In the last three Tips for Effective Boards, we focused on the first three principles for effective board delegation to management:  1) be clear about the recipient of this delegation, 2) be clear about the source of this delegation (that is, the board delegating as a unit), and 3) be clear about the board’s expectations for the performance of the chief executive.

In this month’s communication, our focus is on the fourth principle for effective board delegation to management:  clearly delineate the scope of authority and discretion being delegated to the chief executive. 

I’ve seen three approaches to this issue.

In the first approach, no official decision has been made by the board about what decisions it is to make and what decisions have been delegated to the CEO.  Board and CEO may have a tacit understanding that the board makes the bigger decisions while the CEO makes the smaller decisions or the board makes the policy decisions and the CEO makes the operational decisions.  However, it may often not be clear where the boundary is between the bigger and smaller decisions or between the policy and operational decisions.  Over time, with some luck, board and CEO may arrive at some sense of where the boundaries are for their organization.  In situations where external authorities (law, regulations, funder expectations) may require board decisions regarding certain matters, there’s some clarity about where some board decisions need to occur.  As might be expected, this first approach (that is, no boundaries of authority and discretion officially decided upon by the board) may result in confusion and conflict regarding board expectations of the CEO.

The second approach involves the board usually in concert with the CEO identifying specific areas of decision-making that are officially delegated to the CEO.  This can take the form of a simple listing of such areas.  A more involved option is to create a list of  numerous administrative matters and then determine which matters are being delegated to the CEO, which matters are being delegated to the CEO but with a requirement that the CEO notify the board of his or her decisions, and which matters are reserved to the board’s decision-making.  These delegation decisions can be represented in a matrix with the list of administrative matters in the left column and with other columns with headings like:  CEO decision, CEO decision but inform the board, board decision.  While this approach may be an improvement on the first, it is a quite daunting (impossible?) task to identify all potential decision areas.  That being said, this approach does provide clarity for board and CEO with respect to the administrative matters identified.

The third approach is the approach employed by the Policy Governance® model.  In this approach, the board establishes board policies which identify the boundaries between what is allowable for the CEO to decide or do and what is unallowable for the CEO to decide or do.  Examples of what’s unallowable are:  anything illegal, anything imprudent (too risky), anything inconsistent with board values, and anything which the board reserves for its own decision-making.  The clear message to the CEO is that he or she is allowed to do anything that the board has not forbidden.  The way this works is that the board begins its policy-making with broadly stated policies which allow for a wide range of CEO discretion.  The board then proceeds to further define and specify its policy expectations with the result that the range of CEO discretion becomes narrower and narrower.  This process continues until the board is comfortable with the remaining latitude of discretion afforded to the CEO.  While the previous approach may fail to identify some major areas of decision-making, the Policy Governance® approach includes all possible areas of decision-making since the broadest policy in each policy area is stated in such comprehensive terms as to be all-inclusive.  In sum, the Policy Governance® approach of creating boundaries of acceptability/non-acceptability and policy-making from broad to narrow allows the board to clearly delineate the scope of authority and discretion being delegated to the chief executive.  In contrast with the previous approach (identifying specific delegated areas of responsibility), the Policy Governance®  approach results in expectations of the CEO that are stated in a comprehensive yet concise manner. 

For reference, the seven principles for effective board delegation to management follow.

Seven Principles for Effective Board Delegation to Management 

1. Be clear about the recipient of board delegation to management.
2. Embrace the “group authority” of the board with delegation to the chief executive coming from the board as a whole.  (This principle and the following principles assume the board is delegating to a chief executive.)
3. Clearly state the board’s expectations for performance of the chief executive.
4. Clearly delineate the scope of authority and discretion being delegated to the chief executive.
5. Empower the chief executive to make decisions within the defined delegated scope of authority.
6. Track and evaluate the performance of the chief executive in relation to the board’s stated expectations.
7. Recognize positive performance of the chief executive and take corrective action when indicated.

For more information about Policy Governance®, please go to www.BoardsOnCourse.com/policy-governance.