List of Modules
Module One: What a board is and the purpose it serves
Module Two: Legal requirements of boards and directors
Module Three: Board policies - the basis of governance leadership
Module Four: The board-CEO relationship - a key building block to company success
Module Five: Setting the company’s strategic direction - managing change
Module Six: Managing risk
Module Seven: The board’s own governing processes
Module Eight: The board’s financial responsibilities
Module Nine: Board meetings: where the board does its work
Module Ten: Evaluating board effectiveness
Frequently asked questions
Participants' work sheets
Module One:
What a board is and the purpose it serves
Key concepts
- The board is the Group Training Company’s ultimate leadership group
- The board protects the company’s long-term future
- The board’s job is to govern the company, not to manage it - management is the job of the CEO
- The board is accountable to its owners, legal and moral
- Governance failures are less a problem of people, than one of processes.
A board is a group of individuals appointed or elected to direct and control the company. Typically comprising around 5-9 members (though increasingly closer to 5 than 9), the board has a set of special responsibilities that are different from those carried out by the company management and staff. The board’s role is to govern the Group Training Company, rather than to manage it. This manual focuses on the governance role of the board.
Providing Leadership
Whereas the CEO provides leadership to the staff, the board’s role is to provide leadership to the Group Training Company as a whole.
Responsibility to the entity not to individual stakeholders
The job of the board is to protect the long-term interests of the company. To this end, the board and its directors owe a first allegiance to the company, rather than to the various current stakeholders. This, however, is not to say that the board should not listen to, even follow the advice and direction of, the current stakeholders - but should always do so with the long-term, rather than the short-term view, in mind. This means that the board might find itself making decisions that are contrary to the wishes of current stakeholders, but are in the best long-term interests of the Group training Company.
The three key purposes served by a board are:
1.Ensuring a prosperous long-term future for the company
Because the board’s view is long-term, rather than short-term, it keeps its main focus on the future, rather than the present or the past. The board’s aim is to ensure a prosperous future for the company so that future, as well as current, stakeholders enjoy the benefits offered by the company.
2.Representing stakeholder interests
As was mentioned above, the board acts in the best interests of the company and its various stakeholders.
Stakeholders include all those individuals and other organizations standing to benefit from the existence of the company. Stakeholders of Group Training Companies may include; current and potential host employers, apprentices and trainees, young people who plan to become apprentices and trainees, the community, and State and Federal Government, training providers such as TAFEs and all other suppliers involved in the design and delivery of training and employment e.g. protective clothing, tools.
Some stakeholders will have the special status of ‘owner’ with accompanying special rights and responsibilities. In a later section in this module it is suggested that the board might consider that it has two categories of owners, ‘legal owners’ and ‘moral owners’. The company’s legal owners are its ‘members’. Its moral owners include apprentices and trainees and host employers who are not members.
Other stakeholders, for example training providers, have a business relationship with the company but no special rights.
3.Providing a point of accountability for the CEO
Because the CEO of the Group Training Company is an employee, he or she needs a point of accountability for the carrying out of his/her job. The board provides this. Most boards agree that the CEO is their only direct employee, all other company employees being employed and managed by the CEO. This is an essential principle to follow if the board wants to establish clear accountabilities as the basis for determining the performance effectiveness of their CEO.
The board’s role is to govern the company
The board’s job is to govern the company, not to manage it. Many references to boards use the word ‘management’ in relation to the board, e.g. ‘board of management’. This can be misleading; suggesting that the board’s job is to ‘manage’. This of course is not so. It is the CEO’s job to manage the company. It is suggested that when the board has an official title that includes the word ‘management’, e.g. Board of Management, it should drop this reference from all but official usage, instead referring to itself as simply, ‘the board.’ This simple unqualified title then becomes linked with the board’s proper job of governing without any confusing references to management.
What is governance?
There is no one universally agreed definition of governance. A simple and commonly used definition is:
Controlling and directing the company or organization.
This is rather broad, leaving open the prospect of confusing management’s and the board’s operational controlling and direction setting functions.
Another description is:
The systems and processes used by the board to set strategic direction, priorities, company policies and management performance expectations and to monitor and evaluate the achievement of these in order to exercise its accountabilities to the company and its owners.
This definition identifies the key elements of governance making clear that the board’s is an active job, that it is concerned with both the past and the future. It implies a separation of roles between the board and management and begins to identify aspects of the relationship between the two roles.
Another definition that is often heard is:
The board’s job is to ensure that the organization is well managed without the board itself doing the managing.
While not a terribly good ‘definition’, it nonetheless makes clear that the board should not be involved in managing the company.
Owners
Owners are a special class of stakeholders or shareholders with special responsibilities and duties. It is important that the board is clear about who its owners are, as it is to this group that it owes its duty of accountability. We have already suggested that the board should consider two sets of owners, legal owners and moral owners.
Legal owners
Legal owners often have the power and authority to exercise control over the board through their ability to call and exercise voting rights at an owners’ meeting, usually called an Annual General Meeting (AGM) or Special General Meeting (SGM). At such meetings the owners can exercise their right to change the membership of the board or change the articles of association.
Legal owners are the board’s most important stakeholders although, as we point out in the next sub-section, the apprentices and trainees also play a very special part in the board’s decision-making processes and share an ownership stake, but as moral rather than legal owners.
Moral owners
In addition to the board existing for the legal owners, it also exists for the apprentices and trainees and host employers who benefit from the existence of the company. In fact, it might be argued that the only reason for the company’s existence is to provide a benefit to these two groups. Although the apprentices and trainees and host employers do not sit around the boardroom table, many of the decisions taken by the board directly relate to the benefits delivered to them.
It must be said that the board has no right to ignore the interests of these moral owners - that their interests are paramount in most, if not all, of the board’s decision-making.
Why is governance so important?
As was previously mentioned, the board has a responsibility to the company, and thus to its members/owners. The board represents the legal and moral owners’ interests - not the interests of the staff or other business-related stakeholders.
Given this special responsibility, it is imperative that the board takes every step to ensure that these interests are protected. Allowing the CEO and staff to fulfil both the operational and governance functions is a failure of the board to honor its trusteeship duties and is not an expression of effective governance.
Components of effective governance
There are five essential components to effective governance. These are the board’s responsibility to:
- set strategic direction for the company as the basis for all further strategic and operational planning
- appoint, remunerate the CEO, define CEO accountabilities and the results expected
- develop policies to manage the risks faced by the company
- monitor and evaluate company and CEO effectiveness
- report to owners and other key stakeholders on the successes or failures of the company.
Each of these is explained in more detail in later sections of this manual.
Why do so many boards fail to do their job to the required standard?
The sad truth is that, despite the best intentions of the vast majority of board members of companies limited by guarantee and of associations (and in many commercial organizations), the general standard of governance in the non-commercial sector is generally lower than is desirable. Some of the reasons for this are:
No training
Whereas most managers and other staff are trained in their jobs, few directors in the not-for-profit sector receive training in their governance role.
A short term bias.
The time horizon on which a board should be focused should be more distant than anywhere else in the organization. For many boards, however, history in the form of last month’s financial statement gets more time and attention than the organization’s strategic position and future prospects.
An excessive time spent on the trivial.
Major policy and directional issues go unresolved or even undebated while boards conscientiously grapple with small (usually operational) details.
Being reactive rather than proactive
Many boards allow themselves to be diverted into reacting to external “noise” or to executive initiatives which lack any sort of governance dimension.
Reviewing, re-hashing and re-doing.
Being unclear about their own unique “added value”, many boards spend significant proportions of their time going over the work that their staff have already done (or should have done!).
“Leaky” or unclear accountability.
Having appointed a Chief Executive as their interface with the organization, boards or individual board members continue to relate officially to other staff, giving them directions and/or judging their performance. Boards nominally hold their CEO accountable for organizational performance but often fail to define clearly what they expect from him or her.
A confusion between ends and means.
Many boards, having failed to define clearly the results which they expect the organization to achieve (ends), allow themselves to be drawn extensively into operational matters (means).
Poor structure
The board uses committees to the point where these usurp the job of the board as a whole. The committee structure creates a set of mini boards within a board.
A conformance - performance imbalance.
Many boards spend time checking that the company has complied with various legislation and other statutory requirements, to the exclusion of a focus on company performance.
Diffuse authority.
While often broadly outlined, it is rare to find a board-CEO partnership in which the authority and responsibilities of each have been clearly defined. When in doubt, the “safe” executive response is to delegate upwards to the board.
Low standards of performance.
Few boards hesitate to say that they expect the highest standards of performance and achievement from their CEO and staff. Relatively few boards, however, can explicitly demonstrate that they expect, and hold themselves to the same standards of performance.
Inadequate/inappropriate skills and experience.
Even boards, which can determine their own membership, often fail to gather together the skills and experience needed to provide effective direction of the organization. It is common to find that neither the owners nor the board have clearly stated expectations of the contribution to be made by the board-as-a-whole or by individual members.
CEO/board strength imbalance.
Not infrequently, board members express concern that their CEO dominates the board, determining its agenda and the information which is available to it. In other situations boards or sometimes individual members intrude in such a way as to prevent their CEO from doing his or her job. Outstanding organizational performance demands a complementary and balanced relationship between board and CEO.
Inadequate prescriptions.
Some boards are well aware of at least the symptoms of many of the problems described above. Their response, however, is often ad hoc and based on anecdotal rather than systematic evidence. Much of the prescription for remedying performance deficiencies, therefore, while perhaps momentarily effective, very soon becomes a problem in its own right.
Goodintentions do not necessarily result in good governance
There is no question that board members are mostly well intentioned. They do not deliberately set out to create a situation where their individual and collective performance is consistently below par. Failures of governance are less a problem of people than of process. Many boards simply lack a clear framework for determining what it is that their efforts will be focused on and for selecting the processes by which they will achieve successful outcomes.
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Module Two:
Legal requirements of boards and directors
Key Concepts
- Group Training organizations are incorporated under a variety of legal frameworks
- Company directors have a special duty of care to the company
- Directors must not exploit their position for personal gain
Legal frameworks
Group Training organizations throughout Australia are incorporated under a number of different legal framework, the most common being associations and companies limited by guarantee.
Incorporated Associations
Incorporated associations are required to have a membership. ACT, NSW and Victoria require five members, in Western Australia the number is six although, in fact, many associations have a very large number of members. The size of associations’ business varies from quite small to very large, i.e. many millions of dollars. The legislation governing associations is quite straightforward with a minimum of requirements covering membership, management and meetings, the preparation of accounts and filing certain prescribed returns to the relevant state Government. Most small community based organizations are incorporated as associations. The letters Inc. following the organization’s name, indicates association status.
The rules governing associations are found in their constitution, fulfilling the same function as the articles and memorandum of association of a company.
A company limited by guarantee
Rather than having shareholders who must purchase shares in order to be members, as is the case with a company limited by shares, companies limited by guarantee have members who provide a guarantee. In the event of the company’s liquidation and of its assets being insufficient to meet its liabilities, members guarantee to contribute a specific amount (usually nominal) towards meeting the shortfall. Their personal liability is restricted to the level of their guarantee.
Membership is personal, the membership ceasing when the member dies or, for whatever reason, is no longer deemed to be a member, i.e. membership cannot be handed on to another person.
Typically the board of directors of the company determines the criteria for membership entry and termination and makes decisions accordingly.
A company limited by guarantee is required to have at least five members and three directors at any one time. Its accounts must be audited annually.
Companies have a memorandum of association which sets out their objectives, distribution of surpluses and winding up procedures and articles of association which identify the by-laws or formal rules for the conduct of the company business.
The company is required to annually present to its members at an AGM a set of financial statements.
A company limited by shares
While incorporation as a company limited by shares is the most common form of incorporation in the commercial sector, they are relatively rare within the not-for-profit sector. The company is a separate legal entity, existing independent of its members (shareholder) has perpetual existence and is automatically recognized by all States and Territories. However there are complications associated with membership that make this form of legal entity less attractive to not-for-profit organizations and for this and other reasons, it is rarely used. The letters Ltd after the company name identifies companies.[1]
Directors
Board members are commonly known as ‘directors’ although in the not-for-profit sector this title is used less often than in the commercial sector. Not-for-profit organization directors are more commonly referred to as ‘board members’. However throughout this manual the term ‘director’ will be used to identify a member of the board.