How many ways can you design a tree? Hierarchy in internal governance

This is article 4 in my series on designing internal governance. Some while ago, I was asked to map part of the internal decision-making structure (below Board level) in an organisation I was working in. I talked to the people involved, asking where decisions came to them from, and where they were passed on to, and followed the chain. That exercise taught me a lot about hierarchy in internal governance! The overall picture that emerged was not very clear, which was not a good start (no surprise that everyone else was confused!). However, there were some things that I could say for certain. There were at least six layers: that sounds like a lot of people, a lot of time, and almost certainly a lot of delay, in making decisions. In the middle of the escalation route, there appeared to be a loop: at that level, there were two possible places for the next decision to get made. I still don’t know why, or how you would decide which side of the loop to go round, or what the body not consulted would have thought. And finally – worst of all – if you had to go all the way up the chain, there were three separate bodies at the top! I have no idea how any conflict would have been resolved. I don’t believe that the structure had been deliberately set up like that – it had just evolved. Needless to say, the organisation no longer exists. hierarchy in internal governance

Hierarchy in internal governance: What does good look like?

What would a good structure look like? Good governance requires a simple (upside-down) tree structure. As you go up, several branches may join together, but no branch ever divides. Everything comes together at one body (the Board, reporting to shareholders) at the top. A fundamental point that is sometimes forgotten is that no governance body can be free-standing: if it is not part of the hierarchy it is not part of governance! In deciding what governance bodies we need and how they should relate to each other, we need to find the right balance between, on the one hand, simplicity and clarity of the structure, and, on the other, efficiency and effectiveness in decision-making. Governance only works well if everyone understands it. A simple structure with very few ‘branches’ is simple and easy to understand, but can overload the small number of decisions makers, and may not be very inclusive. On the other hand, a greater number of more specialised meetings, while more ‘expert’ and perhaps more efficient for decision making, will add complexity, reduce clarity, be less joined-up, and be harder to service. So where do we start? All authority within an organisation initially rests with its Board. It then makes specific delegations of that authority. The authority it delegates in turn rests where it is delegated, unless it is specifically sub-delegated by that body. The authority to sub-delegate should be specifically stated (or withheld) in the Terms of Reference; by definition, the lowest tier of Collective Authority bodies cannot have this authority. A body may only delegate authority which it holds itself, and then only if it also has been given the specific authority to do so. These rules naturally create a simple tree structure as described above. The decisions to be made in setting up the structure are
  • How many levels does it need?
  • What is the best way to group the delegated decisions within a level?
The factors guiding the number of levels were discussed in the previous article; this will depend on context, but normally there will no more than two levels below the Board. What should guide the groupings? Aim for simplicity – it needs to be obvious what decisions go where. For example, “Investment Committee” should ideally consider all investments but nothing else, and categories should be chosen to be similarly transparent. It follows that each specific authority should be delegated to one place only: there must be only one route to reach a decision on any matter, and ambiguity must be avoided. This does not prevent ‘dual key’ arrangements, where two distinct decisions from different bodies are both required before proceeding. For example, it may be appropriate for one committee to approve the recommendation from the procurement process, and another to decide that there is a sound business case for the expenditure. In practice, some groupings are common to most governance structures. All UK Boards have an Audit Committee, and normally a Remuneration Committee and a Nominations Committee (possibly combined), although their Terms of Reference will vary. Some form of Executive Committee is also common. There may be other Board Committees, and there also may be subsidiary committees (particularly of the Executive Committee). These will depend on the context.

Principles to establish:

  • That the governance structure will be strictly hierarchical, and that all bodies which have Collective Authority will have a place within that hierarchy;
  • That the design will proceed by establishing those areas where the Board should make delegations (starting by noting the matters already reserved to the Board), and how they should be grouped
  • What (if any) dual-key arrangements are desirable?
 

The Midas touch again – Authority and accountability in Internal Governance

This is article 3 in my series on designing internal governance. One of the most stressful times I can remember in my career as a manager resulted from lack of clarity about authority. I had a big job, and it was reasonably clear what I was accountable for delivering. A few days in, I asked my boss to clarify what authority I had to make decisions. His answer? “I don’t like talking about authority.” I never did get more clarity, and it became clear that whatever authority I did have, it was not commensurate with my accountabilities. This article is about authority and accountability in internal governance.

Authority and Accountability

Matching authority and accountability is a key requirement in any governance structure. If you give someone accountability but not authority, you also give them perfect excuses for failing to deliver (and so in practice for not being accountable): for example, “well, if you had listened to me when I said that was too novel, it would all have been fine.” At best, it results in delays and frustration while decisions are referred. Similarly, if you give someone authority but not accountability, they can make extravagant promises about what will be delivered, and lay the blame for the resulting failure on the person accountable. The blame for the failure really lies with the person who set things up like that in the first place. At the opposite extreme is giving too much authority to the accountable person. This is the case where there is no external holding to account. Very few organisations these days would allow even the CEO to approve their own expenses. But other similar situations are sometimes found, for example, a Programme Director chairing his own Programme Board. While most of the time the situation is probably not abused, it does nothing to remove the temptation to approve a pet project regardless of the business case, or to hide bad news in the hope that things will improve later. It is much wiser to avoid setting up conflicts of interest in the first place than to hope that everyone will be able to resist the temptation to benefit from them. These examples show that deciding what authority to delegate requires balancing the need for control with the need for practical delivery, which includes the ability to hold people to account effectively. Deciding to whom to delegate it brings in a new problem: it requires balancing the desire for decisions to be owned by all those affected directly by the consequences with the desire for a named person who can be held to account. Suppose we need to let a major contract. Perhaps an operations team will have all the day-to-day interactions with the contractor, and they are convinced that Contractor A is going to be best to work with. Should the Operations Director have the final say? At least then we know who to blame if it goes wrong. But the Procurement Director may know that the contractor’s resources are going to be very stretched if they take on this work. The Commercial Director may not be happy with the terms of the contract that can be negotiated. The Finance Director may not be happy with the performance bonds or guarantees they can offer. How do we make the best decision?

Collective and Individual Authority

At this point we need to recognise that there are two sorts of authority: Individual and Collective. Collective Authority means that the decisions are made by a specified group of people; no individual has the authority to make those decisions on their own (hence the need for a quorum to be specified in the Terms of Reference (ToRs) for the group). The group must be established by the delegating body – no decision-making body has authority to create itself (or appoint its members, or approve its ToRs)! Individual Authority means that the decisions are made by one individual, even if that individual appoints a group of people to advise him/her. An advisory group can of course always be set up by the individual holding the authority; it is not part of the governance structure, having no authority, so it does not need terms of reference (it just does whatever the decision maker asks of it), and a quorum would be meaningless. That does not stop the members of such a group being confused about its solely advisory nature if this is not explained. Designing the governance structure requires deciding what to use where, but how do you decide which sort of authority is appropriate? The choice between Collective and Individual Authority must balance the possible need for wide ownership of and support for decisions against the preference for Individual accountability which goes with Individual authority. Generally Collective Authority will be desirable at the most senior levels and for the most complex decisions, where the best outcome will result from contributions from people with different backgrounds, knowledge and experience, or where it is important that several people at the same level, typically across functions, feel they are committed to the decision because they helped to make it. Many (perhaps most) of the strategic decisions the company needs to make will be of this kind. On the other hand, Individual Authority will be preferred where the issues are more focused, and typically fall clearly within one functional area rather than spanning several. This kind of authority is just what line management structures are about. It is normally granted through Letters of Appointment and Schemes of Delegation. We will have little more to say about it here. The further down the governance structure you go, the less the diversity that Collective Authority brings to decision making is likely to be needed, and the more likely it is that line management provides all the ownership that is needed. At the same time, each additional layer of Collective Authority tends to make accountability more diffuse, which is unhelpful. Consequently, one or two layers of Collective Authority below the Board is the most that would normally be appropriate. As a general rule, the lower the level of a Collective Authority body, the fewer different interests need to be represented, so the fewer members it will need to have.

Principles to establish before starting design:

  • That authority and accountability must go together
  • That no-one will have authority to ‘mark their own homework’ (that conflicts of interest will be avoided)
  • That Collective and Individual Authority are different; and what their respective roles and interfaces will be in the structure you will create.

The Midas Touch again – Starting to build internal governance

We all like to feel we are in control, don’t we? Especially when we have been told that there will be consequences according to how well we deliver the task we have agreed to do. We feel pretty confident in our own ability to do the job – probably we would not have agreed to take it on otherwise – but what if we can’t do it on our own? I remember the first time I had to promise to deliver something knowing that I would have to rely on other people to do substantial parts of it. While I still felt the confidence of youth that it would all work out, I also remember the frustration and discomfort of finding my instructions were misunderstood or ignored; of having to let someone else try, and sometimes fail; of not being able to control all the details. As managers, we all find our own ways to deal with this; at the company level, we need to be a bit more formal. This article is about where to start to build internal governance to address this need.

It all starts with the Board

The Board is accountable to the shareholders for delivery of the objectives of the company (public sector and non-profit organisations will have equivalent arrangements even if they are called something different). However, unless the company is very small, the Board does not have the capacity to do more than make a very small proportion of the decisions required to achieve this. It needs to retain enough control to monitor and steer the delivery of the objectives, but it must delegate the authority to make other decisions. Internal governance is the framework that it sets up to manage this. Its objectives may include the following:
  • To balance the Board’s need for control and assurance of delivery with its practical need to deliver through others, in a way which optimises the balance between the risks it takes by more delegation, and the costs (financial and otherwise) it imposes through more control;
  • To have a secure underlying logic so that the framework is self-consistent;
  • To ensure that conflicts of interest are avoided as far as possible for those with delegated authority, as these tempt people to behave in ways that are not in the best interests of the organisation;
  • To make sure that those people who will have to live with the consequences of decisions made feel ownership because they have been involved in making them;
  • To ensure that decisions are escalated when, only when, and only to the level necessary for them to be made effectively, so that interventions are appropriate and timely;
  • To ensure that everyone in the organisation has clarity about the decisions they can make, about where to go for those that they can’t, and about decisions made by others which affect them;
  • To ensure that stakeholders have enough visibility of the decisions of the organisation to have confidence and trust in its management;
  • To ensure that the governance structure is scaleable and adaptable (within reason) to allow for possible requirements for future change without major re-design.

Build internal governance

So where do you start? First, you need to remember that governance necessarily works top-down. The owners of what you design will be the Board members (or equivalent), and they are likely to have strong opinions – that’s almost synonymous with being a Board member! If you start your design at the bottom and work upwards, there is a high probability that some or all of the members will object to at least some aspects of it once they see how it will affect them. Trying to make modest changes to accommodate their concerns will probably undermine the essential integrity of the system, resulting in you having to start again. If bottom-up does not work, what does? The best place to start is to agree the main design principles with the Board members, before even beginning on the design itself. It is much harder for people to object if you can demonstrate that your design is consistent with the principles that they all agreed earlier, and it is much easier to keep the discussion rational when the specific outcomes are yet to be defined. It also helps to ensure that the whole design is self-consistent. It is also worth noting at this point that because governance exists to define flows of authority and accountability that need to run seamlessly from top to bottom of the organisation, a governance design project should take a joined-up top to bottom view too. A project that looks only at the top (or bottom) end is likely to require compromises which will reduce its effectiveness. The next few articles will discuss the principles which you will need to agree at the outset, under the headings listed below. Remember that governance is about finding the optimum checks and balances for your organisation. Because that depends on context, it will be different for every organisation. The way you express the logic and the principles in your own project needs to be right for your context. One size does not fit all!
  • Authority
  • Hierarchy
  • Escalation
  • Ownership
  • Documentation and language

The Midas Touch – What is governance for?

What is governance for?

Wouldn’t it be wonderful if whenever you asked someone to do something, they just did it? And of course, on the other hand, that they didn’t do things which they had not been asked to do? Oh for perfect control! But wait a moment. Midas asked that everything he touched should turn to gold – and look where that got him. Perhaps we had better be careful what we wish for. How often have you said “No, that’s not what I meant!”? Or “I’d have thought it was obvious that that needed doing!”? Let’s face it, most of us are not that great at giving really good instructions about what we need, and we certainly don’t have time to include every detail. At the same time, the people we ask are intelligent and creative. We get better outcomes, and they enjoy the work more and so are more motivated, when we expect them to use those abilities to interpret our needs sensibly and come up with the best solutions, even when we didn’t think to ask. In summary, then, we have specific outcomes we require, but it is neither practical nor desirable for us to be completely prescriptive about how they should be delivered. Governance provides a framework within which the desires for control of outcomes and for flexibility over means can be reconciled with the minimum of effort. Such a framework is fundamentally about good behaviours. Most of us want to behave well, but doing things the way we know would be best often takes more time and effort (at least in the short term), and time is one thing that is always in short supply. Formal governance arrangements help to stop us taking the short cuts which may be unhelpful in the long run. They ensure that we communicate what we are doing – so that changes can be made if required – and may force us to plan a bit further ahead. Being able to see good governance in place reassures stakeholders that the organisation is behaving transparently. It gives Government bodies and Regulators confidence that the organisation is complying with legislation and other requirements. And it allows Boards and managers to delegate authority while retaining sufficient control. Good governance means that we not only behave honestly and competently, but are seen to be doing so, which builds trust. In short, it is the rock on which a well-managed organisation is built. What good governance is NOT about is bureaucracy, box-ticking and delays. It requires finding balances – between control and practical delivery; between the risks of delegation and the cost of control; between wide ownership of decisions and strong accountability for them; between a simple structure and efficient decision-making; between minimum overhead and an effective audit trail – which provide the optimum basis for success. Every organisation has different arrangements because the optimum trade-offs depend on the context. This is the first of a series of articles will set out the main issues to be considered in designing an internal governance system and the principles which should underlie it.