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Guest post by: Phillip Ross Become an Author

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Policy Governance® is a registered trademark of John Carver. A brief report of his book, Corporate Boards that Create Value, follows:

I. Board of Directors Structure

A. Authority, properly executed and observed, provides the necessary "glue" for policy governance. The flow of authority begins with the proper identification and acknowledgment of the owners. The owners then authorize the board to set company or organizational policy. And the board authorizes and empowers the CEO to run the company entirely on the basis of board policy.

B. Source: Corporate Boards That Create Value, Chapter One.

II. Policy Development: Nested Sets

A. The job of the board of directors is to develop a set of policies that is comprehensive enough to provide the CEO with the authority and the accountability to run the company or organization without further input from the board.

i. Accomplishing this task requires the board of directors to design policies in nested sets, beginning with the largest and most comprehensive, such that further refinement of policies is subsumed under the "larger" policies until the board is satisfied that it will be satisfied with any reasonable interpretation of its policies.

ii. The job of the CEO is to run the company or organization on the basis of the board's policies. The CEO has sole accountability for company or organizational performance.

iii. Policy categories are based on ends and means.

a. To encompass every aspect of a company or organization the board must develop policies in four categories.

1. Governance Process: Policy development to control board behavior is required. The board of directors must govern itself through policy development, as well.

2. Board of Directors / Management Delegation: The board of directors should have policy development to delegate authority and accountability to management. Here the board distinguishes between the jobs of board governance and organizational management, and codifies their relationship to management and staff.

3. Ends: Policy development is needed to establish the values of the owner(s) that justify the existence of the company or organization. The owner(s) core values , principles and purposes always drive the organization. Ends describe the owners goals for the company or organization to be accomplished by management.

4. Management Limitations: Requires policy to express management means that are unacceptable to the owner(s) and board of directors. These are the policies that keep management from using unacceptable means to accomplish the mission. This category of policies is necessarily negative because it limits behavior. Consequently, what is not forbidden in policy amounts to automatic approval by any "reasonable interpretation" of the policy.

B. Source: Corporate Boards That Create Value, Chapter Two.

III. Group Leadership: Speaking As One Voice

A. The board must always speak with unanimity. All board decisions and policies must be completely supported by each and every board member. The board of directors is not an advisory body but a commanding body, and its commands must be unified and clear. The board as a whole speaks with a unified voice only to the CEO.

i. Diversity and dialog are essential to board policy development and adjustment, but have no place in command. To communicate a command that is diverse and open to dialog will harm the integrity of the command and result in confusion and inefficiency.

a. The board is to seek diversity and dialog in the process of policy development and adjustment, but once a policy is in place every board member must support it, and not undermine it.

B. Source: Corporate Boards That Create Value, Chapter Three.

IV. Management Delegation

A. The role of the board is to develop policy. Board authority does not extend into management because it delegates management authority to the CEO, and then empowers the CEO to exercise authority commensurate with established policy.

B. Board Chair (CGO) and CEO

i. The function of the board chair is not to supervise the CEO, but to ensure the proper policy function of the board.

ii. The CEO is solely accountable to the whole board, and the board speaks only with one voice—and only to the CEO.

a. The CEO is, then, responsible for all aspects of management, and reports only to the whole board.

b. It is recommended that the CGO and the CEO not be the same person.

C. Source: Corporate Boards That Create Value, Chapter Four and Appendix C.

V. Management Performance

A. Ends Components

i. Results: The value to be produced for the owners.

ii. Recipients: Owners, customers and stake holders must be considered to answer the question: Whom does the company or organization intend to benefit?

iii. Relative Worth: Deciding on the relative worth of desired ends requires the setting of priorities.

iv. Ends are not mission statements or strategic plans. Ends are always and only board determinations. Mission statements and strategic plans are always management determinations.

B. Means Limitation

i. Once ends have been set in policy, the board must decide what means are unacceptable for the achievement of those ends. Forbidding certain means provides maximum freedom for the CEO to accomplish the ends set in company or organizational policy. The CEO knows exactly what is required and what is forbidden.

C. Board Reporting

i. Company or organizational reporting is the responsibility of management, not the board.

a. To have a board treasurer confuses the authority of the CEO. This is not to say that independent audits should not be required in policy. Monitoring and audit reports should be a regular part of board meetings.

b. Because the CEO has complete authority, company performance is equivalent to CEO performance. The job of the CEO is to operate the company or organization in accordance with board policy. The CEO is given the authority to make all decisions not otherwise covered in policy.

D. Source: Corporate Boards That Create Value, Chapters Five and Six.

VI. Staying on Track

A. Carver recommends that policy governance be instituted only upon completion of policy development. To attempt a gradual change is to attempt to move in two directions at once.

i. However, he does concede that many boards will not choose to do as he recommends, and suggests that most boards can be improved by adopting some of the measures he proposes. As improvement is realized, he believes that boards will see the wisdom of the holistic approach and ultimately adopt the whole system. Nonetheless, he recommends doing it right from the beginning.

B. Upon completion of the initial policy development, the board will monitor company or organization performance and policy performance in order to make necessary adjustments and improvements.

i. Three questions for staying on track:

a. What is the policy category for this issue?

b. What has the board of directors already said in its policies about this issue?

c. Is the board happy with the existing policy, and/or how should it be changed?

VII. Carver provides a complete set of generic policies which must be extensively studied by any company or organization considering Policy Governance.

A. The development of specific policies for particular companies will require even more study and adaptation. Like any change in technology, the difficulties of the transition period are as great as the benefits to be accrued.

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