What is Good Corporate Governance and Why Does it Matter? Canadian Police College Canadian Police College

Andrew Graham Andrew Graham

Today's Governance Trends Reflect Theory and Tradition

nStrong interest in corporate governance driven by recent high profile has scandals: Enron, World Com, BreX, Royal Trust and many more

n If you enter Corporate Governance into Google.ca, you 20,500,000 hits

nBut good governance been a long­standing issue in both the private and public sector

"Board governance is an invisible function. It is only when problems appear that people ask: Where was the Board?" ­CAPB report on board governance entitled,

"Putting the Tools in Place"

Today's Governance Trends Reflect Theory and Tradition

nPeter Drucker (1992): “In every single business failure of a large company in the last few decades, the board was the last to realize that things were going wrong.”

nMany reports and legislation: Cadbury (UK 1992), Dey (Canada 1994) and Sarbanes­Oxley Act (US 2002)

Not Just Businesses that suffer from poor governance n Public sector examples abound: n Canadian Red Cross Blood Service n National Arts Centre n B.C. Fast Ferries n International Olympic Committee n And, a few Police Boards have received some bad publicity along these lines too……

Governance has changed in ways directly affecting Police Services n More visibility n More risk n More regulations: rules versus principles n More public awareness and expectations

Corporate Governance Is …

… the system system by which organizations

are directed directed and controlled. controlled.

Cadbury Committee Report (UK 1992)

Corporate Governance Is …

Boards of Directors Boards of Directors are responsible for the governance governance

of their organizations

Cadbury Committee Report (UK 1992)

Corporate Governance Is …

n The exercise of authority, direction and control of an organization

n Why? To ensure that its purpose is achieved n Good governance is about safeguarding the mission of the organization, establishing a values framework, ensuring sound management and risk practices are in place, holding those under oversight to account and accounting to the broader public interest

Corporate Governance Is …

n Governance addresses questions such as: n Who is in charge of what n Who sets the direction and the parameter within which the direction is to be pursed

n Who makes decision about what n Who sets performance indictors n Who monitors process and evaluates results

n Who is accountable to whom for what

Corporate Governance Is …

n Tools of governance: n Structures n Responsibilities n Processes and practices n Policies n Reporting mechanisms n Decision­making protocols n Hiring practices of the Board n Informal relationships and culture

Governance is built on the notion of Agency Theory

Owners

Board

Agents

Leader

Steward

Reporter

Monitor

A Spectrum of Governance Models

n Right "model" depends on underlying cause n One extreme is lack of active oversight: n Cadbury, TSE, Blue Ribbon models address n Select and empower independent­thinking overseers and stewards

n Active role in strategic direction and stewardship for leaders

n Use of committees and working together vertically

n More information flow, checks and controls

A Spectrum of Governance Models

n Other extreme is "micromanagement": n Carver, Turnbull models address getting leaders out of management and operations

n Governance through setting policy and then standing back: let managers manage

n Accountability model results­based n Right model strikes right balance, while drawing best aspects of each extreme

Management Theory

n “Control” has been ceded to a professional class of management

n Board’s role is mainly to open doors, to advocate on behalf of corporation, to ensure stable flow of resources

n The post­war model ­ and still in Japan

Stakeholder Theory

n Board represents interests of all stakeholder groups: n employees n lenders n unions n communities n and owners

n Issues resolved around boardroom table

n Board mirrors diversity of stakeholders

Stewardship Theory

n Board members and management are stewards of the organization

n Board’s role is to support and assist management

n Professional directors: skilled, experienced, committed, connected

Democratic Theory n Owners openly and democratically elect representative directors from among their number

n Board’s role is to act in owners’ interests

n “Lay” board: key competency is membership as owner

Police Services and Governance

n "Governance" means different things to different people

n Not all "buy in to" or tie in the practical benefits of "good governance"

n Key is practice, not theory ... n To succeed, governance must be "win­win", must serve individual's, team's and organization's performance

Police Services and Governance

n Highly political environment n Many stakeholders n Some roles clear (hiring the Chief), some are not

n Legislation can be ambiguous n Who is the Board itself accountable to exactly and how?

Representation Function

­Identification and Representation of Community Needs through community consultation, business planning and deputations ­ Advocacy

Leadership Function

­Prioritizing what needs to respond to. ­Policy Development and Adoption by thoughtful and deliberate decision making

Monitoring and Evaluation Function

­Performance Management of Chief ­Policy Review ­Board and Service Performance Audits ­Program Evaluation

Governance Functions

Are:

Police Services Board Governance Police Services Board Governance Functions Functions

Fred Kaustinen and Barbara Hume­Wright, CAPB Annual Conference, August, 2005

What is the point?

n Accountability: being counted on

n Working together: relationships

n Mandate accomplishment: results

The Principle of Intention … a key to building the role

Board of Directors should explicitly assume responsibility for developing

the organization’s approach to governance issues

Toronto Stock Exchange and Treasury Board Guidelines

The bar keeps getting higher (or) …. welcome to the fishbowl!

n On­line real­time every­stakeholder transparent certified disclosure?

n Skilled, independent, powerful, prescient, accountable Audit Committees?

n Board­led enterprise risk approach to a sound internal control system?

n Mandatory corporate social responsibility and social audits?

And what does SOx mean to you?

Begin with the End in Mind Stephen Covey

n The End: an effective, cohesive, active, independent board

n The Means: building competencies n The Beginning: what kind of board are we? What are our roles? Our competencies?

n Distinct models of governance based on distinct cultures, traditions and legal systems

Agency Theory

Owners

Board

Agents

Leader

Steward

Reporter

Monitor

Board Roles

n Leader: n setting the strategic direction and empowering management

n Steward: n shepherding resources of others

n Monitor: n evaluating performance measures and holding management accountable

n Reporter: n to the members and beyond

Secondary Roles of Board Members n Advocacy role:

n speaking on behalf of corporation, to shareholder and/or public

n prior agreement among board/ management as to what/when said

n may involve fund­raising and promotion of corporate interests/goals

n Mentoring role: n individuals may "coach" senior management and/or others

Responsibilities of Directors

Leadership . . . yes 4

Stewardship . . . yes 4

Management . . . no 7

Responsibilities of CEO/Chief

Leadership . . . yes 4 (shared)

Stewardship . . . yes 4 (shared)

Management . . . yes 4

Governance versus Management Governance Governance

n Vision/values n Destination/ outcomes n Resources/inputs n Monitoring and holding to account n Policy framework n Accountability to stakeholders

Management Management n Piloting/steering/driving n Knowing through expertise, day­

today insight and link to vision n Selecting course from alternative

routes n Assessing need for policy guidance:

knowing the boundaries n Ensuring efficient and effective use

of resources n Good organizational functioning n Assessing progress and conditions n Reporting n Holding subordinates to account

Relationship of Management and Leadership Functions

Management: Task/Result Orientation

Evaluation, Research, Decision making, Planning systems, Problem solving, Administering policy, Specifying procedures, Day­to­Day operations, Data based decisions.

Leadership: People/Process Orientation

Creatively applying research information, Motivating and rewarding others, Team building, Creative planning, Performance management.

Role of the Chair

n Set agenda, in conjunction with CEO and Committee Chairs

n Chair meeting: orderly deliberation of items

n Build consensus, propose solutions, call for vote or tabling

n Promote unity of Board and organization after decisions reached

Strategic Planning ­ Key Tool

n Important tool of good governance: n Affirms long­term direction n Identifies plans and priorities n Offers expected outcome state n Offers measures for assessing performance both for internal and external use.

n Board & CEO develop vision and direction together n Senior management involved often n CEO and senior management initiate, identify, and implement

approaches and strategy n Board approves the plan/direction with CEO

Values

Planning To Prevail

Measures

Strategies & Actions

Objectives

Goals

Mission

Goals

Planning: Goals

Purpose

n Answers the question where are we going ­ long term?

Objectives

Goals

Planning: Objectives

Purpose

Answers the question: n where are we going ­ shorter

term? n These are milestones along the

way to reaching our goals n Objectives should be attainable

and measurable

Strategies & Actions

Objectives

Goals

Planning: Strategies & Actions

Purpose

Answers questions like: n How will we get there? n What exactly will we do? n What will we do? n When will we do this? n How will we proceed?

Values

Measures

Strategies & Actions

Objectives

Goals

Planning: Closing the Loop

Purpose

Answers the

question: How will we know when we have succeeded

?

Family of Balanced Performance Measures

Organizational Performance

Balancing Act

Value Service

Cost Quality Time

Accountability: what are the tools? n Formal:

n Performance agreements n Measures built into plans n Formal evaluation processes n Audits and evaluations n Complaints and investigation systems

n Informal n Monitoring events and keeping informed n Ongoing reporting on important issues n Incident briefing n Meetings with stakeholders, unions, interest groups n Show and tell/ walking around

Accountability – what about external stakeholder accountability?

n Annual reports n Regular information sessions n Public meetings n Use of all media including websites n Posting minutes of meetings, etc.

What are the Impediments and Barriers to Good Police Governance? n Power of the Chief n Ambiguity of roles n Lack of clarity in legislation n Rapid turnover of members n Insufficient turnover of members n Role switching: not really on the Board – just representing other

interests n Inattention to the ‘work’ of governance n Lack of internal cohesion: differing basis for appointment n Lack of ‘composite skill set’ – the right combination of

backgrounds and skills

How Do I Spell ….

n Trust n Integrity n Respect n Loyalty

Trust …

n Is built through relationship n Allows the work of the mission to be done

n Destroys an atmosphere of control n Creates an air of tolerance n Allows leaders to lead

Good Governance Built on Principles – Enabled by Process

n Good governance is work in itself that just doesn’t happen. It is built on: n Culture n Respect n Common vision n Common rules of the games n Evaluation and holding the right people to account

n Adaptation and change

Success and Failure Signs of a Board in Trouble Signs of a Board in Trouble: : •excessive turnover of CEO’s or board members; •Difficulty recruiting credible board members; •rapid depletion of reserve funds; •chronic unplanned or unmanaged deficits; •role confusion between board and CEO; •low attendance or participation in meetings; •stakeholders.

Success and Failure n poor management of meetings; n factionalism; n underground communications; n Unresolved conflicts; n failure to address conflicts of interest; n decision deadlock; n disrespect for organizational norms and policies; n poor communication with funders and other key

Success and Failure

Keys to Success: Keys to Success: n Strong board and staff leadership n A positive working relationship between board and CEO n Role clarity n Strong agreement of key stakeholders on organizational

values, mission and objectives n Respect for organizational norms, board policies and

decisions n Good board development practices and teamwork

Success and Failure n Regular, objective assessment of board, CEO and

organizational performance n High levels of trust and low levels of conflict n Constructive resolution of conflicts and ‘conflicts of

interest’ n A good balance between organizational stability, flexibility,

innovation and enterprise n Consensus or ‘near­consensus’ decision­making n Effective management of meetings and board work

More to follow on assessing Board performance………..