How many times have you heard management grumble: "The board is trying to micromanage the company"? Conversely, how many times have you heard exasperated board members say: "We're wasting our time; management just won't listen to our advice"? Sometimes the problem is real. But too often it's just a misunderstanding by management or by board members of the different roles that today's boards and board members play.
Board members are much more engaged in the business of the company than they were even a decade ago. As a result, they can find themselves discussing a wide range of issues that go well beyond their historic role. But we still use the word "governance" loosely to describe the whole relationship between the board and management. That may be part of the problem. I have developed the concept of "Oversight" and "Insight" to differentiate between the board's roles and to give board members and management a vocabulary that will help them talk to each other.
"Oversight" describes the action of the board of directors when it acts collectively; "Insight" reflects the advice and comments made by individual board members when they provide their views on how the enterprise can maximize opportunities and minimize risk. These comments provide an overview of how a board can identify and fulfill its oversight responsibilities, generate insight opportunities, and keep track of when they are involved in one or the other.
We need to be specific about what we mean by oversight. Oversight is the role that the board plays, as a board, in fulfilling its legislative or other attributed responsibility. The Canada Business Corporations Act provides that "the directors shall manage, or supervise the management of, the business and affairs of a corporation." Similar provisions can be found in other common-law jurisdictions. Typically the legislation requires the board to make decisions such as declaring dividends and placing the financial statements before the shareholders. Under the bylaws, the board appoints the officers, including hiring and firing the CEO. While most of these decisions are based on management recommendations, they represent actions that must be taken by the board of directors itself. In short, oversight is a collective formal decision that is prescriptive in nature. It can be summarized in the phrase: "This is what you shall do."
Oversight also includes those cases where the board decides it needs to take charge directly. For example, a board special committee may be required to deal directly with a takeover proposal because the provisions of management's termination agreements leave them conflicted. In another example, I served on a board special committee investigating allegations of misconduct by the Chief Executive Officer. There is no substitute for direct board oversight in these circumstances.
The board's responsibility to supervise management is also part of oversight. In this case, oversight includes ensuring that board directives, such as policies, are being implemented through the establishment and supervision of procedures developed by management.
What the board needs is a reporting framework that ensures that the procedures are in place and operating in accordance with regulatory requirements, the business plan is monitored, and risk is reviewed against the firm's risk appetite. These reporting frameworks are increasingly called dashboards.
For example, the Ontario Environmental Protection Act imposes a duty on directors to take reasonable care to prevent environmental contraventions. The board cannot meet its responsibility by directly inspecting environmental risk management facilities; it can only supervise management to ensure this is done. The board needs to know that adequate safeguards have been developed, and to have a dashboard that regularly communicates the results. But the dashboard is not a stop sign. The board should also probe those results to ensure that the procedures have not become pro forma, and that they continue to be actively managed. News reports about a leaking pipeline do not paint a pretty picture.
Providing effective oversight is complicated by the comparative exposure of the board and management to the business of the company. Management is composed of experts whose daily involvement in the business continually increases their skills. Board members, on the other hand, are involved only on a periodic basis. The board meets formally at scheduled times during the year, and on an ad-hoc basis to consider pressing matters. Board members are expected to obtain leverage from their own areas of expertise, thereby creating a healthy tension between the board and management so that ideas are challenged, alternative approaches are explored, and risk is thoughtfully considered. But the rapid pace of change puts board members in continuing danger of becoming outdated.
Lifelong learning, board training, and board renewal are three of the ways in which this risk can be mitigated. Some boards seek to alleviate the expertise imbalance by putting experts on the board. This is a tantalizing concept to enhance overall board expertise, but it is not without its own perils. Specifically, the expertise of some board members can overpower other board members, unbalance board collegiality, and lead to diminished board effectiveness. I once had a case where a board member with expertise on financial derivatives engaged in arguments with a senior manager on that arcane subject. Their exchanges went far beyond the reach of other board members. Further, if there was any dispute, board members, under a mistaken sense of collegiality, might side with the expert board member – who could well be wrong. This is where the best course for the board Chair is to take the item off the agenda and deal with it elsewhere.
The relative levels of expertise can reverse themselves in trade associations and not-for-profit organizations, where board members are representatives of, and may be representatives for, the membership. Here, it is the board members who may possess state-of-the-art expertise. In such cases, should they wish, the board members will have the skills available to expand the oversight role deeply into the day-to-day operations of the enterprise. This is often called an operating board, as distinguished from a governing board.
In the absence of defined roles for the board and management, operating boards can cause oversight chaos. Board and management need to identify where they wish to draw the oversight line, which may be beyond the parameters of the board's legal oversight obligations. For example, an operating board would be directly involved in both program policy and program implementation. In a governing board, program implementation would not usually be a board function. So, as executive management matures, the board's role could increasingly become only the setting of the program policy, while leaving implementation to management. However, the board may choose to continue to be directly involved in all elements of programming, retaining its own direct responsibility for implementation. That is the board's right; but it must be clear in its terms of reference and those of the CEO that it chooses to do so.
Thus the line does need to be drawn; otherwise neither board members nor management will know whether they are providing oversight or offering insight. That can only be done by working through the key responsibilities and agreeing on where the boundaries of oversight end and the opportunities for insight begin.
Insight is untamed. It requires a different mindset from oversight. If oversight comes from the reasoning side of the brain, insight comes from the intuitive side of the brain. Insight is how a board adds value. Insight is giving advice, not direction. Insight sounds like the phrase: "This is what you could do."
Setting risk limits is a dose of oversight, while spotting black swans is a gift of insight. For example, it's oversight to set standards for power distribution. It would have been insight to predict that weather conditions, in a country where the thermometer in winter often hovers around zero, could yield an ice storm that knocks out power for weeks over large swaths of the country.
To set oversight policies and supervise their implementation, board members overlay the information provided by management with the expertise and experience derived from their own careers. For insight, board members use their skills to alert management to opportunities and threats. In both cases, board members are drawing on resources beyond those delivered by management to the board. This wider perspective is a vital contribution by board members to the enterprise and it contributes to both oversight and insight. Thus it's easy to see how thoughtless application can cause the two functions to be confused.
Handled thoughtfully, insight from the board can contribute to competitive advantage. When providing insight, board members can provide advice on matters such as the big picture, negotiating tactics, humanresource management, stakeholder relations, or the strategy of the enterprise itself.
In addition, board members have personal contacts and may use them to smooth access to or build confidence with customers, suppliers, potential buyers or sellers, or industry contacts. These too can be regarded as insight. In trade associations and not-forprofits, it's important for board members to know if these activities are intended to be inside or outside their oversight function.
The company's strategic plan is where oversight and insight merge. Approval of the strategic plan is a legislative requirement for Canadian Crown corporations and therefore part of their oversight obligations. In other cases, it is now common ground for approval of the strategic plan to be included in boards' oversight responsibilities.
And yet, the most important insight role for board members is their contribution to the strategic process. In recent years, the board's role in developing strategy has been growing. It has become a more iterative process between board and management as board members add their expertise and experience during the strategic-planning process. Thus, both oversight and insight are needed for the board and its members to fulfill their role in strategy development.
Distinguishing between Oversight and Insight
Board members need to understand that when they are engaged in oversight, they are providing direction. Management also needs to understand when it is receiving direction through the exercise of oversight, and when it is only receiving advice through the offering of insight.
The distinction between oversight and insight should be straightforward. Oversight is delivered by, or flows from, a resolution of the board or of a board committee, while insight usually involves the advice of one or more board members. But there have been many times when I have needed to point out both to management and to board members that silence on the part of other board members does not mean they agree with a director's suggestion and that it has now become a board directive. Just as one swallow does not a summer make, one director's view does not make a board directive.
Management can also be confused when a board member says "This is what you should do," rather than "This is what you could do." It is still insight. On the other hand, the line blurs when many board members offer the same advice. I like to think of it in the subjunctive mood: "This is what we wish you to do." That may just be insight, but it would be a naďve management team that treated that insight as advice only. The board Chair and the committee chairs have a big job in reminding both board and management members when they are involved in oversight and when they are engaging in insight. Where there is uncertainty, the Chair's job is to clarify the situation.
It is important to be clear on when the board is exercising oversight and when board members are offering insight.
Boards collectively fulfill the oversight role. Board members individually provide insight. Oversight relates to fulfilling the board's responsibilities to manage and supervise the management of the company. Oversight is generally initiated by or flows from board decisions. Insight flows from the advice of individual board members. Insight does not result in resolutions of the board.
There are matters that are clearly oversight and others that are clearly insight. But the intermingled roles of the board, its members, and management in the development and approval of strategy demonstrate that that there is no bright line dividing oversight and insight. But if we use the concept of oversight and insight to think about what we are doing, we will be able to sort through those occasions when the situation is less clear, and work it out as we go along.
Originally published in the Director Journal, September 2012
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