Managing Leadership^®

If the dangers of giving a CEO too much freedom of action are countered by those of shackling his or her initiative too closely, then how can the right balance be struck? Is there a fixed set of rules that can safely govern the respective duties of a board and its CEO?

As in so many things, while we look for fool-proof, simple steps to follow to accomplish our duties, the truth is that they don’t exist. This issue, too, requires conscientious attention and the application of principles by means of situationally-appropriate flexibility. Fortunately, there is a way of looking at the board/CEO relationship that is a great help in doing that. The best discussion I’ve found of it is in John Carver’s Corporate Boards that Create Value (co-authored by Caroline Oliver).

Carver has written a series of books on corporate governance, boards, and their relationship with senior management. This book states the basic premise of them all with applicable clarity and depth. I appreciate the approach depicted here largely for the elegance and intuitive sense it possesses, and also because it (unwittingly) offers a nod to my own views about the dangers of unbridled individual leadership in a CEO, advocating instead a kind of “group leadership” incorporating the board and senior management.

Carver’s approach is built around what he calls “Policy Governance” by means of which the board directs the business and supervises its senior management through its control over the guiding policies it establishes for senior management to follow. This can be visualized through what he calls “nested bowls.” The board determines the general categories of import for supervision of the business; these may be operations, human resources management, finance, and the like. Each of these categories require the making of decisions. Based on the most fundamental decisions at the strategic level, subordinate and dependent decisions are made. Carver depicts each of these decisions as bowls, with each dependent decision a smaller bowl nested within the parent.

Think of a circle divided into component arcs, each representing a policy area, and which, together, make up the completed circle. Now, take just one policy arc - finance, say. the most fundamental decision(s) about how finance will be conducted in the company is represented by the arc that represents finance’s part of the overall circle. The board examines all the levels of dependent decisions that will flow from that fundamental finance arc, determines which levels it must retain for itself to make, and at what point it will delegate the remainder to management. The levels it retains can be depicted as smaller arcs nested within the basic finance arc.

If you do this all around the circle for all the other component policy arcs - such as human resources, community relations, and whatever other general policy divisions the board chooses to make - then you will have a circle with smaller arcs thickening its shape inward. This need not be uniform all around the circle. The board may want to keep a close rein on strategy and finance, and supervise human resources and accounting at only the most basic levels. This would make the circle thicker toward the center along the strategy and finance arcs, and thinner (leaving more room toward the center) along the HR and accounting arcs. Senior management’s room for maneuver is represented by the space inside the overall circle not filled with subordinate, nested arcs, and that space varies according to the policy slice of the circle (thought of now as a pie) that management is operating in.

Let’s use the pie image to try to see the system more clearly. Let’s say the board cuts the pie into the four slices mentioned above: strategy, finance, HR, and accounting. Further, let’s say that the crust represents the board’s degree of control over the overall pie and of each slice. Management is left with what remains in the center that the board doesn’t claim for itself. In our example, the crust wouldn’t be even - it would be thick at the strategy and finance slices, and thinner at the HR and accounting slices. The area in the middle, where management can act, would be considerable in those latter two slice areas, and somewhat less generous in the former two. In this way, the board would be applying the degrees of control it deemed necessary in the areas it felt appropriate, leaving the rest delegated to management, allowing it to fill in the pie as it wishes according to the constraints of the policy guidance provided from the crust. All the while, the areas of responsibility flow smoothly from the board to the CEO, and the operable integrity of the whole is maintained.

This approach provides a naturally sensible way for boards to control management, and for management to operate from a clear appreciation of what their policy guidance is, how extensive it is, and how much room for the freedom of managerial action within that guidance that it leaves. The approach also can be modified as the board and senior management accommodate to each other, relaxed or tightened as circumstances and personalities involved warrant.

This is required reading for those interested in the operation of firms at the senior management and board level. Whether you are a manager, a board member, an investor, or simply interested in the problems that beset organizations at this level, you should read Carver’s work, beginning with this book.

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You may want to see all the posts in this series:

1. Taking control of the CEO
2. The CEO: too hot
3. The CEO: too cold
4. The CEO: just right

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