Poor governance significantly increases the risk that a non-profit organization or social enterprise will under-perform or close down.
Yet for some reason, many governing bodies (e.g. boards, executive committees) struggle to perform their duties effectively. These mandated structures seem more interested in micro-managing staff and processes, when they should be helping to lead organizations into their strategic future.
Ultimately, when a governing body stops providing effective oversight and starts doing managers’ jobs, then the executive management team is undermined. Blind spots start to appear in the organization’s strategy. This can be fatal.
I’ve often pondered why this occurs. I’ve concluded that there are four main causes: a confusion about the difference between governance and a management; a failure to appoint the right people to governing bodies; the tendency of those appointed (e.g. Directors) to have the wrong conversations; and unnecessary clutter in governance structures and processes.
This article will explore the differences between governance and management. It will unpack what tends to go wrong and how to fix it. It will also contain insights from a lawyer I work closely with.
What is governance?
In my Social Enterprise Glossary, I’ve defined governance as follows:
Ensuring that an organization is well-managed, foresightful and compliant with its founding documents and the laws and policies that affect how it operates. This is the responsibility of its Board of Directors, Board of Trustees or Executive Committee.
Governance is about providing effective oversight; it is not about running an organization or making all its decisions. It is about setting its strategic direction and the parameters within which it operates.
Effective governance requires that directors see organizations as independent systems and strengthen them accordingly.
It is hard work to govern effectively – to provide the right quality of attention and oversight. Too often this is overlooked, so directors who want to feel like they’re contributing may be tempted to perform roles that belong to managers within the organization.
I’ve previously written about this topic in “Effective Governance of Non-profit Organizations” where I unpacked how effective governance most correlates with having the right people who have a healthy interpersonal dynamic and who have the right conversations.
I asked Nicole Copley from NGO Law SA about how she defined governance. Nicole said the following:
Governance is setting direction, goals, limitations and accountability frameworks and then making sure that these are working and being followed. Those who govern must exercise independent judgement with their eye on the long-term sustainability and success of the organization.
How is governance different from management?
Where governance is focused on oversight, management is more focused on making the decisions needed to run an organization. Some of these decisions may have short-term implications, whereas others many come to fruition over many years. The higher up a manager is in an organization, the finer the line between governance and management will appear.
In 1968, the management theorist George Terry defined management as consisting of four primary functions: planning, actuating (i.e. leading), organizing and controlling. Modern definitions of management have tended to build upon this original framework.
I asked Nicole Copley about how she sees the difference. She explained below:
Governance is about the ‘what’ (what the organization does and what it is becoming) and management is about ‘how’ the organization accomplishes its goals. Governance is an oversight function, so it has the view from the top, and it is intermittent, whereas management is day-to-day and in the trenches.
What goes wrong with governance?
The biggest problem I’ve encountered in my 20+ years of consulting is the tendency of governing bodies to neglect their oversight and focus on micro-managing the organization they’re supposed to govern.
This dysfunctional pattern of behaviour has repeated itself, time and time again. It has almost always had negative consequences such as the three I’ve described below:
- Competent managers and staff feel too controlled and undermined, and become disengaged and leave the organization. The organization is then left with weak and compliant staff. In 2018, I sadly witnessed a talented young CEO being undermined and reprimanded by her board for making decisions that were justified and required to put the organization back on track. This led to the CEO being very angry and demoralized, and feeling betrayed.
- The lack of governance creates a blind spot in the organization’s strategic future. Inevitably, the organization loses the strategic opportunity or makes a stupid strategic mistake. Many years ago, I witnessed a board of a national primary health care organization neglect an obvious strategic risk that led to the organization losing 80% of its income and ultimately shutting down. The board was too busy micro-managing the CEO to pay attention to the strategic horizon.
- The management team becomes dependent on the governing body for an increasing amount of decisions as this dynamic becomes embedded in the organization. This creates “learned helplessness” in the management team, which becomes less capable over time. All important decisions get escalated and the organization becomes unable to quickly respond to opportunities and risk. Surprisingly, I’ve heard some governing bodies complain about this, despite their role in cultivating this behaviour.
I’ve often reflected on why governing bodies fall so easily into these traps. The simplest explanations are that they struggle to delegate and let go, or lack the skills needed to govern so they drop down into their comfort zone as managers or their technical discipline (e.g. finance, HR, law). It is also possible that organizations don’t prioritize leadership ability when appointing directors, rather assuming that someone who is a skilled manager or expert must be similarly skilled in their leadership ability.
A delicate balance is needed
I asked Nicole to elaborate on the reasons why we encounter so many poorly governed organizations in our work. Since she frequently deals with the legal consequences of poor governance, she has insight into this area.
She believes that many of the problems in this area have an evolutionary basis. She said that governance and management are often conflated in young organizations, but as they grow so must the separation between these two roles. In a mature organization the roles of governance and management must be clearly defined and balanced. She said that:
Any imbalance in the relationship will lead to trouble. I have seen boards which become embroiled in management, undermining those who have been delegated power and losing their independent perspective, and I have seen boards which are too passive, and allow management to lead strategic planning, neglect accountability, determine goals and set board agendas. Blurring of roles leads to conflict, loss of morale, and creates opportunities for abuse of power.
What’s interesting is how she also mentions strong managers who’ve dominated their governing bodies, thereby leading to directors neglecting their responsibilities. While I’ve certainly encountered this, I’ve found a strong management team and absentee directors to be less of a strategic problem than a micro-managing board that has the wrong conversations.
How to fix it?
In my experience, the fix is very simple in principle, but very difficult to get right in practice.
The first challenge is to clearly define the roles of the governing body versus the role of managers, and to specify the types of decisions that each is entitled to make.
The second challenge is ensure that the right people are appointed to a governing body. I would describe these as people with integrity, leadership ability, passion, relevant technical skills, and insight into trends and dynamics within the sectors that the organization is operating in. This is vastly different from filling up the positions with quotas, “political interests”, high-status figureheads etc.
The third challenge is to coach these people in the right behaviours. I believe that 50% of conversations at meetings should be about strategic issues facing the organization; 30% should be providing oversight to management decisions; and 20% should be about compliance issues. Unfortunately, in most boards I’ve worked with, the percentages tend to work the other way around.
The fourth challenge is to streamline and declutter both structure and processes. By this I’m referring to governing bodies with too many members to have a constructive conversation, or too many layers of oversight, or an excess of independent sub-committees. I’m also referring to those organizational systems that seem to soak up our time and attention but never seem to help an organization to be more ethical, impactful or sustainable.
In my discussion with Nicole, she observed the tendency of non-profit organizations to shy away from difficult conversations, especially when dealing with the personal issues which arise when the balance between governing body and management teams is wrong. Therefore, one should have these conversations explicitly and upfront, before it’s too late.
Governing bodies play a critical role in the success of non-profit organizations and social enterprises, provided they have the right people having the right conversations. Without this, the entire organization is put at risk.
When directors micro-manage organizations, they fail to perform their duties. It is a similar sin to when a board neglects to give an organization the attention and loyalty it requires. The challenge for directors is to find the right balance – to govern effectively but not to manage.
Too often I wonder whether a board is adding any value to an organization, or whether it is just helping it to comply with statutory requirements. It is sad that I think this so often.
I encourage all non-profit organizations and social enterprises to reflect on what would happen if their governing bodies magically disappeared. If the answer is “no difference”, then it is time to think long and hard about getting the right people on board and teaching them how to pay attention to and discuss the important things.