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: 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?