic decisions need to be made… Then, what information required to make those decisions?

• 2. Board Information



Typical Agenda Issues:

– No distinction of strategic vs. non‐strategic issues – No variation  Rotate order of Agenda items – Hold incamera sessions as regular part of agenda – Studies indicate early items get input; later items get short shrift.

 What’s often last on agenda? Key risk items such as Financial

issues; New Initiatives, etc.

“I feel Board minutes should better reflect discussions held at the

• Board. All minutes seem to look the same.” Survey Respondent
• 2. Board Information

• 3. New Initiatives

 New initiatives = RISK

– Board must ensure it understands implications of

new initiatives – and its link to strategic direction.

– Board should closely monitor implementation

progress and costs of new initiatives.

“Noses in, Fingers out”

• 3. New Initiatives

LION

Management

• vs. MICE

Board CEO – powerful, visionary BOARD – passive, loyal

• 4. The Lion & The Mice

 This is a KEY governance issue

– Evident in many OAG governance reviews – Often a long‐term CEO who “symbolizes” the

• rganization:

“Visionary” – “Entrepreneurial” ‐ “Charismatic”

 Operate as a “rubber‐stamping” Board

– Meetings routine; feel orchestrated – Hesitate to provide feedback – Over‐reliance on verbal reporting

• 4. The Passive Board

 Board must provide effective oversight and

active monitoring of both CEO and

• rganizational performance

 What does active oversight mean?

– Monitoring results achieved in implementing the Board’s strategic direction. – Monitoring CEO performance Conduct annual performance evaluations – Approving CEO expenses  Board or delegated to Audit Committee

• 4. The Passive Board

“But we TRUST our CEO – S/He is excellent!”

– Trust is not synonymous with accountability. – Board must both trust management AND hold accountable!

 Good accountability protects management, as

well as the Board.

– Board oversight of expenses/conflicts of interest protects CEO from suspicion. – Assures Board their trust in CEO is well‐founded.

Trust vs. Accountability

What does “holding accountable” look like?



Management ensures information accurate, clear, and allows monitoring of progress.



Board ensures: – Funds appropriately spent  financial obligations met – Strategic direction being implemented. – Policies in place  and being adhered to! – Compliance with funding agreements / legislation. – Evaluation of performance, both organizational & CEO.

Holding Accountable

Rubber Stamping Grilling Holding Accountable Asking for More Take at Face Value

l Trusting- Comfortable l Trust and Healthy Skepticism l Uncertainty - Increased Skepticism l Overly Trusting- Abdication l Accusatory- Aggressive

Board should be HERE

• - Moving As Needed Between These –

Continuum of Board Behaviour:

Holding Accountable

 Asking Questions for Accountability:

– Not just a routine check‐list of questions, but an active and full dialogue of issues.

 What’s working?, What’s not working?, How do we

know?

 How can it be improved?, Does it need to change

in light of changing circumstances?

– Ask How…? and What..?, rather than WHY?

 Helps to maintain respect & trust.  Never denigrate the relationships.

Holding Accountable

 Full Board responsible for financial oversight

– Not just Chair, or Treasurer, or Audit Committee

 Audited Annual Financial Statements

–What does having a “clean” audit opinion really mean?

• Fraud?
• Level of materiality?
• Summary of unadjusted items?
• Management Letter?  Board to follow up

–Audit is not a financial guarantee  Board must interpret, assess results, and take appropriate action as necessary.

Holding Accountable

CLOSING THOUGHTS

In Closing

 Ensure Board fulfilling all 4 pillars of

governance

– Focus on both DIRECTION and CONTROL

 No “one‐size‐fits‐all” approach to good

governance

– Board can fulfill its functions effectively through various mechanisms and governance models – Principles of good governance remain consistent

In Closing



Keep in mind good governance is not easy:

– Governance never remains static  practices evolve; what once worked may not work anymore – Board culture requires attention  set the tone and spend the time to improve group dynamics – Good governance is a journey…not a destination. It can always be improved! Human behavior on a board can make even the worst set of circumstances work, OR defeat even the best conditions!

Discussion ? Comments?

Copies of all OAG Governance reports available at: www.oag.mb.ca Maria Capozzi, BA MPA

Principal, Strategic Initiatives & Board Governance

Office of the Auditor General (Manitoba)

204-945-4251

MARIA CAPOZZI

The Canadian Society of Corporate Secretaries

1 6 th Annual Corporate Governance Conference

Banff Springs Hotel | Banff, AB | August 24 - 27, 2014