Board Governance How Great Boards Plan to Succeed

1. Board GovernanceHow Great Boards Plan to Succeed Tim Harrington, CPA Email: THarrington@forTeamResources.com

2. The late Ken Lay Former Chairman of Enron Convicted felon

9. What Went Wrong in Operations? • Bonus program focused on profit • Intense pressure to show profits • Internal controls regularly ignored • Business units began to take significant losses • Business unit directors used ‘creative accounting’ to hide losses and show “false profits” • Ethical people who attempted to alert management and the Board were silenced

10. What Does This Have to Do With Policy Governance? The Board was ultimately in charge! Yet they were just a management rubber stamp

11. What Went Wrong on the Enron Board? • Lack of Board Independence • Chairperson was the former CEO • Management controlled Board and Nominations • Board never met without management • Profit was only measure, only goal; ethics suffered • Board attempted Policy ‘type’ governance without the attendant controls.

12. Worst Boards • Interlocking directorships • Holding NO meetings without the CEO present • No nominating committee in place • Allowing the CEO to handpick directors • Awarding contracts to family members • Allowing management to be overpaid in compensation and deferred compensation • Having too many insiders • Too many directors on too many boards BusinessWeek, Annual Corporate Board Survey

13. Best Boards • Independent and interested directors • Remain on level of Planning and Policy • Plan with clear and measurable goals • Monitor plan status regularly • Hold periodic meetings without CEO present • Develop effective nominating committee • Avoid Conflicts of Interest and Nepotism • Evaluate CEO based on achievement of plan • Compensate CEO based on achievement of plan • Evaluate their own performance

14. What has been said of Boards “Effective governance by a board is a relatively rare and unnatural act.”Chait “There is one thing all boards have in common…They do not function.” Drucker “Boards tend to be incompetent groups of competent individuals.”Carver

15. What is a Board? A group of ‘peers’, Working on behalf of member/owners, Ensuring that the business achieves what it should, And avoids unacceptable situations and actions! John Carver

21. Board must increase sophistication to match Credit Union’s complexity

22. Governance is not just Management ‘Writ Large’

23. Independence MEMBERS CEO/Management Board of Directors Supervisory Committee Credit Unions work best with a proper “balance of power”

24. Board’s Role Servant Leaders…but for whom? The Board is NOT here to serve management The Board is here to serve the members. Keep that in mind with every question and act

25. What is the Board’s Role? The Board is the ONLY mouthpiece the members’ have! You are there to ensure a strong Credit Union for the members.

26. What is the Board’s Role? The Board does not exist to advise the CEO… …but to form the accountability link between the owner/members and the operators.

27. What is the Board’s Role? • Oversee and guide the credit union so that the members’ assets are as safe and productive as possible. • Hire/replace management • Provide supportive oversight between hire/replace • Remain independent of management The role is to govern, not to operate the credit union

28. The Board is where all authority resides until some of it is delegated to others.

29. Delegation MEMBERS Board CEO Credit Union Operations

30. Where there is Responsibility You must also give Authority. But there must be Accountability

31. Start all over again! The Governance Process Governance Policies, Strategic Goals and Measurable Results Management Carries Out Plans And Policies Reviews Results, Compares to Plan Evaluation! Reward Management If plan met or exceeded Board (and Management) Management Board and Management Board

32. How a Board Governs Effectively • Establishes clear expectations (Plan) • Personalizes the assignment of those expectations (Responsible Party) • Checks whether those expectations have been met (Measurement and Evaluation) • Responds appropriately to the results • Ties management compensation to long-term success of company

33. How a Board Governs Effectively • CEO is the single point of delegation from the Board • Board has one employee • CEO has one boss, Board as a ‘whole’ • CEO is accountable for meeting the Pre-established expectations (Ends) • CEO must be delegated all the authority needed to match this level of responsibility (Means)

34. Board determines ENDS • CEO and management select the MEANS within certain parameters of legality, ethics, conscientiousness and policy limits. “Whoever is directly responsible for achieving the ends must decide which means to use.” John Carver

35. “The focus of the board has to extend beyond oversight of senior management and deep into the employee base to determine the corporate culture's health, especially ethical health.”Dov Seidman Forbes Magazine

36. Governance is working“Outside the Box” Values, Mission, Plans, Goals, Policies Operations at the control of CEO Member survey, Staff survey, Mystery Shops Fraud hotline External Audit, Internal Audit Regulatory Exam Ethics, By-laws, Laws and Regulations

37. Governance Process Ends Board - CEO Linkage Executive Limitations Policies CarverPolicy Governance CEO Direction Board Direction Policies Instructive to the Board Policies Instructive to the CEO Board Limitations CEO Limitations

38. Governance ProcessDirection for the Board Governance Process Defined • The manner in which the board represents the “member owners” and provides strategic leadership to the organization. A Basic Job Description • Represent Ownership (no one else is charged with this) • Create and follow Explicit Governing Policies • Assurance of Executive Performance • Hold selves accountable

39. Governance Process “Board must be in full control of its own job before presuming to control anything else.” John Carver Board must stay focused on big issues of Strategy and Governance Board must be disciplined in this process and not allow itself to stray.

40. EndsDirection for the CEO Ends Defined • The human needs the organization intends to meet • Who is to be reached, and at what priorities and cost Key Questions • What is our mission? • Who is our customer? • What does the customer need and value? • What is our strategic plan?

41. Ends and Limitations • Values • Mission • Strategic Plan with Measurements • Governance Policies • Laws and By-Laws • Ethics and Conflict of Interest Policies

42. Ends • Board’s expression to CEO of appropriate expectations and benchmarks of corporate success

43. Limitations • Board’s expression to CEO of boundaries around acceptable managerial processes and decisions (as specified by what would be unacceptable).

44. Ends examples • The credit union shall work to improve the financial condition of a majority of its members through products and education. • We will serve selected demographic groups in Monahan and Callahan counties.

45. Whose Policy is it anyway? • Does board make policy or does management? • It depends: • Board Makes BOARD POLICY • Management makes MANAGEMENT POLICY

46. Executive LimitationsLimitations on the CEO Executive Limitations Defined • Those principles of prudence and ethics that limit the choice of staff means (practices, activities, methods). Areas of Focus • Effectiveness and responsibility • Control through proactive constraint • No Board involvement in details • Address common board concerns about: • Personnel, financial condition, asset protection, compensation and benefits, budgeting

47. Limitation examples • The CEO shall not cause or allow w/in the CU any decision, activity, or organizational circumstance that is unlawful, imprudent or contrary to business and professional ethics. • With respect to the credit union, the CEO shall not cause or allow the deterioration in financial soundness or member satisfaction

48. Ends Versus Means “A …superior can control his subordinate buy determining the goals which the subordinate is to pursue, [or] controlling the resources available to the subordinate….” General ‘Ike’ Eisenhower

49. Board-CEO LinkageLimitations on the Board Board-CEO Relationship Defined • The manner in which power is passed to the executive machinery and how that power is assessed. General Principles • CEO accountable to the board as a whole • The board has only one “employee” - CEO • The CEO’s work is measured by results • Board members and the CEO are colleagues • But Board as whole is supervisor

50. Relationship to CEO Whole board is unambiguously the CEO’s superior, not his/her advisor or social partner The BOARD is the CEO’s superior, not the chair!