Where should the board sit on governance vs. guidance?

Neither governance or guidance are the only thing a board should focus on – you can have too much of both. An effective board must strike a balance.

In some quarters, there’s a very active debate that suggests that governance is bad and guidance is good. It implies that governance is only compliance, it’s controlling, it’s rote, and it’s not thoughtful. On the other hand guidance is considered by some to be active, empowering and more strategic, so we should spend more time on it. But things are not quite that black-and-white.

Governance and guidance can and must coexist, in fact, I see guidance as a subset of governance. It’s impossible to govern well without also providing effective guidance.

There are several facets to governance. Compliance is an important part. It’s a bright red line that has been agreed in conversations with regulators. It sets out what things need to be done in a particular way and what needs to be reported. Then there’s a set of actions that are controlling and hindsighting. These identify if the organisation is doing what it said it was going to do and working within the parameters that have been set.

How a company succeeds within these parameters is guidance. It’s active and episodic – directions can change and guidance responds to changes that are occurring within the risk environment.

A good marker that the line is wrong is when management becomes tentative because they’re unclear of the boundaries. Management may be reluctant to move things too far forward or make investments because they fear the reaction of the board.

Guidance is about steering the direction of the company rather than managing it. If a board oversteps the line between guidance and management they will find themselves running the business – which is not a good outcome for anyone.

A good marker that the line is wrong is when management becomes tentative because they’re unclear of the boundaries. Management may be reluctant to move things too far forward or make investments because they fear the reaction of the board.

This line isn’t static. It may sit in different places at different times, depending on how stretchy the strategic agenda is, the competence of the leadership team, and how much authority the board wants to pass down.

The board needs to challenge management in order to both govern and guide. A robust CEO and management team – people that are comfortable in their own skin – will be able to rise to this challenge.

A good indicator of this is whether the CEO is comfortable enough to bring their leadership team to a board meeting. In this situation, look at how the directors interact with the leadership team. Are they supportive, challenging, cheerleading? Or are they just pot plants sitting around and not asking questions? If the balance is right there will be a good conversation with questions going back and forth.

For the board to fulfil their role of challenging management they require information. If the board feels they’re not getting the information they need, or management is reluctant to send more information to the board, then it’s an indicator that governance is not working well. If the board is being given the good news, but not necessarily the bad, then the relationship of trust may have been broken.

In this situation, management may believe that the board is not allowing them to manage. To rectify this, it’s important to find a mechanism that enables the board to challenge management in a constructive way, yet still allows the CEO to feel that they’re in control of the ship.

For example, if considering an offshore expansion, the board should ask the management team to set some parameters against which they believe the organisation can be successful offshore. Management can then come back with a list that is refined and agreed between the board and management.

In this situation the board starts by challenging management but ends up guiding them. Now the leadership team knows which geographies they can focus on for offshore expansion and start looking for targets. This approach enables management to be expansive in their thinking at the outset, and the board helps stop the wheel from spinning and enables things to move forward.

If you have valuable debate and progress in your meetings, then you can feel relatively sanguine that you’ve got the setting right.

To have a fully functioning governance system a board needs to ensure compliance and it needs to be able to provide guidance. How these should be balanced is an ongoing conversation that needs to occur between management and the board. Getting the balance right is one of the most important roles of a high performing board.

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