The critical difference between Governance and Management when you are on a board

This question comes up a lot when teaching wannabe directors. And it comes up with employees who are under the mistaken belief that their board actually manages the company. So let me demystify it now. We don’t manage. At all.

The critical difference is that the board is in place to provide oversight, not to make decisions. Oversight to ensure shareholders are well served. Oversight to ensure the law is followed. That, over time, the decisions the leadership team makes are good ones. Oversight to ensure the company is not damaged by a series of bad decisions. But none of these are the same thing as making decisions.

The CEO and his/her team’s responsibility is to make decisions that move the company forward. And they are the only people that can. They are the people closest to reality with real data about what’s happening on the ground. The board is simply not close enough to the day-to-day to make operating decisions.

Now it’s not so black and white that the board makes no decisions at all. But there are very few such as:

  • hiring (or firing) the CEO – this is always a hard one and usually takes boards too long to realize they have the wrong CEO and yet it is the most important decision a board ever makes.
  • the makeup of the board itself, and the committee structure – yet another decision that in the past boards did not spend enough time on and cronyism prevailed but now, with the emphasis on diversity at the board level, is finally getting enough attention.
  • CEO and pay structure – how much is cash, time based or performance based and is it passing the say-on-pay tests with ISS?
  • major financing or M&A events – clearly big decisions that the board must weigh in on, although in the end it is the conviction of the CEO that must carry the day.
  • response to activists – and this is one place where the board must actively engage, understand the activists position and determine how and whether to respond.

But even all these types, and similar, decisions are made through a process of discussion, consensus and then a vote rather than one person making a decision.

Otherwise, the boards job is to provide oversight and the most effective way to do that is to learn the art of questioning. This can be hard if you have been a CEO or an executive and you are used to making decisions and leading. It can take time to learn how to sit quietly listening, and then think about what question can you ask that will either improve your understanding or help the CEO make a better decision. You’re not paid to talk on a board. You’re paid to be thinking, deliberating and advising. Often less is more.

I heard a great question last week from a panelist on just this issue of how to learn how to question. We were discussing how to help a leadership team review their strategy which can sometimes be contentious because teams do get wedded to their strategies. And yet, you want to help them think through where they may be missing something, or making a mistake. The question this panelist suggested was “What would have to be true for you to be wrong?”. A great question which requires serious thinking about what assumptions the CEO may have that may not be true in the future, but without challenging that the strategy itself is wrong. And the oversight comes as you watch the leadership team respond to the questions, and make their final decisions. You judge on the quality of the decisions over time.

So next time you look at a board and think they are powerful think again. They are, but in a very narrow and yet important way for the health of the company and its shareholders.

Photo: Arches National Park © 2020 Penny Herscher