Policy is Critical, but...

Policy is critical. Yet, there is a balance between too much and too little, and it's essential that you understand this balance when you develop and implement policy.

Those of you who have been in one of our training programs know that clear policy is one of the legs of the "three-legged stool" of effective governance. You can learn more about that in this article.

Without the appropriate policy, your relationship with your chief executive is at risk. In fact, you might not be in control of the chief executive, nor of your organization.

Has anything like this ever happened to you?

A board was debating a bonus program for employees with its relatively new CEO. During the debate, one of the more senior directors said that a bonus program had been approved some years before. She then stated what she recalled the provisions to be. No one else in the group had been there at the time, and so no one could dispute or reinforce the recollection.

What's worse is that the board had no compilation of its policies.

That left the group with two options:

Accept the recollection of the senior member, or
Table the item until the board secretary could go back through years of minutes to try to find the relevant motion.

If the board decided on option 1, it would be acting without full confidence that it was on firm ground. That would make everyone nervous; especially the CEO. If the board decided on option 2, it would risk eroding employee morale by delaying the decision.

Neither of these alternatives is a good one. I call it "management by folklore."

What should board policy be concerned with?

Board policy should focus on the following:

Board mechanics (such things as setting the agenda, defining meeting packet content, deadlines, distribution, minutes).
Board structure (the role of officers, the charter of committees).
Board administration (travel, allowed expenses, fees).
Authority (of committees, the chief executive, the chair).
Ethics (standards of behavior, penalties, mechanics of dealing with infractions).
Personnel and related policies (including incentive and bonus compensation plans, like in the above example).

What happens when policy is lax?

An example:
A CEO complained to her board that a director was engaging in ethics violations. More specifically, that the director was bad-mouthing the decisions (and non-decisions) of the board to shareholders.

The board went into executive session to address the matter, only to realize that it had no policies that defined the following:

What, exactly, constituted an ethics violation.
The penalties and sanctions to be applied when an ethics violation occurred.
The process to be followed when such a violation was reported.

The result, of course, was that the board was unable to take any action at all, at the time. Instead, it summoned a lawyer to the next meeting to advise it. Eventually, the board adopted the appropriate policy. However, it was not able to deal with the behavior until six more months had gone by. That meant six additional months of black PR and continued erosion of shareholder confidence and CEO and employee morale.

How much policy is too much? Too little?

How do you know if you have too much policy - or too little? The rule of thumb is that you need more policy when one of the following two criteria apply:

The cost of a mistake in judgment is too high, or
Common sense judgment has not or would not get the results or behavior that is important to you.

What happens when policy is too stringent?

An example:

A CEO reported to her board that two potential deals had been lost because she (the CEO) did not have the appropriate authority to act. A special board meeting was not held, and the delay before the next regular quarterly meeting was too long. The deals went to another firm. Ultimately, the board loosened its restrictions on CEO authority, enabling that officer to enter into deals. But the damage had already been done.

You know you have too much policy, or that your policy is too stringent, when one or more of the following conditions exist:

The progress of the organization lags because decisions can’t be made quickly enough. (For example, deals are missed, you lose partners, projects are delayed.)
The chief executive expresses frustration at being hamstrung.
You are having to conduct too many meetings.
Your committees are frustrated because their work is being re-done by the full board.

How to correct?

Try this: Make it a point to include a conversation about the appropriateness of board policy in the evaluation of your chief executive. During the evaluation, invite comment on whether current policy is unclear, too stringent, or too lax. Assuming you trust the good judgment of your chief executive, revise your policies, as needed.

For additional articles on setting policy see the "Setting Groundrules" section of BoardGrowth™.

If you are a BoardGrowth™ member, make sure to log in so that you can download the articles at no charge. BoardGrowth™ members are also encouraged to submit questions on policy to the BoardGrowth™ faculty in the AskBoardGrowth™ section of the site.

For more information on being a board member, visit BoardGrowth™ and submit a question under What’s On Your Mind.