In the Australian Financial Review on 1 August 2018, AMP Chair David Murray, in discussing the ASX Corporate Governance Guidelines, recently said that boards should not "meddle too far into management issues" and doing so could "distract the company to less important issues". In the same article Energy Australia Chairman Graham Bradley said that "directors may be starting to manage companies too much and get into the weeds of management too much".
Also in the same article, Tony Shepherd, former president of the Business Council of Australia, backed Murray’s comments and said that "the modern trend in board governance is undermining the fundamental principle that the role of management is to manage all the operations of the company and the board’s role…. is one of oversight, ensuring compliance with all relevant laws and company policy and strategy".
The Australian Institute of Company Directors (AICD) states that one of the keys to good board governance is having the right people on the board that will bring skills, knowledge and expertise in areas such as finance and accounting, strategy, risk management, human resources, marketing and communications, information technology and industry knowledge.
The Governance Institute of Australia defines governance as follows:
"Governance encompasses the system by which an organisation is controlled and operates, and the mechanisms by which it, and its people, are held to account. Ethics, risk management, compliance and administration are all elements of governance."
School boards that do not function well often lack a clear understanding of the board’s role, come up short in appropriate board expertise to develop strategy, and tend to focus on operational detail (’the weeds of management’) rather than the big strategic picture.
If a school board is to govern rather than manage, some of the key roles of the board should be to:
- ensure there is an overarching governance risk and compliance policy framework in place that articulates roles and responsibilities in these areas between the board and management
- ensure appropriate high-level allocation of resources to fulfil organisational objectives
- monitor school operational performance through appropriate reporting
- monitor legal and policy compliance through appropriate reporting
- ensure appropriate operational lines of accountability are in place
- appoint key persons such as the school principal
- support the operational decision-making of the school principal and school leadership
- develop board policies to ensure the board functions as it should and that the relationships between the board and school management are clearly understood.
None of these roles involve board members walking around the school and checking on compliance or approving school operational policies and procedures for student duty of care, workplace safety or child protection.
One of the reasons school boards get stuck in the ‘weeds of management’ and focus on operational issues is because they are not sufficiently resourced to undertake strategic and high-level governance tasks. For boards to engage in these tasks, they require substantial resourcing from senior staff. For example, it is easier and takes a lot less preparation time for executive staff to table and discuss an operational policy at a board meeting than to provide a strategic plan implementation report or an updated strategic risk and task report.
How Proper Board Governance Can Add and Protect Value
According to the Committee of Sponsoring Organizations of the Treadway Commission (COSO), a core board function lies in developing enterprise-wide oversight of risk processes:
“An entity’s board of directors plays a critical role in overseeing an enterprise-wide approach to risk management. Because management is accountable to the board of directors, the board’s focus on effective oversight is critical to setting the tone and culture towards effective risk management through strategy setting, formulating high level objectives, and approving broad-based resource allocations.”
The International Risk Management Standard ISO 31000:2018, Risk management – Guidelines (ISO 31000) states that the purpose of risk management is "the creation and protection of value"; creating and protecting value in this context is ultimately a top-down process. A top-down commitment to risk management inevitably starts with the board.
Boards should focus on the identification and assessment of the key risks that will impact on the achievement of strategic objectives. This involves the development of a strategic risk register that incorporates risks specifically associated with the strategic objectives set out in a school strategic plan or similar document.
Boards should also ensure that there is an operational risk register in place and receive a high level operational risk report, but should not ‘own’ operational risks. Even strategic risks should generally not be owned by the board. It is generally more appropriate for the risk owner of strategic risks to be the principal or another member of senior management. This is because the implementation of strategy and the risk controls that are put in place to manage the risks that will impact on the achievement of strategic objectives are all undertaken by management, not the board.
There is of course nothing that should prevent a board doing a ‘deep dive’ into an operational area that becomes a matter of concern. However, operational issues should not distract the board from its main focus of good strategic governance.
Key School Strategic Risks
Some of the key strategic risks that boards should consider are:
- risks related to strategic planning and achieving strategic objectives
- risks associated with the culture, ethos, philosophy and religious identity of the school and the communication of these to key stakeholders
- risks associated with rapid technological changes and their educational impacts
- risks associated with economic and financial issues and economic uncertainties
- risks associated with property master planning
- board governance risks, including key member succession planning and the effectiveness of governance structures.
Tune Your Antennae
Board members should be highly tuned to identifying board activities that cross the line into the realm of management and operations. Whilst boards can certainly ‘deep dive’ as mentioned, the important thing is to know when they are doing it and why, and ensure that it is the exception rather than the norm.